Philadelphia, Pennsylvania – (StockNewsDesk) – 11/07/2014 — The unexpected legal costs stemming from investigations into Bank of America’s activities in the forex market resulted in BAC’s loss of $232 million in the third quarter. Despite the miss, shares were down less than 1% in premarket trading.
Since the collapse of the housing market, banks have been under a microscope as they have settled with regulators over a litany of issues such as subprime lending, securities fraud, and now this latest issue. Bank of America is being investigated over allegations that it rigged key rates, such as the London Interbank Exchange Rate (LIBOR). LIBOR is used as a reference point for a variety of securities and currencies in the forex market.
The forex market is largely unregulated, despite its size dwarfing all other financial markets. There is no single regulatory body, instead Bank of America is being targeted by regulators from Europe, North America, and Asia, adding to its woes. Due to these reasons, Bank of America added $400 million to its legal reserves, which was a major factor in its third-quarter loss.
This news was not unexpected, as Citigroup had recently added $600 million to its legal reserves. The muted price action may reflect that investors had already priced in this news. Many of the largest banks in the world have already added to legal reserves, while others are expected to do so soon.
Signs of Optimism under the Surface
Another factor in the constructive price action despite the earnings missed are some real signs of a strengthening business under the surface. Bank of America is the largest bank in the US by customer deposits and number of customers, so its earnings report always gives an interesting peek into the health of the economy.
The performance of Bank of America reflects the resilience and accelerating momentum of the US economy, with steady gains in jobs, GDP growth, and consumer spending. Additionally, the drop in gasoline prices has been a stimulus for the US consumer, so there are good reasons to expect this growth to persist and possibly accelerate. For Bank of America, 4 out of 5 units reported increased net income.
The two biggest increases in income were in the Sales & Trading Division and Investment Banking. Further, Bank of America’s balance sheet improved, as credit quality improved with fewer defaults and an increase in payments. The charge off rate was the lowest in a decade. All of this improvement showed as the company posted an impressive profit without including the one-time charges of the $5.3 billion settlement with the Department of Justice and this $400 million boost in legal reserves.
Bank of America’s stock has had a strong run in 2014. This is despite the bad news coming from these settlements, which investors have digested well with little volatility. Between 2012 and 2014, Bank of America’s stock experienced weakness and failed to materially rally along with the broader market.
One of the reasons was the uncertainty related to the negotiations and settlements with regulatory agencies over conduct in the period leading up to the financial crisis. Investors hate uncertainty, and it is not a coincidence that once the issues were resolved, the stock finally started to rally.