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Bank of America Has Great Capital, Earnings Not So Much

Story updated with additional information throughout.

  • Bank of America reports third-quarter profit of $340 million, break-even on a per share basis, beating the consensus estimate of a $0.07 per share loss. according to data compiled by Thomson Reuters
  • Revenue came in at $22.59 billion, beating estimates of $21.89 billion. Year ago revenue was $28.45 billion.

NEW YORK (TheStreet)--Bank of America (ICE) third quarter earnings drew a mixed response from analysts Wednesday, though the strength of the bank's balance sheet drew unanimous praise.

A ratio known as Basel 3 Tier I--one measure of the safest form of capital--rose to 8.97% from 7.95% in the second quarter. Evercore analyst Andrew Marquardt had estimated the ratio would be 7.97%.

Credit Suisse analyst Mosche Orenbach called the capital ratio "extraordinary" on the earnings call, and Goldman Sachs analysts stated that Bank of America is "the best-capitalized money center bank,"--meaning it has a stronger balance sheet than JPMorgan Chase (JPM), Wells Fargo (WFC) or Citigroup (C).

Overall, Bank of America posted a third quarter profit of $340 million Wednesday, break-even on a per share basis, beating estimates of a 7 cent per-share loss.

The result compares to a year-ago profit of 56 cents per share and a 19 cent per share profit in the second quarter.

The results included several "one-time" items, as had been expected. Among these were a 28 cent per share hit related to a settlement of litigation over the 2008 acquisition of Merrill Lynch, an $800 million charge related to U.K. taxes, and a $1.9 billion accounting oddity known as a "valuation adjustment"--reflected as a loss--due to improvement in how credit markets evaluate Bank of America's ability to pay its debts

Citing higher deposits and mortgage originations, CEO Brian Moynihan stated, "Our strategy is taking hold even as we work through a challenging economy and continue to clean up legacy issues."

Revenues of $22.59 billion were slightly better than the $21.89 billion expected by analysts, and slightly higher than year ago and third quarter 2011 revenues, which were $22.49 billion and $22.42 billion, respectively.

Wells Fargo analyst Matt Burnell argued in a research note that Bank of America's trading performance "fell slightly below peers." He saw net interest margin results as positive and added that "credit continues to slowly mend." Bank of America "performs in line with peers today on these results," he wrote.

"Overall, mixed results with lower-than-expected core revenue, but better expenses and lower credit costs," wrote Evercore analyst Marquardt.

Deutsche Bank analyst Matt O'Connor saw mortgage-related claims against the bank--which has been the overriding issue for Bank of America for the past two years--as having "stabilized a bit." New claims were down off a "very high" second quarter level, as outstanding claims rose 12%, O'Connor noted. The analyst also saw an "incremental positive" in management's statement that losses from legal claims against problem mortgage securities could exceed reserves by $6 billion, saying it implied less risk "than some feared." Wells Fargo's Burnell referred to buyback trends as "mixed."

Bank of America shares were flat just three minutes before the opening bell as the bank's conference call with analysts--having begun an hour earlier--continued.

-- Written by Dan Freed in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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