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Market Update

Bank of America Takes Another Bath in 4Q

While it's encouraging to see the bank making progress with respect to its legacy issues, Morningstar's Jim Sinegal remains skeptical that it is over the hump.

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 Bank of America (BAC) reported net income of $2.76 billion, or $0.25 per diluted share, for 2012, including $732 million, or $0.03 per diluted share, in the fourth quarter. Fourth-quarter results alone were affected by $2.7 billion in provisions for representations and warranties and compensatory fees, $1.1 billion in provisions for the Independent Foreclosure Review agreement, $900 million in litigation, and a slew of other unusual items. 

While it's encouraging to see the bank making progress with respect to its legacy issues, we remain skeptical that it is over the hump. Bank of America is still engaged in a variety of legal disputes over its past mortgage practices, which are sure to cost it money even in a best-case scenario. The company's settlement with Fannie Mae (FNMA) should reduce reps and warranties claims outstanding by more than $12 billion, but we note that new claims in the fourth quarter totaled $4.5 billion, and 43% of those claims came from parties other than the government-sponsored enterprises. The uncertainty around Bank of America's eventual earnings power and the pace at which the bank can achieve its potential limits our enthusiasm for the shares, and we do not intend to make major changes to our fair value estimate.

Jim Sinegal does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.