Bloomberg News

BofA Swings to Profit on Higher Revenue, One-Time Gains

October 18, 2011

(Updates shares in the fifth paragraph.)

Oct. 18 (Bloomberg) -- Bank of America Corp., this year’s worst performer in the Dow Jones Industrial Average, swung to a third-quarter profit on higher revenue, better credit quality and one-time gains. The stock jumped in New York trading.

Net income of $6.23 billion, or 56 cents a diluted share, compared with a loss of $7.3 billion, or 77 cents, a year earlier, the Charlotte, North Carolina-based lender said today in a statement. Total revenue rose 6 percent to $28.7 billion, beating the consensus of analysts surveyed by Bloomberg.

“You’re knocking it out of the park with $3 billion extra” in revenue compared with estimates, said Michael Holland, chairman of New York-based Holland & Co., in an interview with Ken Prewitt and Tom Keene on Bloomberg Surveillance. For some investors, the issue is “the amount of stuff that you have to go through to get to, ‘what is the health of the business?’”

Chief Executive Officer Brian T. Moynihan, 52, has presided over a 50 percent drop in the stock this year. He vowed to make the lender smaller and more profitable by divesting unnecessary businesses, trimming $5 billion in costs, and eliminating 30,000 jobs. Moynihan agreed to sell almost $50 billion in assets and units since taking over as CEO last year, and the bank lost its status as the largest U.S. lender during the quarter.

One-Time Events

Bank of America advanced 10 percent to $6.64, making it the day’s best performer in the Dow average.

The quarter’s results were skewed by one-time pretax gains including $4.5 billion in fair-value adjustments of structured liabilities, $3.6 billion from selling a stake in China Construction Bank Corp. and $1.7 billion tied to changes in value of the company’s debt. One-time pretax losses included $2.2 billion related to private-equity investments.

The provision for loan losses dropped to $3.4 billion from $5.4 billion a year earlier as credit improved in the card unit and commercial lending, the bank said. The card unit swung to a profit in the quarter, while income rose at the deposit unit, global wealth and investment management, and global commercial banking.

Global banking and markets, which includes the investment bank, posted a $302 million loss, compared with a $1.5 billion profit a year earlier, on lower sales and trading revenue.

The bank’s mortgage division posted a $1.1 billion net loss, wider than the $392 million year-earlier loss and smaller than the $14.5 billion loss in the second quarter. Revenue slipped 22 percent to $2.8 billion as the lender created fewer mortgages. The provision for loan repurchase demands dropped to $278 million from $14 billion in the second quarter.

Mortgage Claims

Bank of America has been plagued by claims tied to faulty mortgages and foreclosures, which have cost about $40 billion since the start of 2007. While the bank has been negotiating with investors and U.S.-backed mortgage finance companies to contain the expense, repurchase requests from Fannie Mae and Freddie Mac have “become increasingly inconsistent with our interpretation of our contractual obligations,” the company said today in a slide presentation.

One of Moynihan’s first public actions related to his cost- cutting initiative, called Project New BAC, was a management shakeup last month that elevated Thomas K. Montag and David Darnell to co-chief operating officers while leaving Sallie Krawcheck and Joe Price without jobs.

Merrill Derivatives

Montag runs businesses that deal with corporate or institutional clients, including investment banking and trading, and Darnell manages the consumer operations, encompassing the retail bank and wealth management.

“The diversity and depth in our customer and client offerings provided some resiliency in a very challenging environment,” Moynihan said in today’s statement.

Bank of America, hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.

The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.

Accommodating Customers

Jerry Dubrowski, a spokesman for Bank of America, declined to comment on the transfers or the firm’s discussions with regulators. The company “continues to accommodate the needs of our clients through each of our multiple trading entities, including Bank of America NA,” he said in an e-mailed statement, referring to the company’s deposit-taking unit.

Concerns over the European debt crisis and the possibility the U.S. economy may relapse into recession have weighed on the bank’s shares. The KBW Bank Index has slumped 30 percent this year through yesterday, and Bank of America was the worst performer among the 24 companies listed.

The bank lowered its risk tied to five European nations by $2.1 billion in the third quarter, led by reductions in Spain. Sovereign and non-sovereign holdings tied to Greece, Ireland, Italy, Portugal and Spain declined to $14.6 billion as of Sept. 30 from $16.7 billion three months earlier, according to a supplement posted on the bank’s website.

Bank of America may underperform peers in another U.S. recession, while New York-based JPMorgan Chase & Co. may be best positioned, John E. McDonald, a Sanford C. Bernstein & Co. analyst, said in an Oct. 6 research note. Higher unemployment would cause more foreclosure and mortgage costs, he wrote.

Rival Banks

Yesterday, Citigroup Inc., the No. 3 ranked U.S. lender at midyear by assets, said net income jumped 74 percent to $3.77 billion including a $1.9 billion accounting gain. Wells Fargo & Co., the No. 4 bank, said profit rose 22 percent to a record $4.06 billion. New York-based JPMorgan -- which now ranks No. 1 by assets -- said last week that profit fell 4 percent to $4.26 billion.

Bank of America’s third-quarter 2010 loss was fueled by a $10.4 billion writedown of its credit-card division after new U.S. regulations reduced its value.

To help recoup lost revenue, the firm has added fee-based checking and said some debit-card users would be charged $5 a month. San Francisco-based Wells Fargo is testing a $3 monthly fee, and similar charges have been imposed by Regions Financial Corp. and SunTrust Banks Inc.

Bank of America’s plan sparked objections from critics including President Barack Obama. Five House Democrats asked Attorney General Eric Holder on Oct. 13 to investigate whether banks and trade groups colluded on decisions to impose new fees.

--With assistance from Maryellen Tighe, Andrew Frye, Noah Buhayar and Dawn Kopecki 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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