BOFA And Credit Quality

Bank of America is a pure play financial institution focused on an end to end (Last Mile) financial solution to all most every person in the country. They have created a full serve/scale banking giant with their purchases of distressed assets like Merrill Lynch and Countrywide Financial. It is the one financial institution that is the most leveraged to the general state of the economy. If you are looking for a bank that will do very well in a good economy, BOFA is the one to own. Problem is, we are in a poor economy that might very well get worse before there is any turn higher. Bank of America has all most everything covered from coast to coast, but with employment trends getting weaker and the general state if the economy in doubt, BOFA's existence is at stake.

From reading the headlines about their quarterly earnings this morning, it pretty much sums up my points above. BOFA is all ready in major trouble as the economy continues to suffer, but its irresponsible for the CEO to continue to talk about everything except the massive losses that BOFA has sitting on its balance sheet. These losses can be minimized if the economy gets better, but they exponentially get worse as both credit quality and employment worsens further.

BOFA turned a profit of .44 cents per share beating estimates by a wide margin, but they had some devastating things to say about the state of their credit quality. BOFA still faces extremely difficult issues primarily from deteriorating credit quality driven by weakness in the economy and growing unemployment. Bank of America is considered particularly vulnerable to unemployment, and the condition of its mammoth portfolio of credit-card loans is a bellwether for the rest of the industry. Credit card losses soared again during the quarter. Credit loss provisions more than doubled to $13.40 billion and climbed from the prior quarter's $8.50 billion, while the net charge-off rate rose to 2.85% from 1.25% a year earlier and 2.36% in the fourth quarter. Credit card losses increased to 8.62% from 5.19% and total nonperforming assets jumped to 2.65% from 0.9% in the prior year and 1.96% in the fourth quarter. Non Performing Assets now total over $25 Billion.

Breaking down the $4.25 Billion profit figure goes like this, $2.2Billion was from mark to market financial illusion that falsely boosted profits, $765 Million came from restructuring and cost savings, so 2/3 of their profits are non operating for the quarter. Add in the credit deterioration, and you have a stock that is down 17% today.

Whats worse is their commercial loan loss trends are far worse then retail/consumer loss trends, as small business loan loss ratio was 13.5%. I have spoken about potential Commercial Real Estate losses before, this only fortifies my thesis.

Bank Of America has continually stated that they don't need to raise additional cash, this may ring true if the economy somehow turns, but that decision is not in their hands unfortunately. Its beyond belief that the CEO still talks about repaying TARP in a few months after the breath taking losses that BOFA has incurred.

Like I stated Friday, the banks or way ahead of themselves. This announcement about credit card losses really has spooked the market, as the PHLX Bank Index is getting hammered by the tune of 11% so far today. This is just the beginging of the next down leg of the credit cycle, as Bank of America is kind of a barometer for the entire banking industry. Bank of America's results show increased erosion in credit especially with regard to its commercial real estate and commercial and industrial lending. Funny thing is JP, Wells Fargo, and Citigroup stated the same thing when they announced their earnings,but the financials and the markets rallied anyway. The market is all about perception, and the perception of the credit picture is a lot more negative today.

The downward spiral in the financials today just exemplifies not only the underlying fundamentals in the banks, but the broader economy. Today there's more of a realization that the market got a little ahead of itself last week, and that the risk has not subsided. Many investors over the past few weeks had the false sense that we were going into a quarter thinking that credit conditions were bottoming out, not there by a long shot.