Bank of America Reports Worst Quarterly Results In Its History: $9.1 Billion Loss!

$9.1 billion loss is BofA’s biggest (Charlotte Observer, July 20, 2011):

Bank of America reported the worst quarterly results in its history Tuesday, but chief executive Brian Moynihan continued to insist his bank doesn’t need to raise more capital.

The Charlotte bank’s capital base was a hot topic for analysts after the bank reported a second-quarter loss of $9.1 billion, including preferred dividend payments. The loss was in line with estimates the bank gave last month when it disclosed plans to take more than $20 billion in mortgage-related charges.

The river of red ink, compared to a $2.8 billion gain a year earlier, again showed the nation’s biggest bank is laboring to bury mortgage-related troubles inherited from its 2008 Countrywide Financial purchase. A big chunk of the losses stem from an $8.5 billion settlement announced last month over investor claims related to Countrywide loans sold off during the housing boom.

Bank of America’s huge loss contrasted with strong results Tuesday from San Francisco-based Wells Fargo, which earned $3.7 billion in the quarter despite sluggish revenue growth. New York-based investment bank Goldman Sachs posted a profit of $1.05 billion, although the amount was less than analysts had expected.

Like other big banks, Bank of America needs sufficient capital to absorb future mortgage losses and to meet stricter international standards that are being phased in through 2019.

The prospect of raising capital by issuing new shares worries existing shareholders, because it would dilute their holdings.

In a conference call with analysts, Moynihan noted the bank has higher capital ratios than a year ago despite its massive charges and contended it has plenty of ways to increase capital without issuing more stock. Those would include generating earnings each quarter and shedding riskier assets – “all of which give us comfort and demonstrate that we don’t need to raise capital,” he said.

Capital concerns have clearly been weighing on the bank’s share price, said Shannon Stemm, financial services analyst with Edward Jones in St. Louis. The bank’s shares have been trading at a two-year low, and fell an additional 1.5 percent on Tuesday to $9.57.

Although the bank’s executives did a “nice job” outlining ways they can increase capital, the bank doesn’t have a lot of “room for error,” Stemm said. “To the extent there would be a negative shock to the economy, people’s concerns are valid that this company would have to raise additional capital,” she said.

Many segments profitable

Excluding mortgage-related items and other charges, Bank of America said it would have posted a profit of $3.7 billion in the second quarter. The bank’s results (an $8.8 billion loss when excluding preferred dividend payments) were boosted by lower loan losses, gains from selling noncore assets and increased revenue in investment banking and wealth management.

Although Bank of America’s mortgage unit lost $14.5 billion in the quarter, its other businesses – from credit cards to investment banking – made $5.7 billion.

The bulk of the bank’s mortgage woes are tied to the $2.5 billion Countrywide purchase executed under former chief executive Ken Lewis as the financial crisis was still developing. Since that deal closed in July 2008, the bank’s mortgage unit has lost $30.4 billion.

“Obviously, the solid performance in our underlying businesses continues to be clouded by the costs we are absorbing from our legacy mortgage issues,” said Moynihan, who replaced Lewis in January 2010.

The proposed $8.5 billion settlement announced last month is meant to put a large portion of investor requests to repurchase defective mortgages behind the bank, although some investors have challenged the agreement.

The bank stuck by its estimate that it could still take another $5 billion in losses related to investor requests to buy back mortgages.

Bank of America and other large lenders are also in settlement talks with the U.S. Justice Department and state attorneys general over allegations of faulty foreclosure practices. The bank set aside $1.9 billion for litigation expenses in the second quarter, up from about $800 million in the first quarter. Some of those reserves could be applied to a mortgage settlement, Chief Financial Officer Bruce Thompson told analysts.

The negotiations remain “fluid” – although “everyone realizes this would be a good thing to get this wrapped up,” he said.

Looking to reclaim revenue

In addition to mortgage troubles, banks are also struggling to increase revenue in a time of slow economic growth and tighter regulation. Bank of America’s total revenue, when adjusted for the mortgage charges and other items, slipped to $26.5 billion in the second quarter from $26.9 billion in the first quarter and $29.2 billion a year ago.

Contributing to the decline, revenue from sales and trading in the bank’s Wall Street operations fell by $1.1 billion from the first quarter to $3.8 billion. Looking ahead, the bank expects to lose $475 million in revenue in the fourth quarter due to a new regulation limiting fees banks can charge merchants for debit card transactions, said Thompson, who replaced Chuck Noski as CFO at the end of June.

The bank is looking to reclaim some of the revenue lost to regulatory reform by charging customers monthly fees for packages of products and services. The bank has been testing those options, which can range from about $6 to $25 per month, in Georgia, Massachusetts and Arizona and plans to roll them out nationally at the beginning of next year.

To boost profits, Bank of America also launched a cost-cutting campaign in April. Its total employment in the second quarter dipped to 287,839 from 288,062 in the first quarter. While the bank has added financial advisers in growing areas such as wealth management, the company has “reduced positions in various other areas of the company,” Thompson said. The bank hasn’t specified how many jobs could be cut in Charlotte.

One area where the bank is looking to trim costs is in the consumer business, Thompson said in an interview. The bank’s total branches declined to 5,742 from 5,805 as the bank works to reduce total locations by 10 percent. Moynihan said the bank is completing an analysis of expenses in the consumer side of the company and will provide more details when it reports third-quarter earnings in October.

Actions to raise capital

Capital will remain a key issue for the bank.

Under new guidelines set by international regulators, the bank will need a minimum “Tier 1 common equity ratio” – a measure of capital against assets weighted for risk – of 3.5 percent at the beginning of 2013, rising to a requirement of 9.5 percent for large banks in 2019.

Bank of America hasn’t said where its ratio stands now under the new standards but said it expects to be at 6.75 percent to 7 percent at the end of 2012. To meet that goal, it plans to drop $200 billion to $250 billion in risk-weighted assets.

After that, it will need to take additional actions, including selling off more assets and making other changes to its businesses. One such move could be keeping more mortgage loans on its balance sheet instead of selling them off to investors, Thompson said.

In an interview, Thompson said the bank is emphasizing that it will be far above the minimum requirement in 2013 and has other “levers” to pull to get to future requirements. “We think those are significant and are working hard to pull the levers to get to where we want to be,” he said.

In the conference call with analysts, Mike Mayo of Credit Agricole Securities USA pressed Moynihan about his “level of conviction” that the bank won’t need to raise capital. He noted the bank had previously said it planned to increase its dividend in the second half of this year, only to have regulators reject the proposal to boost the payout above a penny per share.

“The level of conviction is, given the economic scenarios which are moving along but at a very slow pace, is that we don’t see it,” Moynihan responded.

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