BofA Swings to Quarterly Profit as Lender Builds Capital
January 20, 2012, 12:28 PM ESTBy Hugh Son
(Updates with share gain, capital ratios, segment data, starting in the second paragraph.)
Jan. 19 (Bloomberg) -- Bank of America Corp., the second- largest U.S. lender, swung to a fourth-quarter profit as the company sold assets and built capital faster than expected.
Net income of $1.99 billion, or 15 cents a diluted share, compared with a loss of $1.24 billion, or 16 cents, a year earlier when the bank booked a $2 billion writedown at its home- loan unit, according to a statement today from the Charlotte, North Carolina-based firm. Revenue expanded by 11 percent, and the stock advanced 4.4 percent at 7:12 a.m. in New York.
Chief Executive Officer Brian T. Moynihan, 52, is cutting assets, expenses and staff while raising capital to meet demands from regulators for a larger cushion against unexpected losses. So far, $50 billion in holdings are gone, and Moynihan’s Project New BAC will eliminate at least 30,000 jobs as the firm seeks to save $5 billion annually. He’s also aiming to quell disputes over faulty mortgages that have cost the bank about $40 billion.
“The key for Bank of America is to remain profitable; if they can do that and shrink their balance sheet, that will take a lot of pressure off,” said Jefferson Harralson, an analyst at KBW Inc., in an interview before results were released. “They’ve made a lot of progress on their capital.” Harralson has a “market perform” rating on the stock.
More Capital
Bank of America said its Tier 1 capital, a measure of a bank’s ability to absorb unexpected losses, surged to 9.86 percent from 8.65 percent in the third quarter, as the firm reaped gains from asset sales and cut riskier holdings. In December, the lender indicated its capital would improve to around 9.2 percent.
Moynihan cited a “gradually improving economy” for a 13 percent rise in commercial and industrial loan balances from a year earlier. The consumer real estate unit posted a $1.46 billion loss, narrower than a year earlier. Global banking and markets reported a net loss of $433 million, compared with net income of $669 million in the year-ago quarter. Revenue in the unit declined 31 percent, primarily driven by lower sales and trading revenue and investment banking fees.
Bank of America is selling assets deemed risky by regulators and stockpiling earnings to comply with new international rules on capital meant to protect against a future financial crisis. The company may have to retain more than $40 billion in earnings by 2019. That figure could drop if the bank unloads more of its riskiest assets, said Jerry Dubrowski, a spokesman for the firm.
Second Place
JPMorgan Chase & Co. supplanted the company as the biggest U.S. lender by assets last year. Bank of America’s divestments during the year included 23.5 billion shares of China Construction Bank Corp., a Canadian credit-card business and private-equity stakes in the biggest U.S. Pizza Hut franchisee and hospital operator HCA Holdings Inc.
The bank doesn’t need to be the biggest, according to Moynihan, who said in September he wants his company to be smaller and more focused. Moynihan also decided to scale back the firm’s mortgage operations, shuttering a correspondent unit that accounted for half of loan volume in the first six months of 2011.
By doing so, the company will accumulate fewer mortgage servicing contracts -- one of the assets it’s been selling because the new regulations compel banks to hold more capital if they own riskier assets.
Mortgage Competition
Rivals may already be taking up the slack in mortgage lending. Wells Fargo & Co., the No. 4 U.S. bank by assets, posted a 20 percent rise in fourth-quarter profit to $4.11 billion as new home loans rose 35 percent from the prior three months. U.S. Bancorp, ranked fifth by deposits, said profit advanced 39 percent to $1.35 billion.
Profit dropped at the biggest New York-based banks as trading slumped in the last three months of 2011. Earnings fell 23 percent to $3.73 billion at JPMorgan, while Citigroup Inc., the No. 3 bank, said income slid 11 percent to $1.17 billion.
Moynihan’s success may hinge on how well he deflects future costs of refunds, writedowns and lawsuits stemming from faulty mortgages and foreclosures -- most of them inherited in the 2008 takeover of Countrywide Financial Corp. They total about $40 billion since 2007, and another $12 billion to $32 billion may lie ahead, according to a Citigroup estimate.
Those expenses helped send the lender’s stock plunging 58 percent in 2011, the worst showing in the Dow Jones Industrial Average. Bank of America’s 22 percent gain this year through yesterday to $6.80 has led the 30-company Dow as investors bet that an improving U.S. economy will buoy earnings.
--With assistance from Patrick Clark 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
