“Recidivism” is a basic concept in criminal justice, referring to an individual’s relapse into illegal activities, typically after the person has already been convicted and punished. The word can also apply to corporations — especially banks that were culpable for the global financial meltdown that precipitated the Great Recession of 2008-2009.
One bank that has received a lot of negative press for its role in issuing billions in bad sub-prime mortgage loans is Bank of America Corp. (BAC), the nation’s second-largest bank holding company by assets.
BAC stock has fallen about 6% over the last 12 months, despite a record bull market and a financial sector that’s returning to health. BofA’s prospects for 2015 remain mixed at best, suggesting that equity investors can find better places to put their money.
Litigation Woes for BAC Stock
Last year, BofA reached a $16.6 billion settlement with the U.S. Justice Department over charges that it conned unwitting investors into purchasing deeply flawed residential mortgage-backed securities. As part of that settlement, the U.S. Securities and Exchange Commission closed its case of securities fraud against the bank.
Also last year, BofA agreed to $9.5 billion in fines to settle civil lawsuits filed by the Federal Housing Finance Agency on behalf of the Federal National Mortgage Association, or Fannie Mae and the Federal Home Loan Mortgage Corporation, or Freddie Mac, which argued that Bank of America had lied about the quality of $57.5 billion worth of residential mortgage-backed securities.
BofA paid $6.3 billion to Fannie and Freddie; the bank also agreed to buy back $3.2 billion of mortgage securities. For full year 2014, Bank of America paid $16.4 billion in litigation expenses, compared with $6.1 billion in 2013.
Now, as the banking sector revives and puts the trauma of the financial crisis in the rearview mirror, the question is: has BofA learned its lesson and will it move forward in a more prudent manner?
BAC Stock Earnings Disappoint
Before we get to that question, let’s look at BofA’s earnings report today. Bank of America reported fourth quarter 2014 earnings of $3.1 billion, or earnings per share (EPS) of 25 cents, compared to $3.4 billion, or EPS of 29 cents in the same period a year ago.
Revenue came in at $19 billion, compared to $21.7 billion in the same year-ago period. Both earnings and revenue missed analysts’ expectations. Weighing on operating performance in the fourth quarter was a sharp year-over-year decline of 21% in bond trading, to $1.5 billion.
For the full year, earnings were $4.8 billion, or EPS of 36 cents, compared to $11.4 billion, or EPS of 90 cents. Full year revenue was $85.1 billion, compared to $89.8 billion in 2013.
Management did not issue guidance. The Wall Street consensus is for first quarter EPS of 32 cents on revenue of $22.4 billion. The full-year consensus is EPS of $1.47 on revenue of $88.5 billion.
Skepticism of BAC Stock is Warranted
The bank argues that fines and litigation expenses are largely behind it, which removes a major headwind from revenue and earnings. But considerable uncertainty hovers over BAC stock.
Competitors such as Wells Fargo & Co. (WFC) are more diversified than BofA, with a greater emphasis on high-margin wealth management, low-cost loans and smaller businesses that are growing amid the economic recovery. As I pointed out in my InvestorPlace article yesterday, Wells Fargo’s prudent management is now holding the bank in good stead and it faces stellar growth prospects in 2015.
BofA claims that it is moving away from the wheeling-and-dealing of the past and forsaking big merger deals and complex trading to focus on higher quality loans and risk control. But the fact is, whether BofA proves recidivist or not, it still has a way to go before it completely shakes off a legacy that has made it one of the most hated companies in America. Potential regulatory sanctions and class action lawsuits continue to lurk in the wings.
Meanwhile, if you want to leverage the improving health of the financial sector, other banks show better growth prospects than BAC stock. This wounded banking giant is still on the mend.
As of this writing, John Persinos did not hold a position in any of the aforementioned securities.
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