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Bank of America Will Cut to Hit Earnings: Analyst

Stocks in this article: BACJPMWFCSTI

While none of the large banks are expected to see a very significant improvement in net interest income over the next two years, Stifel Nicolaus expects Bank of America to reduce its annual expenses by $7.1 billion, or 10%, from an estimated $70.5 billion in 2012 to $63.4 billion in 2014. Granted, Bank of America's expenses have been very high because of the legacy mortgage mess springing mainly from the company's ill-timed and ill-considered acquisition of Countrywide Financial in 2008, however, none of the other large-cap banks covered by the firm are expected to see anywhere near BAC's expense reduction or 30% EPS growth from 2013 to 2014:

  • After Bank of America, the bank that Stifel Nicolaus expects will have the strongest earnings growth from 2013 to 2014 is SunTrust (STI) of Atlanta. Mutascio estimates EPS to increase by 11% from $2.70 in 2013 to $3.00 in 2014. The analyst estimates that SunTrust will lower its expenses only slightly from $6.2 billion in 2012 to $6.1 billion in 2014, but also estimates that the annual provision for loan losses -- the among added to reserves, which lowers earnings -- will decline by 26%, from $1.2 billion in 2012 to $861 million in 2014.
  • Stifel estimates that Wells Fargo (WFC) will see its EPS grow from $3.53 in 2013 and $3.76 in 2014, for earnings growth of 7%. Mutascio estimates the company will see a 2% reduction in expenses, from $49.7 billion in 2012, to $48.6 billion in 2014. Meanwhile, the analyst sees Wells Fargo lowering its provision for loan losses by 17%, from $7.0 billion in 2012 to $5.8 billion in 2014.
  • For JPMorgan Chase (JPM), Stifel Nicolaus estimates earnings to increase from $5.35 a share in 2013 to $5.60 in 2014. That's 5% EPS growth. Mutascio estimates the company will cut its expenses from $61.7 billion in 2012 to $61.1 billion in 2014, which is a reduction of just 1%. He also expects JPMorgan Chase's provision for loan losses to increase by 28%, from $3.8 billion in 2012 to $4.8 billion in 2014.

SunTrust, Wells Fargo, and JPMorgan Chase all have "Hold" ratings from Stifel Nicolaus.

Mutascio said that Bank of America is "better positioned for the current environment than many banks that have already bled the loan loss reserves dry, have little exposure to mortgage origination and debt underwriting in the low interest rate environment, and have no material expense reductions on the horizon."

The analyst added that "with the company achieving a 3Q12 Basel III Tier 1 common capital ratio of approximately 9%," which exceeds the full 8.5% requirement including the 1.5% capital buffer required as a Global Systemically Important Financial Institution, "it has rebuilt its capital ratios much faster than we had expected."

Meeting the full Basel III requirement "should allow for the company to ask for and receive approval for a dividend increase during the upcoming 2012 Federal Reserve stress test process, which could improve overall investor sentiment on a name that we believe is under-owned relative to other large cap banks," Mutascio said.

Interested in more on Bank of America? See TheStreet Ratings' report card for this stock.

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-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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