Bank of America (NYSE:BAC) made money in the third quarter — $6.2 billion, to be exact. The country’s now-second-largest bank by assets saw its stock bounce on the news. While it’s a big turnaround, BAC isn’t out of the woods — not by a country mile. Investors thinking about buying its stock on the good news might want to think twice. A better move is to buy BB&T (NYSE:BBT) instead. Here’s why:
The Real Number
Once you remove one-time items, Bank of America’s third quarter isn’t nearly as rosy. Jason Goldberg of Barclays Capital says BAC earned 25 cents per share in the quarter, excluding items, which is six cents better than the analyst consensus and much higher than its loss from the third quarter in 2010. The bank’s chief financial officer would require a number of hours of your time to explain how the Barclays analyst came to this figure.
Right at the beginning of its press release, the bank states, “There were a number of significant items that affected results in both periods.” In a nutshell, it had $9.8 billion in pretax benefits that were one-time items, as well as a $2.2 billion loss from its private equity segment.
Keeping things simple, basic subtraction suggests that there were $7.6 billion in pretax benefits in the quarter. The summary income statement from its press release shows pretax income in the third quarter of $7.4 billion. One could surmise that the bank didn’t actually generate a pretax profit from operations, but rather a $200 million loss and certainly nothing remotely close to the number the Barclays analyst mentions.
Now I’m sure there’s a perfectly sensible explanation for this, but why would you invest in a company whose financial statements are so impossibly difficult to understand? True, banks do have some of the most difficult financial statements of any industry to comprehend, but when they become an exercise in futility, something isn’t right.
Hits and Misses
As I stated in the previous paragraph, Bank of America’s private equity division lost $2.2 billion in the quarter. It wasn’t the only one. BofA’s mortgage and insurance unit also lost $1.1 billion in Q3, 181% higher than in 2010. Bank of America paid $2.5 billion for Countrywide Financial in 2008. The acquisition has cost the company an estimated $30 billion in write-downs and lawsuits with more likely to come.
Most disappointing, however, is the fact that Bank of America’s mortgage division originated just $33 billion in home loans in the third quarter, less than half the $71.9 billion in the same quarter a year ago. Bill Hassiepen, senior credit analyst at Egan-Jones Rating Co. describes its core earnings as “very suspect.”
Other gems found in its third-quarter announcement include net interest income falling 15.6% to $10.74 billion, a net interest margin that shrank 40 basis points to 2.32% and profits from credit cards falling 35% to $1.26 billion when compared sequentially with the second quarter.
I can’t see anything to like about Bank of America’s earnings, but some people can. Tim Ghirskey, chief investment officer at Solaris Asset Management said of them, “Earnings were very good — surprisingly good — especially the revenue, surprisingly good in a very tough quarter.” I’m surprised at his reaction. His glass must be more than half-full. Save yourself the trouble and avoid the banking industry’s biggest reclamation project.
BB&T Earnings
The Mid-Atlantic bank announces earnings Thursday before the opening bell. Analysts expect earnings per share of 49 cents, 63% higher year over year. BB&T’s earnings, should they meet or exceed expectations, will have improved 35% year over year on average in each of its past four quarters. It’s on a roll despite revenues declining by as much as 24% in the third quarter and 7.7% for all of 2011.
Analysts have mixed feelings about the bank’s fortunes, with 25 out of the 38 surveyed by Thomson/First Call recommending investors hold while only 10 are a “buy,” strong or otherwise. BB&T has paid a dividend every year since 1903, so it’s a safe bet you’ll get your quarterly stipend without fail. In 2009, it cut the quarterly dividend by 68% to repay the federal government’s TARP money early. In March, after passing its second regulatory stress test, BB&T raised its quarterly dividend a penny to 16 cents per share. CEO Kelly King is committed to the dividend as its No. 1 method for returning capital to shareholders, ahead of share repurchases. Since most companies do a terrible job buying back stock, investors should welcome the strategy.
If there’s one single thing that stands out about BB&T’s earnings, it would be its net interest margin of 4.15% in the second quarter — 165 basis points higher than Bank of America. In the third quarter, while Bank of America’s net interest margin actually declined, it’s expected that BB&T’s will remain above 4.05% for the remainder of the year.
Bottom Line
There’s still too much uncertainty surrounding Bank of America’s future. Save yourself some grief and go with BB&T that, although smaller, is better run.
As of this writing, Will Ashworth did not own a position in any of the aforementioned stocks.
