Monday, April 20, 2009

The devil is in the detail.

The headline in the FT said ' Bank of America profit triples to $4.2bn'. Not bad said I thinking my cautiousness about the market might be misplaced. The headline quote from the CEO was upbeat ' The fact that we were able to post strong,positive net income for the quarter is extremely welcome in this environment'.

Then I read the small print - the numbers were boosted by one off items - a gain on the sale of China Construction Bank for $1.9bn and $2.2bn of gains on widening credit spreads. Ex these out and the expanded operation ( post the acquisition of Merrill and Countrywide ) would have been breakeven. Credit quality deteriorated with charge-offs rising from $2.72bn in Q1 '08 to $6.94bn in the year later quarter. Non-performing assets tripled to $25.74 bn and the credit card operations lost $1.77bn.

The market seems to believe that these 'better than expected' numbers point to a recovery in this 'stricken' sector. That may be right , but to me it makes the stock look expensive on the real underlying numbers and the deterioration in credit quality makes me fearful that more capital raising will be needed.

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