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BofA’s Profit Beats Some Estimates as Capital Levels Improve

Oct. 17 (Bloomberg) -- Christopher Whalen, senior managing Director at Tangent Capital Partners, discusses Bank of America's results and suggests the company needs a restructuring. He speaks on Bloomberg Television's "Bloomberg Surveillance."

Bank of America Corp., the second- biggest U.S. lender by assets, reported that third-quarter profit was almost entirely consumed by litigation expenses and an accounting charge.

Net income fell 95 percent to $340 million, breaking even on a per-share basis, from $6.2 billion, or 56 cents, a year earlier, according to a company statement today. Analysts, including David Trone of JMP Securities LLC and Ed Najarian of International Strategy & Investment Group Inc., said operating results beat their estimates, and the bank reported capital levels improved.

Chief Executive Officer Brian T. Moynihan, who took over in 2010, has approved more than $28 billion for settlements of legal and regulatory claims tied to his predecessor’s takeovers of Countrywide Financial Corp. and Merrill Lynch & Co. Last month, he agreed to pay $2.4 billion to investors who said management hid Merrill losses ahead of the 2009 deal.

“If you could clean up the litigation, it’s actually a good story,” said Chris Whalen, a senior managing director at Tangent Capital Partners LLC, on Bloomberg Television. “They would be very competitive with Wells Fargo.”

Revenue at the Charlotte, North Carolina-based firm dropped 28 percent to $20.4 billion before adjustments, and was little changed after excluding accounting charges tied to debt. The quarter’s results were aided by a 48 percent drop in provisions for credit losses to $1.77 billion from a year earlier.

Photographer: Scott Eells/Bloomberg

Bank of America Corp., the second-largest U.S. lender, said third-quarter profit dropped 95 percent on litigation expenses and an accounting charge tied to the firm’s debt. Close

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Photographer: Scott Eells/Bloomberg

Bank of America Corp., the second-largest U.S. lender, said third-quarter profit dropped 95 percent on litigation expenses and an accounting charge tied to the firm’s debt.

Dividend Outlook

“Our strategy is taking hold even as we work through a challenging economy and continue to clean up legacy issues,” Moynihan, 53, said in today’s statement. The stock dropped 2 cents to $9.44 at 4 p.m. in New York.

The firm continued to improve capital levels used by regulators to judge its strength ahead of stricter international rules. The Tier 1 common capital ratio reached almost 9 percent at Sept. 30, from about 8 percent at June 30, the bank said.

That’s enough to run the company and support growth, and the bank will soon begin preparing its next capital plan for regulators, Moynihan said today when asked about the dividend outlook during a conference call with analysts. The capital plan helps determine whether a lender gets permission to boost dividends or stock buybacks.

Bank of America cut its quarterly payout to 1 cent a share during the financial crisis when it received a $45 billion U.S. bailout, which was repaid almost three years ago, and investors have been pressing Moynihan for an increase.

Dividend Outlook

The Tier 1 ratio exceeded levels of JPMorgan (JPM) Chase & Co. and Citigroup Inc., Najarian said today in a research note. The possibility of a dividend increase or share repurchases next year became “much better” after Bank of America’s balance sheet repair, he wrote.

Return on average equity, a measure of how efficiently a company reinvests shareholder funds, was 9.47 percent in the quarter, compared to 8.69 percent in the second quarter and 12.6 percent a year earlier. The firm’s return on average assets was 0.06 percent in the quarter, compared with 0.45 in the second quarter and 1.07 percent a year earlier. Banks typically set a target of 1 percent or greater for ROA.

After preferred dividends, Bank of America showed a net loss for the quarter of $33 million, according to today’s statement. In home mortgages, losses could be as much as $6 billion above reserves on demands that the firm repurchase shoddy loans, compared with previous guidance of $5 billion for a smaller set of demands. The bank was able to reach the projection “as the result of continued dialogue” with Fannie Mae and Freddie Mac.

