Breakingviews- BofA looks like Wall Street's biggest loser

Wed Jul 17, 2013 10:54pm IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

By Agnes T. Crane

NEW YORK, July 17 (Reuters Breakingviews) - Bank of America (BAC.N) looks like Wall Street's biggest loser. Sadly, it's not for getting in shape by shedding unwanted flab. The Charlotte, North Carolina-based bank is improving, at least – second-quarter profit, reported Wednesday, surged 63 percent from the same period last year, though unlike at its main rivals, fixed income trading fell. But compared to fellow crisis laggards Morgan Stanley (MS.N) and Citi (C.N), BofA's returns are poor, its book value stagnant and its stock moribund.

At 6.6 percent, its return on equity tripled from the prior quarter. But it falls far short of the 10 percent deemed necessary for big banks to cover their cost of capital. It remains below what Morgan Stanley earned in the first quarter – the investment bank reports its latest quarterly showing on Thursday. And Citi easily bested BofA in the three months to June with a 9.6 percent RoE.

Book value, meanwhile, has been hit at all three firms by the costs of dealing with legacy asset problems and accounting oddities that force them to mark their own liabilities to market. BofA's has fallen by a tenth to $20 a share since the start of 2010. Citi's, on the other hand, has grown by half and Morgan Stanley's is up 14 percent.

That's in part because the bank was the last of the three to tackle is problems head-on. Even so, shareholders remain skeptical of the bank's sense of its worth. Even with Wednesday's 3 percent pop and a doubling in 2012, the stock still trades at a 30 percent discount to book value. Citi and Morgan Stanley are far closer to parity.

Moynihan is making progress. Operating costs are now 70 percent of revenue, a 7 percentage point drop in a year. Citi's, though, come in at a decent 58 percent. And legacy assets and servicing - where much of the dregs from Countrywide live - only cost the bank $2.3 billion this quarter, a third lower than last year's third quarter. That helps explain why BofA's stock is up by more than a fifth. Citi and Morgan Stanley shareholders, though, are sitting on gains of more than 30 percent.

He now has to prove he can crank earnings up another couple of notches to catch up with his rivals. Otherwise, investors might not be as forgiving.

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CONTEXT NEWS

- On July 17 Bank of America reported a net profit of $4 billion for the second quarter, a 63 percent increase from the same period last year and more than analysts had expected. A strong performance in equity sales and trading and cost-cutting helped drive the results. Revenue, meanwhile, increased 3 percent from a year ago to $22.9 billion.

- The bank's return on equity trebled to 6.55 percent from the prior quarter while its regulatory capital ratios under the new Basel III framework improved despite declines in mark-to-market valuations in fixed-income assets that it intends to eventually sell.

- Bank of America’s stock rose around 1 percent in morning trade to $14 per share.

- BofA earnings: link.reuters.com/syw69t

- Reuters: Bank of America profit jumps on equity trading, cost cuts [ID:nL1N0FN0J2]

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- For previous columns by the author, Reuters customers can click on [CRANE/]

(Editing by Antony Currie and Martin Langfield)

((agnes.crane@thomsonreuters.com)(Reuters messaging agnes.crane.thomsonreuters.com@reuters.net)) Keywords: BREAKINGVIEWS BOFA/

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