Bank of America Corp (BAC) Hit by Settlements

Credit quality

Bank of America posted an increase in its credit quality. Its provision for credit losses decreased 22% to $1.7 billion. Further, the net charge-offs of $2.5 billion were up from the prior quarter’s $3.1 billion, while the net charge-offs ratio improved to 1.1%. Similarly, the nonperforming loans, leases and foreclosed properties ratio improved to 2.5% after the nonperforming assets decreased 3% sequentially.

Capital Position

Bank of America estimated Basel 1 Tier 1 capital ratio of approximately 10.6%, up 20 bps from the linked quarter. Its estimated Basel III Tier 1 common capital ratio is 9.4%, up 17 bps over the linked quarter. This proves that like its peers, Bank of America’s capital position continued to improve during the quarter.

Competition

Most of the money-center banks have already reported their first quarter performance for the current year. Citigroup Inc. (NYSE:C) and Wells Fargo & Co (NYSE:WFC) are Bank of America Corp (NYSE:BAC)’s closest peers, and both reported EPS beats of approximately 10.4% and 4.5%, respectively. Citigroup’s first quarter revenue was 3.2% ahead of estimates.

While Wells Fargo reported a slowdown in its mortgage originations during the quarter, JPMorgan Chase & Co. (NYSE:JPM) and Citigroup increase their originations during the period. Citigroup wrote 28% more home loans this quarter, compared to the prior year, while loan origination volume dipped 15.5% at Wells Fargo over the same time period.

What is more disturbing for Wells Fargo’s investors is the 9% sequential decline in the bank’s un-closed mortgage pipeline. This means you can expect Wells Fargo to report lower originations in the coming quarters.

Besides, similar trends of expense reductions and top-line pressure were visible throughout the banking sector’s latest disclosures. Citigroup and Wells Fargo estimated their Basel III Tier 1 common capital ratios at 9.3% and 8.4%, respectively.

The capital positions reveal that Citigroup is better positioned to survive the new law being drafted by legislators, which requires banks to hold up to 10% capital. Since Citigroup is already holding 9.3%, the law would not disrupt the bank’s regular operations that much.

Conclusion

Despite a renewed focus on expense management through NEW BAC, I believe Bank of America Corp (NYSE:BAC) needs to reduce its costs further. Compared to Wells Fargo and (NYSE:WFC) Citigroup, Bank of America has a more robust capital base. However, I would prefer to invest in Citigroup as it has captured market share in the US mortgage markets during such challenging times.

The article Bank of America Hit by Settlements originally appeared on Fool.com and is written by Adnan Khan.

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