Banks, large and not so large, are continuing to release earnings. There is a pattern emerging that so long as there is no investment bank exposure, bank earnings are solid or better. Today I will analyze earnings from three big banks, one of which is a large, but purely regional bank to see whether that pattern persists throughout the earnings season. My analysis, as usual, focuses on fundamental factors, not technical. Without further ado, some big banks to consider.
Bank of America Inc. (BAC)
Bank of America is the nation's second largest bank, with assets of almost $2.3 trillion. It has struggled mightily these past four years, especially when compared to where it was in the mid 2000s and before. Its growth, and its fall, where occasioned by a few ill timed acquisitions.
In its just released 4th quarter and full year earnings for 2011, I found no surprises. BAC posted net income of nearly $2.0 billion. But if one removes the swarm of one time events, from the sale of its Chinese bank to goodwill impairment charges, along with other events of that ilk, which when combined contributed $1.6 billion toward earnings, things change. BAC also released from its reserves another $700 million. What that means is, as an ongoing bank, BAC continues to be unprofitable, to the tune of a loss of $300 million, or 2 cents per share.
Traders bid the stock up by 5% on the news and it was trading recently at a little over $7 per share. Its 52 week range is from $14.95 to $4.92. It has a market capitalization of $71.8 billion, and a 12 month trailing P/E of 52. Take out the one time adjustments BAC has added to its income and cash flow statements, and the P/E would not be calculable. It pays a token dividend of one cent per quarter, for an annual yield of 0.60%.
BAC makes much in its reports of the increases in its tangible book value and common equity during 2012. Unlike more solvent banks, BAC is prohibited by the Federal Reserve and U.S. Treasury from buying back stock or paying anything more than a token dividend. So, when a bank nets some $34 billion from selling off what it calls in retrospect "non core holdings", what options does it have? BAC Countrywide mess, but also toward cleaning up its balance sheet. Other banks have healthy balance sheets without having to sell profitable assets like BAC's Chinese Bank.
It saddens me to see what has become of the old North Carolina National Bank, citing a profit based upon, as one asset manager stated, "pipe cleaners and paper machete for the Wall Street Science Fair."
Exactly. This is one name to sell.
Morgan Stanley (MS)
Morgan Stanley is not really a bank. What it has been for over 75 years is one of the world's leading investment bankers and wealth managers. Like its peer Goldman Sachs Group, Inc. (GS), it obtained "bank holding" status in 2008 in order to qualify for Troubled Asset Relief Program (TARP) funds.
Morgan Stanley really had no chance for a successful 4th quarter. Its cyclical investment banking business was way, way down during the quarter, and it also wrapped up its troubling litigation with MBIA Inc.for a pre tax charge of $1.7 billion. The sum of these drove Morgan Stanley's net to a loss of $227 million, or ($0.15) per share. For all of 2011, Morgan Stanley reported profits of $4.2 billion, or $1.26 per share.
Wall Street was expecting worse. As a result, Morgan Stanley stock surged over 6%, and it was trading recently about $18.50 per share. Its 52 week range is from $31.04 to $11.58. It has a market capitalization of $35.2 billion, and a P/E of 14.5. It pays a quarterly dividend of 5 cents per share, for a yield of 1.2%.
Much of Morgan Stanley's reported profit for the near, and near profit for the quarter, came from continual readjustments of debt related and credit-rate spreads. This accounted for a gain of $3.7 billion for all of 2011, with $3.4 billion of the benefit falling in the fourth quarter. These spreads continue to narrow and widen in time, as Morgan Stanley took a negative write down in 2010 of $873 million from the same source in 2010.
Morgan Stanley's core businesses were all "off" in the fourth quarter. In a comparison with the year earlier quarter, income in the asset management group was off by 78%, income in the international wealth management group was off 37% and institutional securities swung from a $448 million profit, to a $779 loss, due to the MBIA settlement.
I am not down on Morgan Stanley. I just want all to realize it is as subject to market cyclicity as any other investment banking concern. And given that the fourth quarter was a very quiet quarter, 2012 comparisons may look quite attractive. Now would be the time to hop onboard. Thus, this is one name to buy.
BB&T Corporation (BBT)
BBT is a large, regional bank based in North Carolina. It is the 13th largest commercial bank in the country, with about $175 billion in assets. Its stock was trading recently at about $27 per share. Its 52 week range is from $29.60 to $18.92. It has a market capitalization of 18.9 billion, and a trailing 12 month P/E of 14.8. It pays a quarterly dividend of $0.16 per share, for an annual yield of 2.3%
BBT has historically been a highly profitable bank; just the kind of a regional bank I believe will be standing out in this quarter compared to the larger, money center banks. BBT reported earnings in the 4th quarter of $391 million, up nearly double from the year earlier quarter's $208 million. Per share earnings improved 83%, to $0.55 per share compared with $0.30 per share.
My two most important "snapshots" to ascertain my opinion on a bank are its return on assets, which I want to see at over 1%, and its efficiency ratio, which I want to see at 0.60 or below. The efficiency ratio is calculated by total non interest expense as the numerator, and the sum of net interest income plus non interest income as the denominator. In the 4th quarter, BBT recorded an annualized return on assets of 0.93. Its efficiency ratio was a superb 53.5.
I have not been a fan of BBT, because I have let politics interfere. Its chief executive railed against the excesses of Washington and for the purity of free markets, and the bank then accepted $3.4 billion in TARP loans. The bank is in growth mode, and is now in the process of expanding its Florida presence with the purchase of BankAtlantic Bancorp Inc.
This straight forward institution should appeal to conservative investors who want a financial equity.