Bank of America: Earnings Preview

Earnings:

Several factors will weigh on Bank of America's fourth-quarter results. Banks tend to pack write-downs into the last three months of the year to clean up balance sheets for a fresh start in the next one. Results won't be helped by a seasonal slowdown in trading activity, a $4.1 billion TARP repayment charge, consumer loan losses that remain elevated, and a mortgage business that has slowed down from its breakneck pace in the spring and summer.

Analysts expect Bank of America to report a loss of 52 cents per share, on average, according to Thomson Reuters. Sandler O'Neill's Jeff Harte reduced his estimate to a loss of 31 cents per share from a breakeven performance. He said the change was "primarily driven" by the hefty cost of repaying TARP, but also cited expectations for reduced trading revenue and higher loan losses. He expects Bank of America's "core" trading revenue to have dropped 20% last quarter, and for the firm to report $1.3 billion in valuation losses.

Todd Hagerman, an analyst with Collins Stewart, estimated that fourth-quarter earnings probably dropped about 10% to 20% at U.S. banks, but says things have gotten better. Industry-wide profits had tumbled 50% to 70% in the third quarter and 70% to 100% during the first half of 2009.

"Profitability remains elusive for many banks," Hagerman says.

All eyes will be on Bank of America's huge credit-card business, which has been a troublesome loss leader for the firm. Executives have said losses in the division may have peaked toward the end of 2009, but they're likely to remain elevated in coming months. A telling sign may be in trust data released on Friday, in which Bank of America reported that delinquency rates dropped in December, while charge-off rates increased. The bank may be writing off the bad debt to get it out of the way, even if consumers are shirking on loan payments less commonly.

Hagerman believes that such balance sheet clean-ups and positive earnings outlooks for 2010 could set the stage for a bank-stock resurgence. He's advising clients to buy Bank of America and other firms that are heavily weighted in consumer finance, like Wells Fargo, Fifth Third Bancorp (FITB), Sun Trust (STI) and First Horizon (FHN).