Consumer Bank

Net income for consumer and business banking was $1.3 billion, down $379 million, even as average deposits rose 3 percent. The bank reported sales and trading revenue increased to $3.2 billion from $1.3 billion a year earlier excluding the impact of debt-valuation adjustments, and was little changed from the second quarter. Mortgage originations increased 18 percent, the company said, with consumer real estate narrowing its net loss to $877 million from $1.1 billion.

The U.S. housing market is starting to improve with prices moving “in the right direction,” Chief Financial Officer Bruce Thompson said today. “We’ve clearly begun to turn a corner,” he told reporters on a conference call.

Bank of America set aside part of the cost of the Merrill deal in advance and incurred more legal expenses during the quarter. The company denied misleading investors over Merrill’s health and said resolving the class-action suit was in the best interests of current shareholders.

Debt Accounting

Accounting rules can require companies to book losses when the market price of their bonds increases or a profit when the price falls, reflecting the hypothetical cost to repurchase and extinguish the debt.

Analysts often discount such adjustments because the cost remains theoretical unless the company conducts a buyback. Bank of America has been on a campaign to reduce interest costs since last year, cutting long-term debt by more than $120 billion in the 12 months ended June 30 through redemptions and by not replacing debt that matures.

The debt-accounting charges are a reversal from last year’s third quarter, when Bank of America booked more than $6 billion in gains as its credit deteriorated and concern swirled that its capital might not be adequate.

The bank’s stock plunged almost 60 percent in 2011, dipping below $5 in December for the first time since 2009. The shares have led the Dow Jones Industrial Average this year with a gain that reached 70 percent this week as Moynihan boosted capital and the U.S. recovery strengthened.

Expense Cuts

Moynihan has vowed to cut $8 billion in annual expenses and more than 30,000 jobs. The bank shrank the number of full-time employees 5.6 percent to 272,594 in 12 months.

The CEO sold more than $50 billion in assets since taking over in 2010 from Kenneth D. Lewis, who announced his retirement after clashing with investors and regulators over the Merrill Lynch deal, which threatened the firm’s stability.

JPMorgan and Wells Fargo (WFC) & Co., ranked No. 1 and No. 4 by assets, said record third-quarter earnings were aided by a rise in mortgage fees. JPMorgan’s profit climbed 34 percent to $5.71 billion, while Wells Fargo’s rose 22 percent to $4.94 billion.

Bank of America scaled back its mortgage business after the 2008 takeover of Countrywide saddled it with more than $40 billion in costs from faulty mortgages and foreclosures. The bank became the biggest U.S. mortgage lender after the acquisition, then slipped to No. 4 and had about 4.4 percent of the U.S. market this year, compared with 33 percent for Wells Fargo and 11 percent for JPMorgan, according to industry newsletter Inside Mortgage Finance.

Home Equity

Banks face tougher rules on how to account for home-equity mortgages to troubled customers. Thomas Curry, who took over the U.S. Office of the Comptroller of the Currency in March, is pushing lenders for write-offs when borrowers go bankrupt, even if payments on the home loans are current.

Bank of America said it charged off $478 million of those overdue loans, according to a presentation, most of it tied to home-equity loans. The new guidance also cost JPMorgan, Citigroup and Wells Fargo about $2 billion of write-offs in their third-quarter earnings reports.

Separately, Bank of America said today it had wiped away about $4.8 billion in debt from homeowner’s primary mortgages under an industry settlement of state and federal probes into shoddy foreclosure practices.

Principal Reductions

Participants saw an average reduction of more than $150,000 on first-lien mortgage principal, and 30,000 homeowners were either approved or had moved into permanent modifications by Sept. 30, the lender said today in a statement.

The figures show that Bank of America, which rescued Countrywide in 2008, has ramped up assistance efforts under the $25 billion industry settlement. The bank had been criticized by some housing advocates for not completing any first-lien modifications as of June 30 in the earliest report of lender progress under the deal, which was announced in February.

The assistance puts the lender “well on the way” to meeting its required $7.6 billion in consumer relief within the first year of the settlement, the company said. That relief includes modifications of primary mortgages and home equity loans, as well as other options such as incentives for short sales, the company said.

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

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; Rick Green at rgreen18@bloomberg.net

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