Bank of America (BAC) earnings fell 43% in the second quarter, hurt by $4 billion in legal costs related to wrangling with the Justice Department over dodgy mortgage-backed securities it peddled before the financial crisis.
As the most recent quarter showed once again, the ongoing battle with the federal government has been a huge and expensive overhang for BAC stock. Until it’s removed, BAC stock will likely keep limping along.
Citigroup (C) on Monday said it reached a $7 billion deal with the federal government over its own mortgage-backed securities. JPMorgan Chase (JPM) negotiated a similar settlement for $13 billion in November.
Anyone holding BAC stock can only hope for a similarly favorable settlement for the bank — and soon.
It’s not even so much that the negotiations with the DOJ has been so costly for BAC (the bank has set aside ample cash for the fight) — it’s that the uncertainty casts a pall over BAC stock. After all, if BAC and the government can’t come to a deal, the DOJ will likely file suit against the bank, creating an even more expensive and open-ended problem.
And things are bad enough already for Bank of America and BAC stock.
Indeed, BAC has been so buried in rubble left over from the financial crisis, it’s made it essentially impossible to model future Bank of America earnings — to say nothing of putting a value on BAC stock.
Take the latest quarter as an example. On a net income basis, Bank of America earnings fell to $2 billion from $3.6 billion per year ago. On a per-share basis, net earnings came to 19 cents.
After stripping out litigation expenses of 22 cents a share, BAC earnings would have been 41 cents per share. Now, analysts usually exclude such charges, and on that basis they were looking for earnings of 29 cents per share.
Looked at that way, Bank of America earnings exceeded Wall Street’s forecast by 12 cents per share.
Or did they?
Bank of America Earnings: Estimates All Over the Map
Ordinarily, that’s a big earnings beat, and the market would applaud it. However, in this case, the range of estimates was so wide as to render the Street forecast meaningless. On an adjusted basis, individual analysts were looking for Bank of America earnings to come in anywhere from a loss of 11 cents per share to a profit of 33 cents.
One official arbiter, Thomson Reuters, calculates Bank of America earnings at 22 cents aper share — a miss of 7 cents.
Regardless of how you parse the accounting, the shotgun pattern of estimates suggests the Street was all but blind when it came to modeling adjustments to Bank of America earnings this quarter. Hey, just a day before the earnings release — surprise! — BAC disclosed a $650 million settlement with American International Group (AIG).
All of this murkiness and confusion means that whether BAC earnings beat or missed Street estimates is almost beside the point. Until Bank of America settles all remaining legal issues — especially the big one with the feds — it’s impossible to get a bead on BAC stock.
There’s also the not-insignificant matter of when BAC will be able to implement a dividend hike and share-repurchase program. (BAC had to shelve plans to raise its dividend to 5 cents a share from a penny and buy back $4 billion in BAC stock when it discovered accounting errors related to its acquisition of Merrill Lynch five years ago.)
BAC stock stock hasn’t gone anywhere this year — it was up 1.5% as of Tuesday’s close — and there’s no reason for it to move when future earnings, shares outstanding and the dividend can’t even be penciled in.
When it comes to the big bank stocks, investors have better options — like JPMorgan and Wells Fargo (WFC). BAC stock trades more on its clean-up efforts than anything else. It just isn’t worth the trouble.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.