Bank of America's Kitchen-Sink Writedown Means Moynihan `Better Do Better'

Investors barely blinked yesterday when Brian T. Moynihan wrapped up his first year leading Bank of America Corp. by announcing more writedowns and a second straight quarterly loss. They may not be so forgiving for 2011.

“It was a bad quarter for the industry but particularly for Bank of America,” said Thomas Brown, chief executive officer of Second Curve Capital LLC, a New York hedge fund focusing on financial firms. “It should be tough for everybody again in the first quarter, and Bank of America better do better on a relative basis.”

Moynihan, Bank of America’s 51-year-old CEO, booked a $4.1 billion provision for loan buybacks, which was $1.1 billion more than he disclosed three weeks earlier, and wrote down mortgage operations by $2 billion. That brought 2010 impairments to $12.4 billion tied to credit-card and mortgage units purchased by predecessor Kenneth D. Lewis. Investors may regard new writedowns as Moynihan’s problem.

“The clock is clearly ticking at Bank of America,” said Tony Plath, a finance professor at the University of North Carolina at Charlotte. “How long will institutional investors be happy with a 14- or 15-dollar stock price? They need to make $16 billion or $17 billion a year, that’s what it will take.”

Photographer: Jeffrey Camarati/Bloomberg

Bank of America Chief Executive Officer Brian Moynihan. Close

Bank of America Chief Executive Officer Brian Moynihan.

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Photographer: Jeffrey Camarati/Bloomberg

Bank of America Chief Executive Officer Brian Moynihan.

Bank of America slipped 29 cents, or 2 percent, to $14.25 in New York Stock Exchange composite trading. Shares of the Charlotte, North Carolina-based company have climbed 6.8 percent this year.

Quarterly Loss

Moynihan’s quarterly report showed Bank of America’s loss widened to $1.24 billion from $194 million a year earlier. Bank of America posted a $2.24 billion net loss for 2010 as revenue declined 7.9 percent to $111.4 billion. That compares with a $6.28 billion profit in 2009.

The bank paid $2.8 billion to U.S.-owned Fannie Mae and Freddie Mac last month to settle disputes over bad loans, and said that future demands from various mortgage investors eventually could trigger $7 billion to $10 billion in losses.

While such losses are possible, that doesn’t mean they’re probable, Chief Financial Officer Charles H. Noski said yesterday in an interview.

“Our investors understand that there’s tremendous upside here in getting our businesses running in optimum shape in a more normalized economic environment,” Noski said. “They understand the work we have in front of us, and I think they have confidence in our story and the management team.”

The quarter also included $1.5 billion set aside to cover legal expenses. Lewis’s 2008 acquisition of Countrywide Financial Corp., then the largest U.S. mortgage lender, saddled the bank with lawsuits and demands to repurchase bad loans.

Kitchen Sink

“It’s a kitchen-sink quarter for their Countrywide issues,” said Jason Tyler, who helps oversee $5.5 billion at Chicago-based Ariel Investments LLC. “It’s typical for a new CEO to report a lot of big charges to lower the bar for themselves. You have a small window to do this and not get blamed for it.”

In an interview on Bloomberg Television, Moynihan said there is more work to do on resolving mortgage claims and trading revenue was weak. Positive signs included a rebound in credit-card profit, and loan losses are easing as the economy strengthens, Moynihan said.

Credit expenses will “come down substantially,” he said. “The credit’s really cleaning up.”

Moynihan told investors during a conference call the mortgage operations will need more work, expenses need to be tamed and return on equity should be higher. That may mean reducing staff in some places while adding in others, he said.

Overhead Costs

“We have to bring the overhead in this company down,” Moynihan said. “We know how to take out costs. We’ve done it many times before.” At the same time, the company doesn’t want to lose improvements made in risk controls and in helping distressed homeowners, he said.

“From the shareholders side, our stock did underperform, and our returns in equity and returns on assets are not where we want them,” Moynihan said. Still, tangible value per share grew about 15 percent, he said.

The bank may be able to raise its dividend by the end of this year, Moynihan told investors. “We continue to believe we’ll increase our dividend in the back half of 2011,” Moynihan told investors.

Fixed-income investors showed more confidence as prices on credit-default swaps fell 6 basis points to 157.5 at 10 a.m. yesterday in New York, according to data provider CMA. The swaps can protect holders against losses if a bond issuer doesn’t pay its debts. Bank of America is “on track to lower our long-term debt footprint by 15 percent to 20 percent by the end of 2011 relative to third quarter 2010 levels,” Noski said on the call.

Easier Comparisons

Bank of America’s supporters include Paul Miller, analyst at FBR Capital Markets and a former bank examiner. Miller rates the stock “outperform” and called the company “one of our favorite names” in an interview.

“They pulled a lot of expenses forward this quarter,” Miller said. The result could be easier earnings comparisons. “You are setting a base for 2011,” he said.

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.

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