Wall Street Whispers: Bank of America's Untold Fortunes

Although Bank of America management was more dour than those of other big banks last week, there's another side to the story they didn't outline.
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Bank of America

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is being punished for being the bearer of bad news.

But it may also reward shareholders by delivering unexpected revenue growth that management can't outline publicly without getting sledgehammered by the populist masses.

In a conference call that was seemingly direct and honest, CEO Brian Moynihan laid out the facts: Business is bad, the reform bill will be costly, and it's only going to get harder to make money.

Moynihan characterized it as "sort of a tale of two cities," because while Bank of America is shrinking its business lines, it is also raising capital and getting rid of non-core assets. It is avoiding huge losses -- but not making lots of money in the capital markets -- by prioritizing risk-management above profit-driven trading. Its housing business is still suffering because the bank is going through foreclosures, short sales and liquidations that are necessary to move forward. Even the low interest rates that had made it so easy for banks to rebound are now impairing basic margins.

Then there was the whopper: Regulation.

Management estimates that new measures will reduce revenue by more than $4 billion per year, and cause a goodwill write-down of $7 billion to $10 billion on its credit-card business. While executives said they are already taking steps to make up for the valuation and revenue gaps, the impact of "mitigation actions" won't be immediate as the cost.

As a result, Bank of America shares plummeted 9% on Friday, closing at $13.98. They were trading lower on Monday, recently down another 4% at $13.42, as Goldman Sachs analyst Richard Ramsden removed the stock from the firm's "conviction buy" list. Others cut estimates and price targets following the results.

Analysts largely attributed the sell-off to the dour tone of Bank of America's management. Though he provided much more detail about the costs of reform, Moynihan sounded less optimistic than

JPMorgan Chase

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CEO Jamie Dimon and


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Vikram Pandit, who also reviewed second-quarter results with the market last week.

The disparity seems to have caused investors to assume that things will be bad for all big banks, but


bad for Bank of America. Shares of JPMorgan and Citi and 3.6% and 6%, respectively, on Friday and were falling less than 2% on Monday.

"This assessment of this

financial reform bill from the banker that the President of the United States claims is the only one who really understands the nation's banking needs is a bit shocking," Rochdale Securities analyst Richard Bove said in a note Monday. "It caused the stock to plunge."

But looking closer, investors might want to ask two questions: Whether the other two banks were simply less candid about the impact of reform; and whether Bank of America management was less specific about where it will make up for "lost" revenue because its wards in Washington would have otherwise gone mad.

It's unfortunate for investors that assessing bank stocks today must include assessing opinion polls, but such is the case. Fees are unpopular, and so are interest-rate hikes, but banks must use both of those tools to pay for all the things they provide to the public -- from loans to branches and functional ATMs.

Once it became clear that banks would have to change their fee practices, it was clear that they would have to find different places and new ways to assess them. Consumers have long enjoyed free checking and other deposits, as well as free credit card use, as long as credit card bills were paid on time. Now, those benefits will be fewer and further between.

All of the big banks, including Bank of America, have indicated that they must make up for those billions of dollars in lost revenue with new fees in new places. (As CFO Charles Noski put it on Friday, regulations like the CARD Act have created an "inability to reprice for risk.") While some types of fees will become illegal, banks are not barred from charging for basic services, from speaking to a teller to using automatic bill pay.

But when news hit in November that Citi was planning to charge customers for previously free checking accounts, the public went slightly berserk. (From the

New York Post

: "Penny-pinching Citibank will put the squeeze on small-fry customers.") Whether because regulators applied pressure or because it was deemed internally as a PR disaster, Citi retrenched and said it would reassess the fee structure.

Citi may have taken the first bullet, but other banks are following suit.

Wells Fargo

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recently told customers it will charge a $5 monthly fee for basic checking accounts that fall below a $1,500 minimum balance.

Still, as a result of the public outcry against fees -- and perhaps because Moynihan is savvy enough to know better, as President Obama's favorite banker -- Bank of America management was more circumspect about its efforts to make up for lost revenue.

For instance, executives noted that, in regards to the so-called Durbin interchange amendment, new revenue won't show up in the same card business where value disappeared. Discussing tactics to mitigate losses, Moynihan gave vague answers about "different types of fee structures" and "potentially new products" that would come with new fees:

"It's all around either the fee side, monthly fees, et cetera other than the spread side...And then the issue as we said before, some of that falls in the deposit line of business and some of it falls in from the standpoint of how customers think they're paying for a checking account. 6,000 branches, 18,000 ATMs, et cetera, et cetera, etcetera," he said.

In a less ambiguous manner, Bove notes that if Bank of America charged each of its 29 million checking customers a fee of $10 to $12 per month, that would bring in $3.5 billion in annual revenue. If it charged its 15 million bill-pay accounts $50 per year, that would recoup $750 million per year. A $1 statement fee could create $120 million in fresh revenue. Similarly, if every credit-card customer were assessed a fee, more hundreds of millions of revenue could pour in -- and likely will.

"These are not hypothetical examples," says Bove. "These are fees and charges that banks, in general, and Bank of America, in specific, are going to charge their customers. It is, therefore, spurious to set up a conference call in which the negatives are explicitly laid out and the positives not even alluded to. Investor relations of this nature wipe out shareholder wealth."

He goes on to note that telephone companies -- and other utilities -- list taxes and fees individually on customer accounts, explaining what each item is. Banks could do the same for their customers, who have often felt duped by sudden, large and seemingly inexplicable fees.

All of the assurances about mitigation lacked the specificity of cost estimates for financial reform. Perhaps that wasn't accidental -- and it doesn't necessarily mean that the revenue gap created by financial reform won't eventually be plugged.

"Importantly, management's comments did not include what we expect to be significant mitigation efforts," said Sandler O'Neill analyst Jeff Harte in a report Monday, going on to note that some of Bank of America's estimates seemed excessively conservative. "Accordingly, we view management's revenue impact estimate as more of a worst-case scenario than a likely outcome."

-- Written by Lauren Tara LaCapra in New York


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