Bank of America Q1 Report
Board: Bank of America
Results out today, to which Mr Market hasn't reacted in an ideal fashion; however, as always with these things, you need to ignore the headlines and look at the detail.
Listened in to the analyst call and one of them asked the CFO why he thought that the share price was down in pre market trading - he said that some of the analysts hadn't factored in some seasonal things which happen in Q1, in particular extra comp, and therefore expectations were too high. If you strip these seasonal things out then it looks to me that they beat EPS forecasts by about 3 cents (26 cents vs 23 expected).
My take on the results was quite positive:
- revenues up surprisingly and were higher than any quarter last year
- LAS (legacy business) costs down by $0.5bn vs Q4 FY12 and headcount down by over 10%
- litigation costs down by $1.1bn vs Q4 FY12
- strip out the higher costs which are linked to commission on the higher revenue and recurring costs are down by about $0.3bn vs Q4 FY12
- provisions were $0.5bn lower than Q4 FY12 and below the level which management guided to
- Tier 1 Basel 3 ratio of 9.42% compared with the 8.5% which they need to be by 2019
So all in all I thought that the results were positive, though they can still go a long long long way further, in particular when it comes to taking out cost.
Based on the guidance which they've given (which seems to be conservative) around costs, provisions, cost savings its actually not too difficult to model the P&L - the big questions is what is going to happen to revenue as that flows all the way down through the P&L and therefore has a massive impact on EPS.
However my figures suggest that EPS for Q4 this year should be in the region of 30-35 cents, depending on revenues. Annualizing this gets you to $1.2 - $1.4 EPS for a run-rate year.
By the end of 2014, on a similar basis and factoring in the rest of the cost savings and more reduction in the LAS business, EPS should be in the region of 40-50 cents by Q4.
One other interesting thing which they disclosed today for the first time (I think) was in the appendix to the analyst presentation - it showed the amount of capital which is allocated to each of the businesses and out of a total of $144bn, about $24bn is allocated to the CRES division which includes the legacy asset business which they're trying to wind up. Stripping out the part of this which isn't related to legacy assets, this shows that there's a double digit billion of capital which they can redeploy in the next couple years to earn better returns or actually return to shareholders.
I do think these shares are still great value and as the costs continue to come out of the business there should be a massive uplift to EPS over FY13 and FY14. I think you can comfortably double your money on these on an 18-24 month time frame