NEW YORK (TheStreet) – With a market capitalization of $182 billion, Bank of America (BAC) , the world's fifth-largest bank and second-largest in the U.S. by total assets, knows how to make money, and it knows how to spend it.
But after the release of its third-quarter earnings, investors have learned that BofA's spending hasn't been the type of that generates shareholder value.
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Legal expenses, including a third-quarter charge of $5.3 billion, stemming from a settlement with the Department of Justice, continue to eat into BofA's profits. And there is no end in sight, following last Thursday's announcement that the bank will now take another $400 million charge in the third quarter to cover litigation costs, this time related to an inquiry in its foreign-exchange business.
Nevertheless, shares of BofA are trading Monday at about $17, up about 11.5% for the year to date, because investors know that the bank still has plenty of money to meet any dire situation, thanks to stricter federal regulation. But that doesn't mean that there are better investments out there.
Since taking over the bank in 2010, Chief Executive Brian Moynihan has delivered five quarterly losses, causing investors to wonder when the continuing litigation costs that the bank has been unable to offset with higher revenue will stop.
For Moynihan, it has been one legal headache after another. Following the bank's record $16.7 billion settlement with the U.S. government over mortgage probes this year, questions are being raised about the bank's foreign-exchange business.
In a recent regulatory filing, BofA disclosed that it has been engaged in "separate advanced discussions with certain U.S. banking regulatory agencies to resolve matters related to its foreign-exchange business."
In fairness, BofA isn't the only one suffering from these issues. Thursday's revelation follows statements made by both Citigroup (C) and JPMorgan Chase (JPM) that suggests that they also face similar allegations.
Last month, Citigroup cut $600 million from its third-quarter earnings, saying that regulatory agencies in the U.S., Switzerland and the United Kingdom had made inquires about its foreign-exchange business. Last week, JPMorgan said that the Department of Justice had opened a criminal investigation into its foreign-exchange business.
But though all three banks share in the legal woes, BofA is struggling more in terms of key metrics.
For instance, in the most recent quarter, BofA's 1.5% year-over-year revenue decline was the lowest among the four major banks. Revenue grew 9.5%, 4.9% and 3.5%, at Citigroup, JPMorgan and Wells Fargo (WFC) , respectively.
In terms of operating margin, BofA posted a decline to 2.9% from 18.18% in 2013. Citigroup, meanwhile, posted a year-over-year decline of just 0.52 percentage points, while JPMorgan increased its operating margin to 31.72%, topping last year's mark of 26.82%.
There is also BofA's return on equity, which is the lowest among the big four banks at -0.13%. ROE shows how well a company is using its money to build its business, and there is perhaps no other metric that explains how well a company is being managed when compared with its peers within its industry.
JPMorgan's ROE registers at 9.81%, while Citigroup's is 5.31%. Wells Fargo leads the big four banks with a ROE of 13.34%.
And considering that BofA's third-quarter net interest income margins are on the decline, which were affected by drops in both net loan assets and total deposits, it is tough to see where the bank's growth will come from. Net loan assets declined 4.24% year over year, while total deposits dropped 1.97% from the previous quarter.
What's more, net loan assets as a percentage of equity declined 30 basis points year over year to 3.66%, from 3.94%. And BofA's total deposits as a percentage of equity fell 13 basis points to 4.65%, from 4.78%.
These ratios are used to assess a bank's available cash position. It works by dividing total loans by total deposits.
In that case, the declining ratio suggests that BofA isn't earning as much as it could each quarter. At the same time, however, had the ratios been too high, it would indicate that the bank might now have enough cash to cover potential capital requirements.
BofA still has a lot of work to do. Not only must it get its business heading in the right direction, it is still miles away from gaining pre-recession level respect from Wall Street.
The bank won't run out of money any time soon. But shelling out millions each quarter in legal costs isn't great for shareholders.
And at some point, shareholders must reconcile how long they are willing to wait for these issues to be resolved.
At the time of publication, the author held no position in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
TheStreet Ratings team rates BANK OF AMERICA CORP as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate BANK OF AMERICA CORP (BAC) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its expanding profit margins and solid stock price performance. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
You can view the full analysis from the report here: BAC Ratings Report