(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.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- 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]
Legal dividends [ID:nL2N0DO0Y5]
Keep him hungry [ID:nL2N0D40VT]
Multiple envy [ID:nL2N0D20N4]
- For previous columns by the author, Reuters customers can
click on [CRANE/]
(Editing by Antony Currie and Martin Langfield)
Keywords: BREAKINGVIEWS BOFA/
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