Is Bank of America Back?

Anand Chokkavelu, CFA, The Motley Fool

Bank of America (NYS: BAC) was up about 5% this morning on the strength of a market-pleasing 7 a.m. earnings report, helping to drive the Dow (INDEX: ^DJI) and the market higher.

Importantly, B of A posted positive earnings for the fourth quarter and for the full year. It's important because Bank of America has been the laggard of the big banks.

Wells Fargo (NYS: WFC) , JPMorgan (NYS: JPM) , and even Citigroup (NYS: C) have been firmly in the black, but it's only now that Bank of America is back to profitability on a trailing-12-month basis.

We also see an improving Tier 1 common equity ratio (up to 9.86% vs. 8.65% three months before) and less need for credit-loss provisioning (in other words, better credit quality). And for what it's worth, it claims $14.4 billion in exposure to the PIIGS countries (Portugal, Italy, Ireland, Greece, and Spain), down $1.4 billion from a year before.

That's the good news.

The bad news is that the newfound profitability isn't due to core operations. It's due to shedding assets. For example, the fourth quarter's $2 billion of net income can be attributed to the pre-tax $2.9 billion on the gain on sale of China Construction Bank shares.

Over the course of the year, B of A sold $34 billion in "non-core assets and businesses."

But for Bank of America, I think we'll take the earnings win any way we can get it. And bigger picture, I like what I'm seeing from CEO Brian Moynihan. He's being prudent about becoming leaner and meaner -- both through asset sales and through cost-cutting measures like Project New BAC that looks to cut some 30,000 jobs.

When your stock is trading at about a third of book value, even an earnings report full of asterisks is welcome news. That's what we see today for Bank of America.

I'm long-term bullish on Bank of America for advanced investors who can stomach the risk and unknowability of its balance sheet, but if you're looking for a much less complex bank that has some of the best operational numbers I've ever seen, check out our brand new free report: "The Stocks Only the Smartest Investors Are Buying." I invite you to take a free copy to find out the name of the small bank I believe Warren Buffett would be interested in if he could still invest in small banks.

At the time thisarticle was published Anand Chokkavelu owns shares of Bank of America, JPMorgan, Wells Fargo, and Citigroup. He also owns warrants in JPMorgan, Wells Fargo, and Citigroup and long-dated options in Bank of America. The Motley Fool owns shares of JPMorgan Chase, Bank of America, and Citigroup. The Fool also owns shares of and has created a covered strangle position on Wells Fargo. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.