Bank of America Gains Thanks to This Hidden Strength

Bank of America

saw revenues jump to $25.1 billion in Q4 2011, exceeding analyst expectations by over 4% and helping the stock to rally in premarket trading only to fall slightly in intraday trading to the 7.10 mark. CEO Brian Moynihan credit "a gradually improving economy" to the bank's results, reflected in a 5% growth of average deposits to $47 billion for 2011. The bank also saw a cut in operational expenses thanks partly to layoffs and a cut of operational expenses, although the bank has also shed a number of holdings in an attempt to get leaner and more competitive. The bank has cut $50 billion in assets and the company is looking to lose a total of 30,000 jobs. The jump in revenue helped raise net income to nearly $2 billion, or 15 cents per share. This is a marked improvement on last year's $1.24 billion loss last year. The bank also improved its capital ratio with the bank's tier 1 capital jumping to 9.9% from 8.65% last quarter. This is an important--and unexpected--accomplishment for the bank because it is near the important 10% mark that investors usually prefer and far above the required 4%. Tier 1 capital, which is the ratio of bank's core equity capital to its risk-weighted assets, is an important measurement in determining the creditworthiness and sustainability of a bank's operations. By improving its Tier 1 requirements, Bank of America has shown that it is on the road to a more sustainable and less risky business practice while it is improving profitability. This helps to explain why investors have renewed confidence in the bank, beyond the better-than-expected results. Bank of America isn't only posting better profits, but it is raising capital at the same time. The Bank also pointed the finger at the Durbin Amendment of the Dodd-Frank act, which sets a limit on interchange fees related to debit card transactions. Bank of America says that the restriction, which went into effect October 1st, cut revenues by $430 million. However, credit cards were a source of bounty as purchase volume increased 5% from Q3, thanks to holiday shopping. New credit cards were up 53% from Q4 2010, although down from the previous quarter. On the profits side, Bank of America's Q4 EPS results are slightly better than analysts' expectations at 15 cents a share, while the analyst average was 13 cents a share. However, pre-provision operating profit was down 40% to $3 billion due to lower net interest income thanks to leaner margins on loans and less investment banking opportunities at the end of 2011. In other words, less business took a big cut in the firm's net income. The results also point to other concerns relating to the bank's operational size. The loss of an interest in China Construction Bank Corp. (HK: 939) gave the bank a one-time gain of $2.9 billion that it will not be able to repeat. The timing of the sell-off was probably right, since

, but next quarter's results will not include this windfall of nearly $3 billion, which accounts for nearly 10% of the bank's revenue. Bank of America has other international woes. Revenue in global banking and markets fell by 31 percent and gave the bank a net loss of $433 billion, a decrease of over a $1 billion from last year's net gain of $669 million. While Bank of America's exposure to Europe is substantially lower than Morgan Stanley

, which is up on a reported loss in intraday trading Thursday, it has expanded internationally thanks to a number of acquisitions that could be on the chopping block as Moynihan looks to cut the bank's exposure to risky debt. The bank's book value per common share fell slightly to 20.09, and some analysts have set a price target for the stock at $8, although others see $11 in the future. Certainly, the sharp increase in tier 1 reserves was a pleasant surprise and should sustain confidence in the bank. Previously, the ratio had remained virtually unchanged from 8.6% at the end of 2010 to 8.65% in Q3 2011, so the jump to the near sweet spot of 10% should help sustain confidence in Bank of America's risk exposure. However, concerns about Bank of America's business model should rightly give investors pause. It was not too long ago that outrage resulted in public protests against Wall Street, only to be coupled by a resurgent Move Your Money campaign thanks to Bank of America's botched plans to $5 charge to use a debit card. While the potential revenue from such a move must have left Moynihan and his execs salivating, the PR disaster reminded Americans that community banks and credit unions are a viable alternative for consumers, which is a fact Bank of America would like Americans to forget as quickly as possible. Bank of America is also facing stiff competition from Wells Fargo

, who similarly reported strong earnings and whose investment in the mortgage sector may help the stock to overperform if the American economy continues to recover and unemployment falls.