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Bank of America Has 37% Upside: Morgan Stanley (Update 2)

Bank of America's first-quarter revenue totaled $23.7 billion, increasing from $22.5 billion a year earlier, and coming in ahead of the consensus estimate of $23.41 billion.

The Fannie Mae settlement led to a great reduction in the outstanding mortgage repurchase claims against the company. Unresolved mortgage putback claims against Bank of America totaled $28.3 billion as of Dec. 31. The bank's fourth-quarter earnings presentation implied that the Fannie Mae settlement would reduce the putback claims by roughly $12.2 billion, leaving about $16.1 billion in claims. But the company reported outstanding mortgage repurchase claims of $17.135 billion as of March 31, showing that new claims were continuing to come in.

Bank of America's first-quarter net interest income was $10.875 billion, increasing from $10.555 billion in the fourth quarter, but declining from $11.053 billion in the first quarter of 2012. Another positive quarter-over-quarter trend was that the net interest margin -- the spread between the average yield on loans and investments and the average cost for deposits and borrowings -- widened to 2.43% in the first quarter from 2.35% in the fourth quarter, although the margin was down from 2.51% in the first quarter of 2012.

First-quarter noninterest income totaled $12.833 billion, increasing from $8.336 billion the previous quarter and $11.432 billion a year earlier. The company's trading account profits rose to $2.989 billion in the first quarter, from $792 billion in the fourth quarter and $2.075 billion in the first quarter of 2012.

Bank of America followed the industry trend of declining mortgage revenue, with a sharp decline in its gain-on-sale margin for newly originated loans. The first-quarter margin was 3.26%, declining from 4.38% in the fourth quarter. First-quarter mortgage banking income totaled $1.263 billion, improving from a negative $540 million in the fourth quarter (because of the Fannie Mae settlement), but declining from $1.612 billion in the first quarter of 2012.

The bank's litigation expenses totaled $881 million during the first quarter, compared to $916 million the previous quarter and $793 million a year earlier. First-quarter litigation expenses included $500 tied to a settlement of a class action suit by mortgage-backed securities investors against Countrywide.

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