Bank of America, Morgan Stanley Jump on Earnings

Bank of America (BAC) rose 4.5% and Morgan Stanley (MS) rose 4.8% in premarket trading after both banks reported earnings that were muddled by charges related to changes in the value of their debt.

Bank of America posted 3 cents of EPS, versus analysts’ expectations for 12 cents. Revenue of $22.28 billion missed expectations for $22.51 billion. Improvements to the company’s credit spreads forced it to take a $4.8 billion charge known as a DVA (Debt Valuation Adjustment). The valuation change makes direct comparisons to analysts’ estimates difficult — some analysts are saying that the bank beat core earnings expectations. “[O]ur initial view of ‘core’ is closer to 26 cents,” wrote Evercore analyst Andrew Marquardt.

Return on average equity of 11.05% surpassed fourth quarter results, but was below the 15.41% return the bank reported for the first quarter of 2011. Bank of America was also able to reduce its credit-loss provisions to $2.42 billion from $3.81 billion in the fourth quarter.

�The narrowing of our credit spreads reflects the significant progress we�ve made to strengthen the balance sheet,� said Chief Financial Officer Bruce Thompson. �During the quarter, we increased our Tier 1 common equity ratio by 92 basis points from the prior quarter, improved our liquidity to record levels and continued to reduce risk-weighted assets. While the improvement in our credit spreads results in a negative adjustment to earnings this quarter, it should not overshadow the positive momentum that we are seeing in our businesses.�

Morgan Stanley reported a 6-cent loss, but would have earned 71 cents per share without accounting for changes in the value of its debt. Analysts had been expecting the bank to post 44 cents of EPS. Revenue of $8.91 billion (excluding DVA) compared to expectations for $7.31 billion.

The bank’s fixed income and commodities trading jumped 34%, more than its peers.

“The results are very good. Fixed-income trading rebounded significantly and outpaced peers�and that’s still Morgan Stanley’s core business. We should see good performance out of the shares today. We have a buy rating, because we see a lot of upside in the stock longer term,” noted Edward Jones analyst Shannon Stemm, according to Reuters.

Correction: Our initial report of analysts’ BAC EPS estimates was incorrect.