Bank of America Corp. has proven it can retreat its way to an improved capital position. Now it needs to show it can hold that ground.
The company's fourth-quarter results displayed the fruits of a plan to slash or sell anything not bolted to its core operations. That effort is still very much in progress, with the bank cutting a net 7,000 jobs and promising continued reductions through "New BAC Two," an encore to its first expense-cutting exercise.
Chief Executive Officer Brian Moynihan promised investors that a stable basic banking business would soon reemerge.
"We have now absorbed the Durbin, the Reg E, the CARD Act, and all the change that occurred over the last couple years," he said on the company's conference call in reference to financial reforms of recent years. "For 2012 we can now really focus on our retail strategy."
B of A shares closed at $6.96 apiece, up 2.35%. Though earnings of $2 billion was good news, bank divestitures and one-time adjustments made for a noisy quarter.
Perhaps more important was the bank's progress in improving its regulatory capital position. It's Tier 1 common equity ratio now stands at 9.86%, and its tangible common equity ratio rose to 6.64% from 6.25% in the third quarter.
"That's what people are going to reward us for," Chief Financial Officer Bruce Thompson said on the earnings call. "[BofA's] capital and capital ratio should continue to grow" through earnings, he added.
Stifel Nicolaus managing director Christopher Mutascio applauded the regulatory capital gains in an interview. But he remains concerned about Bank of America's prospects for generating the capital it needs through earnings growth.
"If you drill down to the core earnings to the core number, there's not a lot of earnings power here," Mutascio said, suggesting that further dispositions might be necessary. "There's still work to be done on the balance sheet."
Bank of America's ability to convert reduced assets and headcount into stable profits still depends on overcoming two obstacles. The first, as Thompson readily noted, is a broad expectation of "economic headwinds and low interest rates." The second, which the bank's leadership did not dwell on, is the possibility that its legal and repurchase costs are not yet contained.
Much of Bank of America's $2 billion profit for the quarter was the result of one-time gains and charges such as the $2.9 billion it earned from the sale of its stake in China Construction Bank Corp. But the relatively good numbers can also be ascribed in part to its lower fourth-quarter provision for mortgage-repurchase costs, which at $263 million were the lowest of any quarter in the past year. Though litigation expenses were up sharply to $1.5 billion, they were only on par with the bank's 2011 average.
According to CFO Thompson, the two "significant" explanations for the bank's litigation reserve were a Countrywide fair lending settlement and the expectation of an eventual settlement with the Justice Department and a coalition of the state attorneys general.
That is potentially cause for concern given that a number of recent legal decisions — from the issue of proving causality in MBIA's bond insurance litigation to a federal court's decision to review the bank's proposed $8.5 billion settlement with Countrywide mortgage bond investors — did not swing the bank's way.
Mutascio said that he was not bothered by the lack of continued buildup in B of A's reserves — the company already has more than $15 billion set aside for putbacks already. Whether that is sufficient likely depends on whether the company's proposed settlement with Countrywide investors actually goes through.
"That could be a needle mover," he said.
Bank of America is still asking its investors for patience; the company is not currently seeking Federal Reserve approval for stock dividends or buybacks. Moynihan made clear that the bank has little tolerance for waiting out the sluggishness of some businesses. Other banks have staunchly defended the assumption that trading revenues will recover, while Bank of America appeared more ambivalent.
Questioned by Oppenheimer analyst Chris Kotowski about whether Bank of America was providing its global markets business with enough capital to be a "world-class investment bank," Moynihan first responded that B of A was committed to giving the unit all the resources it could use. But if results from its capital markets operations didn't pick up, Moynihan later added, the bank was not going to keep pumping in money.
"We need that business to come back or we've got to do more on expenses," he said. "That is what this New BAC 2 process is working on."
Moynihan's unwillingness to forecast the speedy recovery of investment banking revenue may simply have been diplomatic, Mutascio said, because the CEO has recently been trying to rebuild investor confidence by not overpromising. But given B of A's continued capital concerns, the bank cannot wait indefinitely for the sector's recovery.
"This company has a different level of pressure than others on capital," Mutascio said. "JPMorgan [Chase & Co.] has got a greater ability to withstand a slump."
Moynihan also addressed Bank of America's debit-fee public relations debacle. The outcry over the proposed charge drove customers to leave the bank, but did not appear to cause lasting damage.
"Yes, we had some impact," he said. "That is why we made the decision to reverse it."