Bank of America Earns by Shrinking (Update 3)

Bank of America story updated with new details throughout, including Stifel Nicolaus analyst Chris Mutascio halving his 2012 estimates.

• Bank of America reported a fourth quarter profit of $2 billion, or 15 cents per share.
• Revenue was $25.1 billion.
• Analysts expected earnings per share of 15 cents, according to consensus estimates from Thomson Reuters

NEW YORK (TheStreet) -- Bank of America(BAC) continued shrinking its way back to health in the fourth quarter, hoping investors would overlook weak earnings and find encouragement in the bank's stronger balance sheet.

While the Charlotte, N.C. bank showed a fourth quarter profit Thursday, meeting expectations on earnings and beating on revenues, it showed limited earnings power, according to a report from Stifel Nicolaus analyst Christopher Mutascio.

Mutascio halved his 2012 estimates to 40 cents per share from 80 cents, while lowering 2013 estimates to 80 cents per share from $1.10. He nonetheless maintained his "hold" rating on the shares, noting the bank "significantly improved its capital position.

Mutascio enumerated $5.3 billion in one-time items in his report, including $2.9 billion from the sale of China Construction Bank shares, $1.2 billion on the exchange of trust preferred securities, and $1.2 billion in investment securities gains.

There was also $3.4 billion in one-time losses, according to Mutascio's report, including $1.3 billion on mortgage-related litigation expense, $800 million in fair value adjustments on structured liabilities, a $600 million goodwill impairment charge, and $500 million on debt valuation adjustments on trading liabilities.

"The net gains/losses equal a positive $1.9 billion. If you exclude these non-core items from the reported net income, the company's earnings would have been essentially break even," Mutascio wrote.

Bank of America reported net income of $2 billion or 15 cents per share, compared to a year-ago loss of $1.2 billion or 16 cents per share and a third quarter net income of $5.9 billion or 56 cents per diluted share.

Revenue came in at $25.1 billion, up 11% from a year earlier.

"We think revenues remain weak but there are positive trends in net charge offs and reduced costs," wrote Atlantic Equities analyst Richard Staite. He said the bank's guidance on meeting new capital requirements known as Basel III has also improved.

Analysts expected Bank of America to report earnings per share of 15 cents on revenues of just over 24 billion, according to consensus estimates from Thomson Reuters.

"We enter 2012 stronger and more efficient after two years of simplifying and streamlining our company," said Chief Executive Officer Brian Moynihan. "We built our capital ratios to record levels during 2011 on the strength of our core businesses and by shedding those that are not core to serving customers and clients."

Evercore analyst Andrew Marquardt was encouraged by those efforts.

Despite what he termed a "miss" in core earnings, he argued investors are mainly focused on balance sheet strength ahead of an upcoming Federal Reserve "stress test."

"We do not believe [Bank of America] needs to raise capital based on our work, and we think today's results and upped capital target sends a strong message and supports our view that indeed [the bank] will be ok," through the upcoming stress test, he wrote.

Wells Fargo analyst Matt Burnell wrote in a report that Bank of America had a positive surprise in its net interest margins, which were up by 0.13% to 2.45% versus the third quarter.

Net interest margins, which reflect the difference between what it costs banks to borrow and what they charge on loans, were also better than expected at Citigroup(C) and Wells Fargo(WFC).

Burnell said that positive surprise, as well as balance sheet strength and the fact that the banks' shares trade at a low price-to-tangible book value, would likely cause the shares to perform well on Thursday despite what he argued were weak core earnings.

Bank of America closed up 2.35% to $6.96.

-- Written by Dan Freed in New York. Follow this writer on Twitter.

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