Exiting Bank of America After $1.2 Billion AML Embarrassment
The big bank disappointed with earnings, right after news of a major government penalty.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
Something told me to get rid of my long position in Bank of America (BAC) ahead of earnings. I should have listened to that voice.
In all fairness to myself, I have been preoccupied with the welfare of a loved one in a distant state and managing money has not been my priority for more than a week. Good thing I pay a guy to manage my bond portfolio and another guy to manage a different set of equities. The Sarge-folio? That’s on me. Time to buckle my chinstrap and get back in the game.
On Wednesday morning, a day after other large banks had posted some mixed results, Bank of America went to the tape. For the third quarter, BAC posted an adjusted EPS of $1.08 on revenue of $29.96 billion (+6.8% year over year). These numbers badly disappointed as Wall Street had been looking for something more like $1.10 on about $30.65 billion.
Net interest income grew about 8% to $16.4 billion. The firm’s provision for credit losses of $1.3 billion was relatively flat to the year-ago comp and decreased from $1.4 billion in sequential terms. Book value per common share increased 4% to $39.26, while tangible book value per common share grew 3% to $29.14. In my humble opinion, not awful, but certainly not worthy of my investment capital.
What Was Awful
The EPS print mentioned above is adjusted, which did catch my eye. Bank of America is one of those firms that prides itself on posting GAAP results and does not normally dress things up with wrapping paper, ribbons and bows. The GAAP EPS print landed at $0.91 as GAAP net income crossed at $6.9 billion, down from a rough $8.3 billion for the year-ago period. Nasty.
Why? The bank apparently took a $1.21 billion ($0.17 per share) regulatory charge against these earnings. News broke on Tuesday evening that the Department of the Treasury had imposed $1.21 billion in penalties against Bank of America over anti-money laundering and sanctions laws violations. Wait. What? That’s right. Bank of America allegedly failed to mitigate and report priority national security risks, including Chinese money laundering networks and illicit finance along the southwest border.
How humiliating. Quite honestly, I am embarrassed that I am even a shareholder. What a disgrace. Straight from the Treasury Department’s statement:
“As part of its resolution with FinCEN, Bank of America admits that it willfully violated the BSA and failed to (1) implement and maintain an AML program that met the minimum requirements of the BSA and FinCEN’s implementing regulations, (2) conduct due diligence for correspondent accounts for foreign financial institutions, and (3) file suspicious activity reports (SARs).”
Treasury Secretary Scott Bessent commented:
“Financial institutions are on the front lines of protecting our economic and national security. When a bank of this size fails to meet its anti-money laundering and sanctions obligations, the consequences extend far beyond its own walls, exposing the entire U.S. financial system to significant illicit finance risks. Today’s actions send a clear message that even the biggest financial institutions are not above the law.”
Needless to Say
I will be exiting my long position in BAC as soon as possible (after publication), regardless of price and I won’t be looking back. Given that I also have a long position in JP Morgan Chase (JPM), I have to wonder if there will be other shoes that drop in this direction.
That said, in order to maintain a certain level of exposure to the banking sector, I imagine that I may take advantage of sector weakness and split the proceeds from this expected sale between a traditional banker such Wells Fargo (WFC) and an investment banker such as Goldman Sachs (GS) or Morgan Stanley (MS).
positions: Long BAC, JPM equity.
