This morning we saw a seemingly impressive earnings report from Bank of America (NYSE:BAC). Revenue was up. Profits beat expectations. Good news, right?
Not so much. A closer look at the numbers show some fuzzy math that only a contortionist could feel comfortable with. The real bottom line is that Bank of America earnings still are in trouble, and the entire financial sector remains a very risky bet.
Here are the headline numbers: Bank of America earnings tallied a profit of $6.2 billion, or 56 cents per share. Revenues were up 6% at $28.8 billion at BofA. Wall Street was expecting EPS of 20 cents per share on revenues of $25.95 billion, so it all looks pretty good on paper.
But the latest quarter’s earnings figure included $4.5 billion in “fair value adjustments.” In short, this means a bank can decide how much its assets and liabilities are worth on its own! For instance, a few days earlier, both JPMorgan (NYSE:JPM) and Citigroup (NYSE:C) said the spread between their debt and U.S. Treasuries led to “profits.” No business actually transpired — other than a different number being used to calculate the Excel spreadsheet in accounting. Theoretically, as their debt “loses value” it is cheaper for banks to pay it off, resulting in a paper gain.
Confused? Well you should be — because an accounting trick that conjures billions out of thin air seems fishy to many investors. Interested parties can read an excellent, detailed report on the kinky accounting practices from Reuters here. Unfortunately, we have other fuzzy math to discuss in regards to BofA and have to keep moving …
Next up is the pretax gain of $3.6 billion from Bank of America’s sale of shares in China Construction Bank. Obviously, a huge one-time gain like this cannot be recreated. And as I wrote when the deal went down, the sale damages the future of BAC lending in China, a crucial emerging market considering how poor the credit market is in the U.S. and Europe right now.
Then there’s the loss of $2.2 billion related to private equity and strategic investments. Investors had a rough third quarter too, but $2.2 billion seems a bit ugly for a supposed Wall Street icon.
To top it off, all this comes after a Monday report from Bank of America Corp.’s credit card division that indicated an increase in late customer payments for September, the first such uptick in a year. Additionally, Bank of America still has one of the highest credit card default rates in the industry.
Nobody Knows How Bad Things Are at Banks
The squints on Wall Street can fight over the finer details of this quarter’s earnings at BofA. But the bottom line is that nobody knows how bad things really are. One-time charges, goofy “mark-to-market” tricks juicing numbers and lingering problems with consumer lending mean a very bleak picture for financial stocks.
Consider these other earnings reports:
JPMorgan Chase (NYSE:JPM) saw third-quarter earnings slip 3.5% thanks to higher expenses. On the revenue front, things are going nowhere fast — 2009 and 2010 full-year revenue totals were almost identical. As for 2011, JPM is looking at a slight decline in revenue.