Bank of America (BAC) eked out a $732 million profit as it closed out serious legal and regulatory costs in the fourth quarter.
The costs of mortgage-repurchase settlements, regulatory deals, and debt valuation swings were offset by gains from asset sales, strong asset management income, and staff reductions.
The prospect of resolving crisis-era woes loomed large in the bank's Thursday morning analyst call, with Chief Executive Brian Moynihan citing concrete progress during a year that saw a peer-leading doubling in B of A's stock price.
"We improved the balance sheet, we managed risk, and we addressed significant legacy issues," Moynihan said.
Significant liabilities remain, however, and working through them has consistently been slower and more painful than executives predicted.
Dozens of variations of the phrases "addressing legacy issues" and "putting things behind us" litter B of A earnings transcripts over the last three years, referring to market shifts, settlements, and management changes. Analysts pressed Moynihan on what was left to come.
One concern: whether B of A has adequately prepared for adverse outcomes in its litigation with mortgage bond insurers.
"This litigation goes back and forth, and the judge has a lot of decisions to make, but we're comfortable with our legal positions across the board," Moynihan told CLSA analyst Mike Mayo, speaking of the bond insurer MBIA's suit in New York's Southern District against Countrywide, the lender B of A acquired in 2008.
The bank's $11.6 billion repurchase and servicing agreement with Fannie Mae resolved what might be its single largest mortgage exposure, helping the bank drop from an average of $300 million per quarter in repurchase costs to an expected $150 million from now on. The bank shed 9,000 employees, its fifth straight quarter of staff reductions. Some of those job cuts were made possible by a settlement with the Office of the Comptroller of the Currency that cut short an expensive review of foreclosure actions.
After readily ceding its dominant spot in mortgage originations to Wells Fargo and other major banks just in time to miss out on a refinancing boom, B of A is now seeking to rebuild its position in the red-hot government-backed mortgage origination business - without taking on risk.
Although the bank talked up a 6% quarterly gain in its much-diminished origination volume, executives stood by their decision to close its correspondent lending business, which had been producing $6.5 billion of loans a quarter, and split its existing mortgage portfolio between "loans that would be a go-forward business," as Moynihan put it, "and products that were never going to be done again."
"The next challenge is to replace the HARP volumes over the next year" as the Home Affordable Refinancing Program peters out, Moynihan says. The bank could "chase volume" while catering to "people who are very safe credits …There's plenty of market share to grow." The bank's distaste for dealing with troubled loans extends to its current portfolio: after selling distressed and iffy mortgages with a face value of $306 billion during the fourth quarter, executives said they expect additional sales this year.
Even as mortgage credit risk remains a third rail for the bank, B of A has loosened up on risk in other areas.
In the global markets operation, fourth-quarter Value at Risk - a measure of how much a bank expects it could gain or lose in a single day — nearly doubled to $100 million, and Chief Financial Officer Bruce Thompson suggested the increase would be sustained.
"We would expect to see the benefits of that VAR flow through during the first quarter" as the increased risk produces greater revenue, he said.
The bank generally did well from the businesses it inherited from the crisis-era purchase of Merrill Lynch. Debt underwriting revenues stood at $1.1 billion, up more than 20% quarter over quarter. Global banking income, much of which comes from the Merrill side of the family, grew more than 10% to $1.4 billion. The bank's wealth management operation ended the quarter with record assets under management.
Amid signs of stability, analysts pressed hard for hints of capital buybacks. Bank of America remained coy, as it has for the last several quarters. Executives simply said they would remain mum until regulators concluded stress tests. Regulators have made it known that the bank needs to prove it can consistently generate earnings before it can begin distributing capital, Moynihan said.
Bank of America is not shy about noting how well-positioned it is to reward shareholders in the event that it can gain that stable profitability, however.
"At 9.25%, regardless of buffers [for systemically important financial institutions], we have more capital on a Basel III basis than anyone else," Moynihan said, referring to the upcoming global standard for capital held against risk assets. "We have the opportunity as core earnings rebound to grow capital more quickly than our peers."