Since its shotgun marriage with Merrill Lynch back in 2008, Bank of America (BAC:NYSE) has struggled to deliver positive results to shareholders as it lumbers forward under the burden of legacy disputes arising from the last housing crisis and continued scrutiny over its business practices. This has contributed to the softness in the bank’s shares, which have been amongst the worst performers in the US financial sector. Hurt by falling revenues and a weak outlook for net interest income, the possibility of a shifting credit cycle could not come at a worse time for the bank as it struggles to impress shareholders with its litany of overhauls. With inherited problems still plaguing the Bank, sky high legal fees and never ending battles with regulators demanding their pound of flesh could continue to weigh on the outlook in spite of progress in other areas.
Fundamental Strides Not Translating to Share Price Upside
Performance of Bank of America has been lackluster to put it mildly, with shares plunging by -22.94% year-to-date, although trending modestly higher since hitting multi-year lows last seen in 2013 back in January. Although shares did manage to rebound 18.02% off the 52-week lows, the bounce may prove short-lived in spite of big picture improvements on the income statement. A quick look at the 5-year view of financials show that the bank has managed to go ahead and grow net income substantially, reaching $15.888 billion in 2015, climbing dramatically above the $4.833 billion reported in 2014. During the same time period, earnings per share have risen from $0.36 in 2014 to $1.31 in 2015 in strong confirmation that the bank’s leadership is taking the appropriate steps to deliver value to stakeholders down the road.
However, the one disappointment from a balance sheet perspective is rising loan loss provisions. Although many of the settlements for improprieties during the subprime loan crisis have been resolved, helping to reduce legal costs for Bank of America, the new looming risk factor is in other lending areas, notably the bank’s exposure to loans in the energy exploration and production sector. As the energy industry begins to deleverage following the hangover from a borrowing binge that emerged on the back of rock bottom interest rates, banks with heavy exposure to the sector such as a Bank of America are expecting losses to be recorded in the upcoming quarters. Although debt servicing risks have been reduced modestly off the most recent rally higher in oil and gas prices, the long-term view is still weak as these indebted firms struggle to generate cash flow to repay these loans.
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