On Friday, Bank of America (BAC) released another disappointing earnings report. Although BAC reported net income of $2.05B, that is a sizable decrease from the $3.18B a year ago. Earnings per share dropped to $0.17 from $0.28 a year ago. While comparing 1Q2011 with 1Q2010, it is important to note that the impressive trading revenues earned in 2010 will be difficult to repeat in today's economic climate; with that said, until BAC can successfully get a handle on its mortgage-related issues, it will continue to look less attractive than comparable large cap banks. Year-to-date, BAC is down 6.9% and has been the worst performer amongst its peers Citi (-6.54%), Wells Fargo (-4.74%), and JP Morgan (+3.62%).
On top of its lackluster earnings, BAC announced they would pay $1.1B to Assured Guaranty to resolve claims that they misrepresented $11B worth of mortgage-backed securities. After adding the cost of the loss-sharing reinsurance pact in the deal, the true cost is nearer to $1.6B. The securities in question were based off of mortgages issued by Countrywide - yet another setback in the seemingly endless Countrywide saga.
As negative as the environment surrounding Bank of America seems, I feel selling out at this point would be inappropriate. The $1.6B payout to Assured is a one-time hit and will go a long way in reducing the uncertainty surrounding mortgage-based liabilities. As mergers and acquisitions rapidly picks up there will be an excellent opportunity to replace some of the revenue which has disappeared from trading. Although short-term performance may be mediocre, on a longer-term basis I feel Bank of America continues to be worthy of remaining in the portfolio.
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