Bank of America Corp. (NYSE:BAC), the second-largest U.S.-based financial institution, is expected to swing to a second-quarter profit when it reports on Wednesday as cost-cutting helps it bounce back from horrendous results in last year's second quarter.
Analysts surveyed by Thomson Reuters expect Bank of America to report a profit of $1.84 billion, or 14 cents per share, on revenues of $22.87 billion. A year ago, the company lost $9.13 billion, or 90 cents per share, on diminished revenues of $13.24 billion.
While those numbers constitute a median expectation, the market remains polarized about Charlotte, N.C., bank. On the one hand, it is a huge financial institution valued at bargain-basement prices that has been slapped with the U.S. government's too-big-to-fail label, an implicit guarantee that taxpayers will step up to bail it out should a new financial crisis threaten its existence. On the other hand, it is still seen as stocked to the brim with toxic mortgage-backed securities that will take it years to write down, courtesy of its deal-from-hell merger with Countrywide Financial Services.
BAC engulfed an inordinate amount of embedded liability with the CountryWide acquisition. As a result, our enterprise-wide risk suggests that BAC has the highest amount of loss potential out of any of our large cap banks in a worst case scenario, over 400 percent of normalized earnings at risk, Marty Mosby, an analyst with Guggenheim Securities, wrote in a mid-June note, in which he nevertheless reasserted Bank of America's stock as a buy.
Further obscuring Bank of America's potential financial results: Accounting adjustments due to large movements in the bank's creditworthiness metrics over the quarter could add billions of dollars in paper profits. Those profits will have to be analyzed carefully by the market.
Given that lack of clarity, whether Bank of America surprises or disappoints, analysts say, will likely come down to cost-cutting. It is expected that revenues from all lines except consumer real estate will decline when compared to a year ago. The consumer real estate line of business was almost exclusively responsible for the bank's catastrophic numbers in the second quarter of 2011, posting a $14.52 billion loss that negated earnings elsewhere.
In the face of reduced inflows, the cost-cutting could be dramatic, with Deutsche Bank analyst Matt O'Connor suggesting a 10 percent decline in expenses, mostly from slashed payrolls, could be in the cards. That would be in line with cost-cutting in total noninterest expenses observed at competitor JPMorgan Chase and Co. (NYSE: JPM) and far more than the 2 percent cut from operating costs at Citigroup Corp. (NYSE: C).
The bank has pursued divestitures during the second quarter. It began talking with Julius Baer Gruppe AG about buying Merrill Lynch's non-U.S. wealth management unit, an asset that could be worth about $3 billion. Further, it agreed with Barclays Bank PLC to sell its jointly held 26.5 percent stake in Archstone to Lehman Brothers Holdings Inc.
As of Monday, it seemed investors were betting on a potential upside, with options traders piling onto bullish $8 call options for shares in the bank.
Shares rose eight cents to $7.81 in premarket trading.