Bank of America: Cost-Cutting Loser (Update 1)

Updated with Capital One's disappointing fourth-quarter results, and harsh reaction by investors in aftermarket trading.

NEW YORK ( TheStreet) -- Bank of America ( GS) was the loser among the largest U.S. banks on Thursday, with shares sliding over 4% to close at $11.27.

As earnings reports continued to roll in, the KBW Bank Index ( I:BKX) rose slightly to close at 53.62, although only six names showed declines, including Citigroup ( C), which was down 3% to close at $41.24.

Bank of America

Bank of America reported a fourth-quarter profit of $700 million or $.03 a share, beating the consensus EPS estimate among analysts polled by Thomson Reuters by a penny, after the company pre-announced a large mortgage putback settlement with Fannie Mae ( FNMA) and a major contribution to the $8.5 billion foreclosure settlement between federal regulators and the nation's largest loan servicers.

Earnings for all of 2012 totaled $4.2 billion, or 25 cents a share, increasing from $1.4 billion, or a penny a share, in 2011.

Bank of America CEO Brian Moynihan said during the company's earnings conference call that the company had achieved "strong results" in strengthening its balance sheet, as the company built a $19 billion reserve for mortgage putbacks and increased its estimated Basel III Tier 1 common equity ratio to 9.25% as of Dec. 31, which is significantly above the 8.5% that will be required in January 2019, when the Federal Reserve's enhanced capital requirements for systemically important financial institutions are fully phased in.

When discussing the company's efforts to lower its expenses, Moynihan said "We have reduced our employee count in each quarter in the last five and we have done that while we continue to invest in our targeted growth areas," and that "we reduced our delinquent mortgage count, which allowed us to reduce our legacy asset servicing expenses," according to a transcript provided by Thomson Reuters.

UBS analyst Brennan Hawken said in a note following the earnings announcement that "excluding the foreclosure settlement, litigation, and GSE compensatory fees, legacy asset servicing (LAS) costs seem to be $2.8 billion, a 7% decline sequentially (3Q was $3.0 billion). Certainly a step in the right direction, but may be a bit light vs expectations."

When discussing Project New BAC -- Bank of America's "branded" cost-cutting program -- COF Bruce said during the conference call that excluding LAS costs, expense savings "on a quarterly basis were at $900 million a quarter as we leave 2012. We expect that our New BAC cost savings when we get to the fourth quarter of '13 will be at $1.5 billion per quarter."

When asked for clarification on the company's plan to reduce LAS expenses from $3.1 billion by $1 billion by the fourth quarter of 2013, Thompson said "you should generally expect it to come out throughout the year. It is not something you're going to have to wait for the fourthquarter to see."

Hawken has a neutral rating on Bank of America, with a 12-month price target of $11.50, estimating the company will earn 95 cents in 2013, with EPS climbing to $1.20 in 2014.

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


Citigroup reported fourth-quarter earnings of $1.2 billion, or 38 cents a share. Excluding credit valuation and debit valuation adjustments, the company earned $2.2 billion or 69 cents a share, missing the consensus estimate of 96 cents.

Citigroup's earnings were reduced by charges related to its restructuring announced in the fourth quarter, as well as a declining release of loan loss reserves.

Net income for all of 2012 totaled $7.5 billion, or $2.44 a share, declining from $11.1 billion, or $3.63 a share, in 2011. The company said that excluding credit and debit valuation adjustments, losses on minority investments and costs from the company's fourth-quarter repositioning, 2012 operating earnings totaled $11.9 billion, increasing from $11.1 billion in 2011.

During the company's earnings conference call, Citigroup CEO Michael Corbat -- who replaced Vikram Pandit in the top spot after Pandit was shown the door in October -- was asked by CLSA Securities analyst Mike Mayo the following question: "If in five years from now you were to look back at your performance, what would you want to see to show that you were successful?" Corbat replied that "we've got to get to a point where we stop destroying our shareholders' capital. That would certainly be at the top of the list. That we run a smart and efficient business that's good at its allocation of its resources around its customer and client segments, that it's continued to have the ability to lead and accompany those clients around the world, that it served a social purpose."

Bloomberg later reported in an investor alert that Mayo had upgraded Citigroup to a "Buy" rating from "Outperform," with a $50 price target.

Bank of America Merrill Lynch analyst Erika Penala had said in a note earlier in the day that Citigroup's shares might be headed lower, and also said "we still think C represents one of the most attractive restructuring and recovery story long-term, and would view the expected weakness as a further buying opportunity."

Penala rates Citigroup a "Buy," with a $46 price objective.

Interested in more on Citigroup? See TheStreet Ratings' report card for this stock.


PNC Financial Services Group ( PNC) was the sector winner, with shares rising 4% to close at $62.01, after the Pittsburgh lender reported fourth-quarter earnings of $719 million, or $1.24 a share, compared to earnings of $925 million, or $1.64 a share, in the third quarter, and $493 million, or 85 cents a share, in the fourth quarter of 2012.

In keeping with the industry's "kitchen sink" theme for clearing out extraordinary items in the fourth quarter, PNC had preannounced $91 million in expenses related to mortgage foreclosures, including $70 million for the industry settlement. Other items included " a pretax provision of $254 million for residential mortgage repurchase obligations related to expected elevated levels of repurchase demands primarily as a result of further changes in behavior and demand patterns" of Fannie Mae and Freddie Mac, as well as ""a $45 million goodwill impairment charge for the company's mortgage unit, and a gain of $130 million on the sale of Visa ( V)." Together, the items lowered PNC's fourth-quarter earnings by 47 cents a share.

Another major item affecting the fourth-quarter earnings was a $318 million provision for credit losses, increasing from $228 million the previous quarter, and $190 million in the fourth quarter of 2011. CFO Rick Johnson explained during the company's conference call that the provision "higher than the previous guidance of $150 million to $250 million, primarily due to the completion of our implementation of regulatory guidance for loans discharged from bankruptcy. A provision of $53 million was recorded in the fourth quarter related to this guidance."

Net income for 2012 was $3.0 billion, or $5.30 a share, declining slightly from $3.1 billion, or $5.64 a share in 2011.

Jefferies analyst Ken Usdin said in a note after the earnings announcement that PNC's core earnings looked "closer to $1.60-$1.65."

With the company's Basel 1 Tier 1 common equity ratio increasing by 20 basis points during the fourth quarter to 7.3% as of Dec 31, Usdin said "we believe PNC is well on its way to its goal of 8.0%-8.5% by year-end 2013."

The analyst rates PNC a "Buy," with a $72 price target."

Interested in more on PNC Financial Services Group? See TheStreet Ratings' report card for this stock.

Capital One Disappoints

After the market closed, Capital One ( COF) reported fourth-quarter net income available to common stockholders of $825 million, or $1.41 a share, missing the consensus estimate of $1.59, among analyst polled by Thomson Reuters.

Earnings declined from $1.173 billion, or $2.05 a share, in the third quarter, with CFO Gary Perlin saying that "seasonal expense and margin trends led to a reduction in fourth quarter earnings compared to the previous quarter."

Capital One's revenue declined to $5.625 billion in the fourth quarter from $5.782 billion in the third quarter. The company provided 2013 guidance, saying it expected "average quarterly revenue levels in 2013 to be consistent with the fourth quarter of 2012, as a modest decline in earning assets will be offset by a steady to slightly higher net interest margin."

The company reported a sequential 45 basis point narrowing of its net interest margin, to 6.52%.

Please see TheStreet's detailed earnings coverage for more on Capital One's fourth-quarter results.

Capital One's shares were down over 7% in aftermarket trading, to $57.10.


-- 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 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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