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Bank of America Gets Reduced Stake From Fairholme Capital

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Fairholme and Bank of America

Fairholme Capital, managed by Bruce Berkowitz, reduced its stake in Bank of America (BAC) during the fourth quarter ending December 2014. The fund lowered its position by 3.4 million shares to 13.8 million shares in the company. The position now makes up 1.21% of Fairholme’s US long portfolio. Bank of America is a component of the Financial Select Sector SPDR Fund (XLF), making up 6.67% of the ETF.

Fairholme’s exposure to the financial services sector stands at ~73%, with holdings in American International Group (AIG), Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), JPMorgan Chase (JPM), Lincoln National Corporation (LNC), and Berkshire Hathaway (BRK-B).

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Overview of Bank of America

Bank of America is the second largest bank in the US, with assets of $2.1 trillion and ~48 million consumer and small business relationships in the United States. It does business in more than 40 countries and jurisdictions.

Bank of America offers a full range of banking and nonbanking services, including commercial banking, corporate and investment banking, wealth and investment management, research services, and other services. It operates through the following five major segments:

  • Consumer and Business Banking
  • Consumer Real Estate Services
  • Global Wealth and Investment Management
  • Global Banking
  • Global Markets

Challenging interest rate environment subdues profitability

In 4Q14, Bank of America’s total revenues net of interest expense fell 14% year-over-year (or YoY) or by $2.7 billion to $18.9 billion, principally due to lower yields. Since the majority of the company’s revenue-producing assets are linked to market interest movements, the top line tends to fluctuate along with it.

Profitability also suffered as net income for 4Q14 came to $3.1 billion, down from $3.4 billion in 4Q13.

Asset quality metrics improve

On a positive note, Bank of America reduced non-interest expenses during the year by nearly $3.1 billion, as the number of loans delinquent beyond 60 days decreased from 325,000 in 4Q13 to 189,000. This improvement helped reduce some of the impact on its bottom line.

In addition, the company’s credit quality improved during the quarter, as provisions for credit losses fell by $117 million from 4Q13 to $219 million in 4Q14. Net charge-offs declined by nearly 44% from 4Q13 to $703 million in 4Q14, with the 0.40% charge-off ratio being the bank’s lowest in a decade. The decline in charge-offs was in turn due to improvements in its portfolio trends, particularly increased home prices.

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