Chart of the Day – Bank of America Earnings Leverage and Volatility

by Enis August 9, 2012 11:45 am • Commentary

Yesterday I laid out a case for buying BAC implied volatility through Sept options.  BAC has long been one of my favored names to buy volatility when market volatility as a whole gets cheap because of its levered business model and its tendency to grab headlines.  But there is one other reason illustrated by today’s chart.

Bank of America’s retained earnings are a sliver of what they used to be, as the profitability from the underlying business has diminished and their Countrywide purchase in 2008 ate up significant profits over the last 4 years due to write-downs.  The following chart, courtesy of the FT, illustrates the decline in retained earnings:



Of course, this small sliver of retained earnings also implies that any piece of good or bad news on the earnings front is going to be especially amplified.  In the past, the headlines have ranged from self-imposed foolishness (like their $5 debit card fee in 2011) to legal battles on mortgage putbacks on the negative side, and settlements with government agencies or European banking rallies on the positive side.  Whatever the headline though, it’s likely to move the stock because of its levered nature.