Why Ford Can Cry on Bank of America's Shoulder
The phone rings. It's late, but Ford recognizes the number on the caller ID and picks up.
"Hello, Bank of America ."
"Ford," B of A responds on the other end, "I feel your pain."
Ford's fourth-quarter results overall were darn solid. My fellow Fool and Ford expert John Rosevear ran it down for readers earlier today -- including noting that earnings per share of $0.31 were well above the $0.26 that Wall Street was expecting.
So why did B of A think Ford might need a shoulder to cry on? Ford's financial services arm, which churned out $7.7 billion in revenue for the year, watched its pre-tax income fall nearly 30% from a year ago.
The reason (per Ford): "lower credit loss reserve reductions and lower financing margin as higher-yielding assets originated in prior years run off."
It's a problem that B of A can certainly understand. The economic downturn spurred high credit provisions, which depressed results. Those provisions have since come down drastically, reversing the bottom-line drag. However, the reductions to provisions are now slowing.
Meanwhile, low interest rates have been great for financial operators from the perspective that financing costs have plummeted. However, as rates continue to fall, the amount that lenders can earn on new loans is falling fast.
For Bank of America, that means as past loans and investments with higher yields mature, they're forced to redeploy that capital in today's lower-yield environment. For Ford, it means essentially the same -- loans made in higher-yield times are dropping off the balance sheet as they're paid back, and new, lower-yielding loans are crimping margins.
There's no quick fix here. When rates begin to rise again, lenders -- who typically borrow via shorter-duration instruments and lend on the longer end of the spectrum -- will see funding costs rise faster than yielding assets, which will only further crimp margins.
The good news, though, is that tight margins beat the heck out of a sagging economy and piles of souring loans. And when we consider the Ford / Bank of America comparison in particular... well, here's how that conversation ended:
"B of A," Ford concluded, "I appreciate the call, but if anything, I should be consoling you. I reported $1.6 billion in fourth-quarter profit. You managed less than half that. And I don't have lawyers breathing over my shoulder just aching to build on tens of billions of settlements and fines already levied."
The other end of the line fell silent.
"Oh, would you look at the time..." B of A finally stuttered. "I'd better go. Beauty rest and all."
"Beauty rest," you say?
Bank of America will need a whole lot more beauty rest before it wins any pin-up contests with investors. Things have been improving at the banking behemoth, though, and with the stock still trading at a cheap multiple, perhaps an investment today is more beauty than beast. To dig in further on B of A, I encourage you to check out our in-depth company report on Bank of America. The report details Bank of America's prospects, including three reasons to buy and three reasons to sell. Just click here to get access.
The article Why Ford Can Cry on Bank of America's Shoulder originally appeared on Fool.com.Matt Koppenheffer owns shares of Bank of America. The Motley Fool recommends Ford. The Motley Fool owns shares of Bank of America and Ford. Try any of our Foolish newsletter services free for 30 days. 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.
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