Bank of America Posts $7.3 Billion Loss on Cost of New Rules

Bank of America Corp., the largest U.S. lender, reported a $7.3 billion loss tied to new rules on consumer accounts and credit cards and said it’s fighting demands to buy back allegedly faulty loans.

The third quarter’s loss of 77 cents a diluted share widened from a loss of $1 billion, or 26 cents, a year earlier, according to a statement today from the Charlotte, North Carolina-based bank. Excluding a one-time writedown, the bank earned $3.1 billion, or 27 cents a share. The average estimate of 26 analysts surveyed by Bloomberg was 14 cents.

Chief Executive Officer Brian T. Moynihan, 51, must contend with stricter rules on consumer fees, rein in mortgage losses and fend off state probes of the industry’s foreclosure practices. Moynihan said trading gains boosted results, adding that the worst of the credit losses have passed and there’s no need to sell stock to meet new international standards.

“This is as optimistic as you’re going to hear Brian talk,” said Thomas Brown, CEO of Second Curve Capital LLC and Bloomberg Contributing Director, on ‘In the Loop’ with Betty Liu. “The results were impressive in two areas. One was the improvement in credit quality, the other was the improvement in capital, but it was a very good quarter for them.”

Stock Reaction

Shares declined 4.4 percent to $11.80 after Bloomberg News reported that Pacific Investment Management Co., BlackRock Inc. and the Federal Reserve Bank of New York wrote a letter to Bank of America seeking to force the lender to repurchase soured mortgages packaged into $47 billion of bonds. The letter also went to Bank of New York Mellon Corp., the debt’s trustee, according to people familiar with the matter.

“We continue to review and assess the letter, and have a number of questions about its content, including whether these investors have standing to bring these claims,” Bank of America Chief Financial Officer Charles H. Noski said today on a conference call with analysts. “We continue to believe the servicer is in compliance with the servicing obligations.”

Revenue net of interest expense rose 2 percent from a year earlier to $27 billion, according to the company. Compared with the second quarter, revenue fell 8.4 percent.

The global banking and markets group reported a $1.4 billion profit compared with $928 million in the second quarter and $2.2 billion a year earlier. Investment banking income gained 3.9 percent from the previous quarter.

Trading Revenue

Bank of America’s fixed-income trading revenue surged to $3.53 billion from $2.32 billion in the second quarter, exceeding the totals at JPMorgan Chase & Co. and Citigroup Inc. and bucking the declines that those competing banks reported for the period. The trading units made money every day, the bank said.

The wealth and investment management business reported a $313 million profit, up 34 percent from a year earlier. Brokerage fees declined $175 million because of reducing trading volume, the bank said.

Card services reported a $9.87 billion loss compared with a $955 million loss a year earlier because of a goodwill charge of $10.4 billion. Laws enacted this year could slash as much as 80 percent of debit-card revenue, hurting the value of the business.

Moynihan said Sept. 14 the company will recoup most of the lost consumer-banking revenue, without providing details. He succeeded Kenneth D. Lewis as CEO at the start of the year.

Commercial Banking

Commercial banking swung to a $637 million gain from a $160 million loss a year earlier. Demand for commercial loans picked up at the end of the third quarter, Noski said.

Bank of America’s mortgage banking income almost doubled during the quarter to $1.76 billion from the previous quarter. Profit margins widened and the bank took in more fees from borrowers wanting to lock in interest rates for home loans, the bank said.

The bank earmarked $5.6 billion for credit losses, compared with $8.1 billion in the second quarter and $11.7 billion a year earlier. Net write-offs of uncollectible loans declined 25 percent.

“We see delinquencies coming down in all our portfolios,” Moynihan said today in an interview on Bloomberg Television. “We can see the American consumer healing.”

State Probes

A probe by attorneys general in all 50 states focusing on faulty foreclosure documents has raised concern that lenders will be forced to buy back billions of dollars of loans from investors. The bank said yesterday it plans to resume filing foreclosure affidavits after an Oct. 8 halt to review its procedures.

“This is not pleasant, and we would like to get through it,” Moynihan said. “We’re going to defend our shareholders and make sure that any loans that come back to us, if there were mistakes made and we owe the money, we’ll do it.” For the most part, he said, “they don’t have the defects that people allege.”

Bank of America’s cost of repurchasing mortgages that didn’t meet investors’ standards declined to $872 million from $1.2 billion in the second quarter.

The bank expects elevated levels of repurchases through 2012 as it negotiates with Fannie Mae, Freddie Mac and other investors in loans and mortgage-backed securities, Moynihan said.

Document Disputes

Executives including Moynihan and Barbara Desoer, head of the home lending unit, sought to soothe investor concern last week that mishandled foreclosures may have caused a wave of erroneous evictions, or that the bank may be facing massive expenses tied to fixing faulty court filings.

“The foreclosure document issue is a minor problem, but the headlines related to that are a major problem for Bank of America,” Paul Miller, an FBR Capital Markets analyst who has an “outperform” rating on Bank of America, said in an interview before results were released. “Just contesting these foreclosures drags out the time until we have some resolution.”

Moynihan said Oct. 14 that about a third of the homes Bank of America seizes are vacant, and that borrowers in foreclosed homes typically haven’t made payments for 15 to 24 months. Desoer added the next day that estimates by analysts and investors of costs from delays have been “grossly distorted.”

Credit Costs

JPMorgan, the second-biggest U.S. bank by assets, said Oct. 13 that third-quarter profit rose 23 percent. Citigroup, the third-largest, yesterday reported a $2.17 billion profit as it reduced its loan-loss reserves by $1.99 billion. Results at both companies exceeded the consensus of analysts surveyed by Bloomberg. Wells Fargo & Co., based in San Francisco, reports tomorrow.

“There’s no revenue growth,” Jason Tyler, a senior vice president at Ariel Investments LLC in Chicago, said in a Bloomberg Television interview. “Everyone is struggling to figure out how these banks are going to make money.”

Bank of America ranks first in the U.S. by deposits and assets, and second among credit-card and housing lenders. The acquisition of Merrill Lynch in January 2009 bolstered the company’s corporate and investment-banking operations.

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net;

To contact the editor responsible for this story: Rick Green in New York at rgreen18@bloomberg.net.

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