Bank of America’s Slow Recovery Continues in the First Quarter
The performance overhang attributable to the bank's crisis-era missteps is fading, writes Morningstar’s Jim Sinegal.
Notably, the performance overhang attributable to Bank of America’s crisis-era missteps is rapidly fading. Litigation expenses fell significantly from the $6 billion recorded in the first quarter of 2014, and the $370 million legal charge taken in the first quarter represented only about 2% of noninterest expenses. The number of full-time-equivalent positions fell by 8% over the past 12 months, as the bank reduced headcount in its legacy mortgages business and in its core businesses, despite a continued regulatory burden. Net charge-offs, excluding certain bad loans acquired over the years, totaled just under 0.6% of loan balances, in line with our long-term expectations. That said, the bank’s bottom line benefited as provisioning was more than $400 million below the quarter’s charge-offs. Overall, these developments are clearly signs of continuing progress.
We believe Bank of America possesses structural advantages sufficient to support returns on tangible equity modestly exceeding its cost of capital—in line with management’s reaffirmed 12%-13% guidance. The bank remains the largest retail deposit-taker in the country, and consumer deposits grew 5% during the year. The benefits of this low-cost funding, which the bank obtained at a rate of only 0.05% during the quarter, should become evident as the regulatory and macroeconomic environment slowly and eventually normalize.
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