22 January, 2008

Bank Of America & Wachovia see Profits Diminish but not Evaporate

The latest major US Financials to report earnings saw first hand the engulfing losses that have plagued many of their peers. Bank Of America (BAC) and Wachovia (WB) proved to be just as culpable in the US mortgage and credit mess as many of the other US banks and Investment Houses. Earnings for these two firms fell 95% and 98%, respectively.

Bank Of America, which till now, hadn't been hit by selling as hard as major competitor Citigroup (C), acknowledged a multitude of mortgage based losses and set liquidity provisions on its balance sheet to absorb even more. Now, while not as headline grabbing as the bigger losses of its peers, BAC managed to rack up over $5Billion in mortgage related write-downs and a further $5.5Billion in related trading losses. Even so, the company managed to eek out a small profit. $0.05/share vs. last year's mark of $1.16/share (Profits of $268Million vs. last year's $5.26Billion).

Revenue falling was also a concern as a 31% top line dive for any type of company can not be seen as healthy. Bank Of America also set aside over $3Billion for future related troubles (read: more losses due to bad loans), but it seems to have seen the worst for now. Analysts still expect somewhere over $4/share in earnings in FY2008, pegging a forward P/E for the battered bank at just under 9. In-line with what the markets expect to pay for the big Financials. BAC's cause was helped today by a 4% run-up (over 11% reversal from the open) in its stock.

If there's a less greedy bank option in the US, and one ripe for ownership for a longer haul reversal, it is probably BAC.

Another financial competitor, Wachovia, also posted a drastic decline in profit, but like BAC-and unlike others in the sector-it in fact still reported a profit! Profit numbers were minuscule at $51Million ($0.03/share) vs. a year ago result of $2.3Billion ($1.20/share). That's a spectacular 98% drop. However, it does show that Wachovia had some wits about itself to not completely jump in with both feet into a saturated sub-prime market. The revenue slide was not as great as most peers, coming in only 19% lower than a year ago at $6.3Billion.

Now, that's not to say all is well here, as in fact Wachovia increased its provisions for more losses many times over, 7 times in fact, to $1.5Billion, as well as recording a loss of $1.7Billion on loan related investments. That is a future provision of almost 1x current reported losses. This number is far more worrisome when compared to larger competitor BAC, which set provisions of only 0.3x current reported losses. Management however, reiterated that while poor results were in fact delivered today, the goals for the future and the expectations on those goals, remain very much in tact.

The Major Financials in this market-climate seem like a laundry list of the heaviest hit securities, and deservedly so, but some more than others, and a quick glance at profit declines and loan loss provisions shows which were in fact the greediest. While Citigroup tries to dig itself out of massive losses, others are simply dealing with profit cuts and slightly larger provisions. JPMorgan Chase (JPM) is an example of the latter, and along with BAC and WB seems to be the better candidate for a recovery into the later stages of this year and next.

Disclosure: Author is long BAC, WB


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