The 'Bank' in Bank of America Shows Signs of Strength

Bank of America made a convincing case Thursday that its core businesses are firming up, even as baggage from the financial crisis continued to weigh on the company.

Excluding a big accounting charge, the Charlotte, N.C., giant's profits increased in the first quarter from the previous quarter, as problem loan costs dropped and home mortgage and capital markets activity improved, particularly in fixed income.

Chief Executive Brian Moynihan stressed progress across the company's five key business lines after telling investors in January that its banking business would soon stabilize. It was making headway in its consumer and business banking, where revenue was soft but profits increased on lower provisions.

"All the regulatory changes … took away a lot of profit in an interest rate environment in which we're all familiar with," he said. "We're seeing improvements in online, mobile, the ability to fine-tune the branches, the cost of the branches per dollar deposit … has improved and dropped again."

Excluding an accounting charge, Bank of America's profits were much higher than analysts had expected: Profits excluding certain one-time items of $3.7 billion, or 31 cents per share, beat the average 12-cents-per-share estimate forecast by analysts in a Bloomberg poll.

Net interest income and net interest yield were better than in the prior quarter, in part due to debt securities and trading account asset gains as well as lower deposit and short-term borrowing interest expenses.

Overall loan charge offs were stable as higher consumer losses were offset by an equal decrease in commercial losses. Overdue loans and assets were flat. A sharp decrease in provisions to cover future loan losses created a $1.6 billion credit loss reserve release.

An improving Tier 1 Common Equity ratio bolstered confidence that the company would not need to raise capital in order to comply with Basel Committee of global regulators rules that go into effect next year.

"On the capital side, obviously, the build has been very impressive, much more than many of us, including myself, had thought," said Matt O'Connor, analyst with Deutsche Bank.

The prospect of a surprise upswing in future mortgage related-losses dimmed as the company reached a foreclosure process settlement with the Department of Justice and State Attorneys general in the quarter. Mortgage banking income was stronger in the quarter in part because it set aside less money to repurchase questionable loans sold to investors and the government-sponsored mortgage agencies. Its so-called reps and warranties provision was $282 million compared with $1 billion a year ago.

A recovering economy aided broad improvement across most of the company's six primary operating units.

"Over the last two quarters each of [the company's] business units have been experiencing declining earnings, but in the first quarter [it] began to show a turnaround in the profitability of the core business units, as each reported an increase in profitability," Marty Mosby, an analyst with Guggenheim Securities, wrote in a research note Thursday.

Consumer real estate services remained unprofitable, although its loss of $1.14 billion was about $300 million less than in the prior quarter. Quarter to quarter: Consumer and business banking profits increased $200 million to $1.5 billion, global banking rose by $250 million to $1.6 billion and global wealth rose nearly $290 million to $547 million.

Global markets earned $798 million after losing $768 million in the fourth quarter while non-core operations such as discontinued real estate products and global principal investments lost $2.6 billion after earning $1.4 billion in the prior quarter.

"Our cost structure is coming down and many of the business, customer and profit metrics have improved," Moynihan said.

Various news outlets reported this week that Bank of America is seeking to sell its wealth management units that operate outside the U.S. in Europe, Asia, the Middle East and Latin America.

Moynihan declined to address that speculation directly, said the company's goal in the last two years has been to "get out of the businesses which don't" directly serve U.S. businesses, consumers and other core customers.

"It's really fine-tuning the franchise," he said.

The bottom-line results were skewed by a $4.8 billion accounting charge involving the performance of its debt, as well as from gains from equity investments and securities sales. Citigroup (NYSE:C) also reported profits that were similarly skewed by a negative debt-valuation adjustment.

The country's second largest bank by assets earned $653 million in the quarter, or about 67% less than in the fourth quarter and 68% less than a year earlier.

Bank of America's shares closed down 1.68% to $8.77 during a session when bank stocks broadly declined.