Both stocks were up more than 4% on their earnings announcements yesterday morning, and some analysts predicted that their operating results are good news for the entire financial sector.
Not so fast, I say.
Bank of America is the big story — way up thanks to surprising profits of nearly $1.6 billion. That is a surprise when you consider that a year ago, BAC’s quarterly loss was roughly that amount.
But look behind the numbers, and the story becomes less upbeat.
For starters, there’s trouble at the heart of BAC’s business. While some costs were cut and credit reserves for bad loans declined, the investment bank unit’s numbers were u-g-l-y. Trading plunged 73% from the prior year, and investment banking fees fell 34%.
Making up for these shortfalls were big asset sales — the kind of one-time events that may make this quarter look good but can’t be repeated.
Among these one-time items were a $2.9 billion gain from the sale of China Construction Bank shares, a $1.2 billion gain from a massive exchange of debt and a smaller gain from the sale of some Canadian credit-card operations.
To see what’s really going on at a company like BAC, I look at metrics that aren’t obscured by big one-time events.
On my scorecard, Bank of America gets a failing grade on Sales Growth, Return on Equity and Cash Flow. Plus, the last few weeks of buying pressure on the stock isn’t anything to write home about, so it’s very unlikely that today’s move will be sustainable.
My analysis says that the rot runs deep at Bank of America and needs a lot more time to be worked out. Steer clear.
Now let’s look at Morgan Stanley. Despite yesterday’s pop in the shares, the picture here is also not good.
Revenue is down 26%, institutional-securities division revenues are down 42%, and profits…well, there were no profits. MS lost $227 million for the quarter.
Now, a big chunk of this loss was related to settling a long-running legal clash over bond insurer MBIA. And the loss is smaller than what analysts were expecting. Still, the signs of weakness in Morgan’s core operations are clear and cannot be ignored.
My stock-grading system gives Morgan a “D” on the critical factor of Return on Equity. More importantly, MS gets an “F” on my quantitative metric.
One quarter of results that are not as bad as we thought doesn’t outweigh those facts, so I won’t be buying any MS shares anytime soon, and neither should you.