Bloomberg News

BofA Posts Record Quarterly Loss on Costs of Bad Home Loans

July 19, 2011

(Updates with closing share price in the fifth paragraph.)

July 19 (Bloomberg) -- Bank of America Corp. posted the biggest quarterly loss in the lender’s history after Chief Executive Officer Brian T. Moynihan booked more costs tied to defective mortgages and revenue continued to slide.

The second-quarter loss of $8.83 billion, or 90 cents a share, compared with profit of $3.12 billion, or 27 cents, a year earlier, the lender said today in a statement. Ed Najarian, head of bank research at International Strategy & Investment Group, called revenue “fundamentally” weak and Paul Miller at FBR Capital Markets said doubts about earnings power may prompt analysts to lower their ratings.

Moynihan, 51, is working to move Bank of America past the fallout from lax home lending by reaching settlements with mortgage bond investors and insurers and setting aside funds for future claims. The bank, the largest U.S. lender by assets, said it’s able to get funds at attractive rates and Moynihan rejected suggestions from analysts during a conference call that the company may need to raise capital.

“We need more confidence in the numbers,” Miller said in an interview on Bloomberg Television. “A lot of analysts are going to lower their ratings.”

Bank of America dropped 15 cents, or 1.5 percent, to $9.57 as of 4:15 p.m. in New York Stock Exchange composite trading. Shares of the Charlotte, North Carolina-based firm have dropped 28 percent this year, the worst showing in the 24-company KBW Bank Index.

Revenue Slides

Revenue plunged by more than half to $13.5 billion because of previously disclosed mortgage costs. Excluding that charge, revenue slid 10 percent from the year-earlier period and 2.2 percent from the first quarter.

The mortgage unit’s loss widened to $14.5 billion from $1.5 billion a year earlier, on the previously announced settlement costs and additions to provisions.

Analysts asked Moynihan to explain how much “conviction” he had that the bank wouldn’t need to raise capital under various scenarios, including a slowing U.S. economy, European sovereign-debt defaults and a ratings downgrade.

“You were considering the possibility of dividend increases by the end of the year, and now several investors asked about the idea of a potential capital raise -- we’ve gone full circle here,” said Mike Mayo, an analyst at Credit Agricole Securities USA.

Moynihan told analysts he didn’t see the need for raising capital, and the company’s statement said the bank continued to strengthen what it called a “fortress balance sheet,” with a Tier 1 common equity ratio of 8.23 percent and tangible common equity at 5.87 percent.

Montag’s Unit

Profit at global banking and markets, run by Thomas K. Montag, advanced 73 percent to $1.56 billion from a year earlier. Sales and trading revenue of $3.8 billion was $666 million more than a year earlier, the bank said. Investment banking fees of $1.6 billion, excluding self-led deals, rose 28 percent from a year earlier. Fixed-income, currency and commodities revenue was $2.7 billion, $467 million higher than a year earlier.

The wealth and investment management business run by Sallie L. Krawcheck reported a $506 million profit, 54 percent higher than a year earlier when it had a charge related to an asset sale. Revenue rose 7 percent from a year earlier to $4.5 billion as the unit added deposits and financial advisers.

Lower Provision

Provisions for future credit losses dropped 60 percent, the bank said, and profit excluding one-time gains and losses was 33 cents a share, beating the 29-cent average estimate of 21 analysts surveyed by Bloomberg. The overall loss was smaller than the most pessimistic forecast given last month by the company, which estimated the deficit could range from $8.6 billion to $9.1 billion.

Moynihan has called his company a “tale of two cities” because its non-mortgage operations are making money. He is seeking to boost results from commercial lending, wealth management and investment banking and limit damage from home loans originated before he became CEO. Global commercial banking reported the highest net income since the second quarter of 2009, according to the bank.

Bank of America told investors June 29 it would book more than $20 billion in second-quarter charges from faulty mortgages. The sum includes funds to settle claims from institutional investors that the Countrywide unit used false or missing information to create home loans that later defaulted. Regulators criticized Countrywide’s lax underwriting, which left the firm near bankruptcy before Bank of America bought it for $2.5 billion in July 2008.

Settlement Sums

The settlement followed a $3 billion accord in January to resolve similar claims from Fannie Mae and Freddie Mac, and an April agreement with bond insurer Assured Guaranty Ltd. valued at $1.6 billion. If home prices decline beyond internal company estimates, the bank may need to set aside more capital for soured mortgages, executives have said.

The costs make it harder for Moynihan to keep pledges that he’ll boost the company’s dividend ahead of new international standards. The firm has to achieve a 9.5 percent ratio of capital to risk-weighted assets between 2013 and 2019 under rules from the Basel Committee on Banking Supervision.

Capital Needed

Using guidance given by Bank of America on June 29, the company may need to raise about $50 billion to conform to the rules, which were designed to build a buffer against losses and avert a repeat of the 2008 financial crisis. Firms can get to their goals by retaining earnings or reducing riskier assets that require a lender to hold more capital against losses.

The bank is weighing the sale of at least part of its $21 billion stake in China Construction Bank Corp., three people briefed on the plans said last month. The sale would simultaneously raise cash and reduce assets that are penalized under the capital rules.

Banks have been releasing reserves for loan losses set aside during the recession, helping some firms beat analysts’ estimates for second-quarter results. JPMorgan Chase & Co. said last week that profit for the three months ended in June rose 13 percent to $5.43 billion on a surge in investment banking and more on-time payments by credit-card customers. Citigroup Inc. said earnings increased 24 percent to $3.34 billion on higher investment-banking fees and reduced reserves.

“At least they’re making progress,” said Brian Charles, an analyst at R.W. Pressprich & Co. in New York. “Their losses do continue to come down away from mortgages.”

--With assistance from Brooke Sutherland, Dawn Kopecki and Lindsey Rupp in New York. Editors: Rick Green, Dan Kraut

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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