Bank of America's earnings aren't real

There's too much uncertainty and fuzzy math in these profits.

By InvestorPlace Oct 18, 2011 7:52AM

By Jeff Reeves, InvestorPlace.com


This morning we saw a seemingly impressive earnings report from Bank of America (BAC). Revenue was up. Profits beat expectations. Good news, right?


Not so much. A closer look at the numbers shows some  fuzzy math that only a contortionist could feel comfortable with. The real bottom line is that Bank of America earnings are still ugly and that the entire financial sector remains a very risky bet.


Here are the headline numbers: Bank of America earnings rose by $6.2 billion, or 56 cents per share. Revenue was up 6% at $28.8 billion. Wall Street was expecting EPS of 20 cents on revenue of $25.95 billion, so it all looks pretty good on paper.


But the latest quarter's earnings figure included $4.5 billion in "fair value adjustments." In short, this means a bank can decide how much its assets and liabilities are worth on its own. For instance, a few days earlier, both JPMorgan (JPM) and Citigroup (C) said the spread between their debt and U.S. Treasurys led to "profits."


No business actually transpired -- other than a different number being used to calculate the Excel spreadsheet in accounting. Theoretically, as their debt "loses value," it is cheaper for banks to pay it off, resulting in a paper gain.

Confused? You should be, because an accounting move that conjures billions out of thin air seems fishy to many investors. Interested parties can read an excellent, detailed report on the accounting practices from Reuters here. Unfortunately, we have other fuzzy math to discuss in regards to B of A and have to keep moving.


Next up is is the pretax gain of $3.6 billion from Bank of America's sale of shares in China Construction Bank. Obviously a huge one-time gain like this cannot be re-created. And as I wrote when the deal went down, the sale damages the future of BAC lending in China,  a crucial emerging market, considering how poor the credit market is in the U.S. and Europe right now.


Then there's the loss of $2.2 billion related to private equity and strategic investments. Investors had a rough third quarter, too, but $2.2 billion seems a bit ugly for a supposed Wall Street icon.


To top it off, all this comes after a Monday report from BofA's credit card division that indicated an increase in late customer payments for September, the first such uptick in a year. Additionally, Bank of America still has one of the highest credit card default rates in the industry


The squints on Wall Street can fight over the finer details of this quarter's earnings at B of A. But the bottom line is that nobody knows how bad things really are. One-time charges, goofy "mark to market" tricks juicing numbers -- these are simply not playing fair.


Worse, what we do know about lingering problems with consumer lending means an even darker picture for financial stocks.


Consider these other earnings reports:


J.P. Morgan Chase (JPM) saw third-quarter earnings slip 3.5%, thanks to higher expenses. On the revenue front, things are going nowhere fast -- 2009 and 2010 full-year revenue totals were almost identical. As for 2011, JPM is looking at a slight decline in revenue.


Wells Fargo's
(WFC) third-quarter earnings missed expectations as the financial stock's loan business didn't grow fast enough. The revenue trend for WFC is also ugly, with six straight quarterly reports that show year-over-year declines. Not inspiring.
‎A massive one-time accounting gain allowed Citigroup (C) to eke out its seventh consecutive quarterly profit. But subtract a paper gain of $1.9 billion related to the risk of its debt and "mark-to-market" accounting shenanigans, and the $2.2 billion in profits shrinks to a very unimpressive level. Revenue is all over the place, ranging from a low of $8 billion a quarter to a high of $74 billion a quarter in the last six earnings reports. The company just can't seem to get ahead.


As you can see, Bank of America earnings are just part of a troubling industrywide trend.


True, financial stocks have a tough row to hoe right now. Persistent troubles with bad mortgages and bad debt are eating away the bottom line. Fewer qualified borrowers are out there because of the tough job market and black marks on credit reports due to other economic hardships Americans have had to endure.


But that's all academic. Aside from the fact that financial stocks willfully created the subprime-mortgage bubble, Wall Street isn't much interested in excuses. Investors want to identify profits and risks – nothing more.


Right now there are way too many risks. And worse, it's impossible to truly identify the profits and risks when banks can create billions of dollars out of thin air.



Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks.




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21Comments
Oct 18, 2011 1:35PM
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Banks have been ripping us off for years
Oct 18, 2011 1:51PM
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Not to worry about the fuzzy math.  BoA will get the books correct after they increase the debit card fee on or about Black Friday.  Politicians of any party should be publically shamed if they supported baling these maggots out...though it won't happen as people don't care enough to make a change.

