At B of A, Moynihan Gives Doubters Reason to Believe

Brian Moynihan is turning the doubters into believers.

For four years, the Bank of America (BAC) chief has been under relentless pressure to improve the bank's image and performance, and as recently as a year ago analysts and investors were questioning whether he was up to the task. But after the nation's second-largest bank reported solid profit and revenue gains for the fourth quarter Wednesday, the naysayers were starting to sound more like fans.

"We started 2013 with a number of doubters about Brian Moynihan and his abilities," says Nancy Bush, a banking industry analyst with NAB Research. "That has pretty much been vanquished. Brian has proven that he can run this company."

Even Jack Welch, the former chairman and CEO of General Electric (GE), heaped praise on Moynihan Wednesday. "I think Brian Moynihan's done a hell of a good job," Welch told Bloomberg Television. "You have to give him a lot of credit."

The change in the perception of B of A was evident in the tone of Wednesday's earnings conference call. Rather than sparring with analysts over issues like legal expenses, repurchase requests and problem loans — as has been the case in recent quarters — Moynihan instead found himself fielding questions about loan growth, opportunities in its advisory business and its mobile banking strategy.

"The momentum is becoming more evident," Moynihan told analysts. "We're building the basics that are producing balanced growth."

Its fourth-quarter results were notable for star performances from three of its five business segments — consumer and business banking, which had its best results since 2011; global wealth and investment management, which posted record earnings; and global banking, which generated record revenue. Those segments helped propel Bank of America to a 364% jump in fourth quarter profits of $3.4 billion and a 15% jump in fourth-quarter revenue of $21.5 billion from a year earlier. (Year-ago profits were affected by a $11.6 billion settlement with Fannie Mae.) Its earnings per share of 29 cents were two cents better than the estimates of analysts polled by Bloomberg.

Better still, company executives said that B of A has yet to reach its earnings potential.

"We feel good about the EPS number but it's still not where we need to get the company to," Bruce Thompson, the chief financial officer, said on a media call. "As we look at the balance sheet, the capital and the liquidity, the foundation is there for us to grow and move the company forward."

To be sure, B of A still faces its share of challenges, particularly in its mortgage business, which suffered massive losses following its ill-timed acquisition of Countrywide Financial in 2008.

Though B of A continues to whittle down its problem assets, litigation expenses in the fourth quarter more than doubled, to $2.3 billion, due to ongoing litigation involving the sale of mortgage-backed securities to bond investors.

Given the size of B of A's mortgage operation, it's unlikely that litigation expenses will go away any time soon.

"It's like bees attracted to honey, the legacy costs are just going to continue," says Erik Oja, an analyst with S&P Capital IQ. "That was one negative in a quarter that had a lot of moving parts but a lot of promise. The underlying business does look stronger."

B of A also got a boost from a one-time tax benefit of roughly $500 million that brought its effective tax rate to 10.6% in the fourth quarter, though its tax rate in 2014 will be closer to 30%. B of A also released $1.2 billion in loan loss reserves that contributed about 13 cents a share to the bank's 29 cents a share in quarterly earnings, Oja says. Reserve releases are expected to slow going forward as credit quality improves.

"The quality of earnings is still very low but it doesn't matter because the outlook brightened," says Oja.

Provisions for credit losses, net chargeoffs and nonperforming loans all declined significantly, an indication of improving credit quality. Analysts say the B of A's results were particularly strong given the lackluster economic outlook.

"B of A, like JPMorgan Chase and Wells Fargo, are just not seeing any real sign that the economy is turning around in such a definitive way that we're going to see a near-term pop in lending or profitability," says NAB's Bush. "For all the banks, I continue to characterize this as a transitional quarter."

B of A's consumer banking segment reported a 36% jump in net income, to $2 billion, from a year earlier, posting its best results since the second quarter of 2011. Meanwhile, global wealth and investment management posted record earnings of $3 billion, compared with $777 million a year earlier.

Consistent with other banks, B of A saw a massive drop in mortgage lending. Mortgage originations fell 49% in the fourth quarter, to $11.6 billion, and Thompson said he expects more job cuts because of the shift to a purchase market from refinances.

B of A reduced its headcount by 2.3% in 2013, to roughly 242,000 employees.

"We always right-size the number of people working on the mortgage product given the volumes," Thompson said on a media call. "Given where we are now there will be more changes to that."

But he also said some of the job cuts would be offset by additions in other areas, including commercial and corporate banking and wealth management.

B of A's shares closed at $17.16 Wednesday, up 2.3% from Tuesday's close.