BofA Bites the Bullet

The largest U.S. bank sees greater credit losses and writedowns of bad debt, though it still expects to post a profit this quarter

The chief executive of the largest U.S. bank warned Dec. 12 of more pain to come.

With a few weeks still to go on 2007, Bank of America (BAC) CEO Kenneth Lewis said of end-of-the-year numbers, "I think you certainly can assume results will again be quite disappointing."

The credit crisis has hurt Bank of America along with the rest of the financial sector.

BofA said a month ago it expected writedowns of $3 billion from bad debt. "Based on conditions today, we expect those writedowns will be larger than have already been reported," Lewis said.

Speaking to an investor conference, Lewis also said BofA expects to set aside an extra $1.3 billion for credit losses, mostly on residential mortgages and small business loans.

Against that backdrop, however, Lewis says most of the bank's businesses are doing well, and some are growing strongly. "We have strong momentum in most of our businesses," he said.

BofA, with more than 5,700 retail branches, recently bought Chicago-based LaSalle Bank. It expects to spend even more on growth initiatives in 2008 than in 2007, including efforts to do more banking for affluent clients. Recent Federal Reserve interest rates cut mean a "friendlier" environment for BofA, which should help profits, Lewis said.

The fourth-quarter earnings report won't arrive until January. According to data from Reuters Estimates, analysts are expecting earnings of 59 cents per share, vs. $1.16 a year ago. However, reflecting a lot of uncertainty about BofA's financial situation, there is a wide range to the earnings estimates, from 19 cents to as much as 91 cents per share.

Lewis said the bank does expect to be profitable.

Thus, while BofA has problems, it is seen by both the market and by most analysts as better-positioned than rivals like Citigroup (C) or Washington Mutual (WM). Both of those banks are expected to report losses in the fourth quarter, due to losses on credit investments and the tough environment for mortgages and housing.

Standard & Poor's Ratings Services on Dec. 12 said BofA's credit ratings wouldn't be affected by the day's announcement. That reflects BofA's "continued strong fundamental credit strength, including diversity, strong liquidity, and capital-raising capacity," the analysts wrote. (S&P, like BusinessWeek, is a unit of the McGraw-Hill Companies.)

BofA shares ended trading on Dec. 12 down 2.67% to $43.46 per share. The stock was above $52 in early October.

Though credit quality has suffered on many mortgages, a strong U.S. labor market had been expected to prop up BofA's other businesses like retail banking and credit cards.

BofA now expects the U.S. to avoid a recession. However, gross domestic product should grow 1.5% to 2% in 2008, with the second half better than the first.

Much depends on whether that forecast is right. With many things going right at BofA, the key question is whether a weak economy, along declining home prices and more credit turmoil, can overwhelm the positive trends at the bank.

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