 

Just sayin...

Oct 18, 2011 2:16PM
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I saw Smartest Man in the Room recently about the Enron scandal. The thing that hit me was the fuzzy math that Enron used with SEC approval seems to be the same fuzzy math that the banking industry, in its entirety, uses today. Apparently, what was a crime for Enron, is now SOP today.

 

Go figure (using fuzzy math).

Oct 18, 2011 12:30PM
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There's an old saying...Numbers don't lie, but people do. I'd like to add to that.

 

Numbers don't lie, but people do. But watch out...Because people lie about the numbers!!!

Oct 18, 2011 10:37AM
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figures don't lie but liars can figure
Oct 18, 2011 2:20PM
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Nice to read an article where the author is on top of his game.
Oct 18, 2011 1:40PM
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Give them a minute and they'll firgure a way around goverment mandates.  BoA as well as Wells Fargo, and JP Morgan Chase will start charging a fee for debit cards.  Just what we don't need right now.
Oct 18, 2011 2:09PM
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most of our system in the USA does fuzzy math, thats one reason were up the creek now...Confused
Oct 18, 2011 2:05PM
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Doctoring the numbers?  Wonder why state and federal authorities are asleep at the switch with this operation?  This must be one of those appendix ailments .. because I have a bad gut feeling about this one. Sarcastic
Oct 18, 2011 3:28PM
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Fuzzy math, uhn?  Just like the government uses fuzzy math when quoting unemployment rates in this country. (they only count the ones still collecting, if the claim has been exhausted, those numbers are not figured in)  FUZZY MATH SEEMS TO BE THE WAY IN AMERICA!  Can't trust any of them!!
Oct 18, 2011 4:33PM
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I am just a dumb old country boy. I can never understand why individuals, families and small businesses would do business with A Bank of America, Chase, Citibank, or Wells fargo. The have so much overhead and so much risk. Deal with your smaller home town bank that is solvent. (most are). Your money stays local for the most part and profits usually stay at home too. Shun the big boys, most of which contributed to the problems we are having now, and are not part of the solution. Let the congregation say AMEN!
Oct 18, 2011 2:26PM
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Well, Gee whiz..........

the oracle takes over and now the math is fuzzy......go figure...i guess that's what cutting 30,000 jobs does to a brain!

Oct 18, 2011 4:22PM
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can't we just break this failure up. oh thats right they bought there get out of jail card from the goverment.
Oct 18, 2011 3:39PM
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ya know what i like about numbers?    you can always count on 'em.
Oct 18, 2011 1:20PM
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Any company can "mark to market" with its investments.  Here the company downgrades its investments in stocks to what they cost, when they were purchased.  Banks do not hold stock in their investment portfolio long, so a sale probably did not earn them what the were hoping for.  They marked those investments to market to recover more money on the sale.  Or they actually are trying to offset a loss in the sale of stocks.  Did BAC have to reserve an inordinate amount of moeny to its loan loss account?  Was it a substantial amout of the 6.0% in quarterly earnings?  Money segregated to the loan loss reserve is lost to use forever.  An increase in the credit card reserve for losses is the same effect.  Here is one question for you:  Has BAC increased their investments in overnight repurchase securities?  Has this income increased over the past 6 or 12 months?  Has this activity increased over the last 9 to 18 months?   Some of the loss of $2.2 billion in private equity and investments may be part of Merrill-Lynch drag on/to earnings that have been consolidated to BAC. It is the first full year of losses that Merrill Lynch has experienced and the first full year of impact on BAC.
Oct 18, 2011 3:05PM
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Yeah, about all they are trying to do is get our money in their bank, then we will be broke , too, huh?
Oct 18, 2011 2:18PM
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Good afternoon from Seattle, Washington. Bank lending to institusional ,to private lending has dried up globally world wide.
Oct 18, 2011 3:02PM
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Don't direct you anger at the banks for raising debit fees on consumers.

Blame the ObamaCrats for passing regulations that stopped them charging merchants for those fees.

If there is no financial incentive for Debit, they will simply do away with it. You can't regulate a business to do what you want, but make no money at it. By putting use fees on the consumers, they will kill debit.

There is no advantage for the consumer to using debit anyway. Just pay off the credit card bill and there is no cost to using credit for the consumer. Since you would have to have the money available if you used the card as debit, you will still have the money to pay the credit card.

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