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Market Update

Earnings on Tap: Bank of America

Hefty litigation costs and macroeconomic pressures are likely to keep a lid on the bank's earnings growth in the near term.


 Bank of America (BAC) will be reporting second-quarter numbers Wednesday ahead of the opening bell.

Wall Street analysts expect the bank to post earnings of $0.25 per share this quarter on revenues of $22.82 billion compared with $0.19 per share posted on revenues of $21.97 billion in the year-ago period.

In the previous quarter, the bank's earnings fell short of analysts' estimates, but were significantly higher than those in the first quarter of the previous year. The country's second-largest lender by assets reported first-quarter earnings of $0.20 per share, which is comparable with $0.03 reported in the year-ago period.

However, the company's performance has been marred by hefty costs of litigation over bad mortgages. In the first quarter, the bank spent $881 million in litigation expenses.

Earlier in April, Bank of America reached a record $500 million settlement with investors who claimed they were misled by its Countrywide Financial unit, which the bank had acquired in 2008. In another settlement with bond insurer MBIA, Bank of America will pay $1.6 billion as well as a $500 million credit line to MBIA, and remit to MBIA the 5.7% senior notes that Bank of America acquired in late 2012, in addition to closing out various trading positions in the company.

Morningstar analyst Jim Sinegal believes Bank of America is nearing closure with respect to its past mortgage misdeeds, but he says that a return to full earnings power remains in the distant future as a result of both elevated expenses and macroeconomic pressure on the top line.

The company's shares have rallied nearly 20% during the past six months and are presently trading near Sinegal's fair value estimate.

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