Bank of America Corp, the largest US bank by assets, reported first-quarter profit more than tripled on gains from home refinancing and trading. The stock fell in early trading as more borrowers fell behind on their payments.
Net income rose to $4.24 billion from $1.21 billion, or 23 cents a share, a year earlier, the Charlotte, North Carolina- based bank said on Monday in a statement. Earnings per share equalled 44 cents in the three months ended March 31 after preferred dividends to the US rescue fund, beating the most optimistic analysts’ estimates. The quarter included an addition of $6.4 billion to loan loss reserves.
The results may determine whether Chairman and Chief Executive Officer Kenneth D Lewis can stave off pressure from shareholders after Bank of America spent more than $30 billion on takeovers during the past year as the recession worsened. Lewis said February 26 that the purchases of Merrill Lynch & Co and Countrywide Financial Corp were “the two stars” that were driving profit at the bank.
“We are especially gratified that our new team mates at Countrywide and Merrill Lynch had outstanding performance that contributed significantly to our success,” Lewis said in the statement.
“However, we understand that we continue to face extremely difficult challenges primarily from deteriorating credit quality driven by weakness in the economy and growing unemployment.”
The lender’s stock declined almost 6 per cent to $9.99 at 7.49 am New York trading. Bank of America follows New York- based JPMorgan Chase & Co, Goldman Sachs Group Inc and Citigroup Inc in posting first-quarter earnings that topped analysts’ estimates.
Bank of America benefited from trading at the Merrill Lynch brokerage division and an increase in mortgage refinancings after its July acquisition of countrywide, the biggest US home lender. President Barack Obama said on April 9 that refinancings rose about 88 per cent in the last month.
Income from the corporate and investment bank rose to $2.7 billion per cent from a $991 million loss a year earlier. Merrill Lynch contributed $3.7 billion to net income, excluding certain merger costs, on strong capital markets revenue.
Mortgage banking and insurance losses narrowed to $498 million from $732 million a year earlier as mortgage lending and refinancing increased. The company reported a $1.78 billion loss in its credit-card services unit, compared with a $867 million gain a year earlier.
Loss reserves
Reserves for future loan losses increased 57 per cent to $13.4 billion since the end of December. Charge-offs for uncollectible loans more than doubled to $6.94 billion from the same period a year earlier.
Bank of America set aside $8.2 billion in reserves for credit-card losses, up from $4.3 billion a year earlier. It also set aside $3.4 billion in reserves for its home-loan unit, compared with $1.8 billion in the same period last year. Total profit included a $1.9 billion gain from the sale of a $2.8 billion share of the bank’s China Construction Bank stake, and $765 million of reorganisation-related costs. Bank of America is cutting 35,000 jobs in an effort to reduce annual expenses by $7 billion after the Merrill Lynch purchase.
Lewis, CEO since 2001, has been criticised by shareholders, including Jerry Finger’s Finger Interests LLC in Houston, and proxy advisers Glass Lewis & Co and Risk Metrics Group Inc for not telling investors that Merrill’s fourth-quarter loss was spiralling toward $15.8 billion before they voted to approve the takeover in December. Investors are also calling for the defeat of board members, including lead director Temple Sloan Jr. Lewis status
Bank officials have contacted some of the biggest shareholders to round up support for Lewis and received a “mixed” reception, according to the people. The board’s backing for the 62-year-old CEO is unconditional and directors expect him to stay in his role until the regular retirement age of 65, said one of the people, who added that there hasn’t been a discussion about who might replace Lewis if he’s ousted.
“We believe we have acted legally and appropriately in our disclosures around the Merrill Lynch acquisition and that the acquisition will ultimately create value for Bank of America shareholders,” spokesman Scott Silvestri said on April 17.
“Three weeks ago, everyone had a nose around Ken Lewis’s neck, but it’s amazing what a 50 per cent increase in a stock price can do,” said Robert Patten, a New York-based analyst at Morgan Keegan. Bank of America shares closed at $10.60 on April 17 in New York Stock Exchange trading after falling to as low as $2.53 in February. “There’s a return to normalcy in some of their trading operations, and the write downs aren’t as severe,” Patten said.
Capital levels
Analysts, including Chris Kotowski of Oppenheimer & Co, have said Bank of America may have to raise capital to satisfy regulators. The bank needs $36.6 billion to meet a 6 per cent ratio of tangible common equity to risk-weighted assets and approach the 6.3 per cent average of the 25 largest banks, Kotowski said in an April 8 report. The bank has said it disagrees with Kotowski’s assumption.
The Treasury holds $45 billion of Bank of America preferred shares bought as part of the US programme to rescue the financial industry. The bank also raised $41.7 billion selling debt guaranteed by the Federal Deposit Insurance Corp as part of that agency’s effort to bolster lenders.
The government also has guaranteed $118 billion of assets after Merrill Lynch’s losses widened in December. The step was taken to ensure that Lewis wouldn’t back out of the takeover and to prevent a new round of turmoil in the financial markets.
Investors and analysts, including Paul Miller of Friedman, Billings, Ramsey Group Inc, speculated that regulators would have to seize Bank of America before it collapsed.
“Nationalisation of Bank of America is off the table,” said Chris Marinac, an analyst at FIG Partners LLC in Atlanta. “It was ridiculous that we were even talking that way.”
