All Smiles at Bank of America

Bank of America (NYSE: BAC) reported better-than-expected quarterly earnings on Monday. Shares have surged more than 50% in the last week alone. So does this mean the credit crunch is milder than many predicted? Nope.

B of A's relatively good numbers simply mean that banks that didn't throw all their weight into one segment -- particularly low-quality real estate loans -- will be the survivors.

Not so bad
B of A's second-quarter net income came in at $3.41 billion, or $0.72 per diluted share, down some 44% from the $1.28 per diluted share earned in the year-ago period. Net revenue climbed to a record $20.32 billion year over year. The bank set aside $5.8 billion to cover charge-offs, including $2.21 billion for future losses, but investors didn't seem to mind too much. Shares gained more than 10% at one point Monday on the news.

The kicker of B of A's earnings came from segments removed from the ragged real estate market. Investment banking and global corporate banking net income came in at $1.74 billion, with advisory services logging its second-best result ever. Global wealth and investment management saw a surge in total revenue, up more than 20% from last year, and net income of $573 million. All good news there.

The troubling spots B of A must still deal with are -- surprise! -- exposure to CDOs, credit cards attached to rattled consumers, and anything within spitting distance of the real estate market. CDO writedowns came in at $645 million for the quarter, card services net income sank 55% from last year, and consumer real estate net income coughed up $982 million in losses.

Countrywide is on your side
One area that stunned even the most optimistic investors was the announcement that the recent Countrywide acquisition is expected to add to B of A's net income this year. While Countrywide still swung to a $2.33 billion loss for the quarter, losses may have been blunted as it "worked out 119,000 loans, nearly twice the number of its completed foreclosures." That's great news, but it doesn't mean the new Countrywide assets will be a free ride to easy money. As interest rates face upward pressure in order to tackle inflation, the alternative-lending products Countrywide pushed over the years could get shackled by homeowners facing suffocating mortgage payments.

Bottom line
Like rivals JPMorgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC), B of A's results helped soothe investors and gave an inkling of hope for the future. Sure, this bank's not nearly as challenged as Washington Mutual (NYSE: WM), Wachovia (NYSE: WB), or even Citigroup (NYSE: C), but B of A still has its work cut out for it.

If you jumped into B of A during last week's bloodbath, congratulations. If you're looking at it today as a possible bargain bank, tread carefully. Other options, particularly Wells Fargo and Goldman Sachs (NYSE: GS), give you big-bank opportunity with a much less uncertainty.

Copyright © 2008 Universal Press Syndicate.