April 20 (Bloomberg) -- Bank of America Corp., the largest U.S. lender by assets, dropped the most in almost two months of New York trading after the company put aside $6.4 billion to cover a growing pool of uncollectible loans.
The bank dropped $2.36, or 22 percent, to $8.24 a share at 3:16 p.m. in New York Stock Exchange composite trading and fell as low at $8.16. While first-quarter profit more than tripled on gains from home refinancing and trading, Bank of America said on a conference call today it boosted reserves as losses increased on consumer, credit-card and commercial real estate loans.
Chairman and Chief Executive Officer Kenneth D. Lewis is under pressure from shareholders after Bank of America spent more than $30 billion on takeovers during the past year as the recession worsened. Lewis said Feb. 26 that the purchases of Merrill Lynch & Co. and Countrywide Financial Corp. were “the two stars” driving profit. He said today unpaid loans are rising because of the weak economy and rising unemployment.
“It was a quarter with extremely low quality earnings and climbing credit costs,” said Nancy Bush, an independent bank analyst. “It’s not a healthy picture.”
Net income for the first quarter rose to $4.25 billion from $1.21 billion, or 23 cents a share, a year earlier, the Charlotte, North Carolina-based bank said today in a statement. Earnings per share equaled 44 cents in the three months ended March 31 after preferred dividends to the U.S. rescue fund. 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.
Refinancing Mortgages
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 U.S. home lender. President Barack Obama said April 9 that refinancings rose about 88 percent in the last month.
Total profit included a $1.9 billion gain from the sale of a share of the bank’s China Construction Bank stake, and $765 million of reorganization-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.
The bank also recorded a $2.2 billion gain because of the declining value of some Merrill Lynch structured notes. Accounting rules enable Bank of America to book the gain on the expectation that it will eventually repurchase the debt at a lower price.
Merrill Lynch
Income from the corporate and investment bank rose to $2.4 billion 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.
“We absolutely don’t think we need additional capital,” Lewis said on a conference call today. The decision whether to convert $45 billion in preferred shares sold to the U.S. government into common equity is “now out of our hands,” he said.
Mortgage banking and insurance losses narrowed to $498 million from $732 million a year earlier as lending and refinancing increased. The company reported a $1.77 billion loss in its credit-card services unit, compared with an $867 million gain a year earlier.
Bank of America credited recent improvements in consumer loan delinquencies to seasonal factors and said economic weakness is spreading beyond hard-hit states including California and Florida.
‘Feel the Teeth’
“We’ve been fighting the downturn for at least seven quarters and we expect to fight it for several more,” Chief Financial Officer Joe Price said on the conference call. Credit- card defaults are “where you feel the teeth of this slowdown.” He said he expects the U.S. unemployment rate, which was 8.5 percent in March, to remain under 10 percent.
The cost of bad loans increased 57 percent 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.
Charging off bad credit-card loans and increasing reserves for expected defaults cost $8.2 billion, up from $4.3 billion a year earlier. Soured home loans drained $3.4 billion, an increase of 89 percent.
“Question marks remain on this company’s earnings for the rest of this year because of the continuing credit quality problems,” said Bert Ely, CEO of Ely & Co., a bank consulting firm in Alexandria, Virginia. Analyst David George at Robert W. Baird & Co. said in an interview on Bloomberg Radio the quarterly rebound in profit was “probably not repeatable.”
Deposit Growth
The bank’s deposits increased by $140 billion, or 27 percent during the quarter, aided by the Merrill and Countrywide acquisitions. The one-year increase exceeds the total deposits of all but six U.S. retail banks. SunTrust Banks Inc., the seventh-largest U.S. retail bank, had deposits of $113 billion as of Dec. 31.
“There are so many moving parts at Bank of America and so many unknowns that you can’t walk away from these earnings really knowing what is ahead,” said Michael Nix, senior fund manager at Greenwood Capital Management in Greenwood, South Carolina, which oversees $600 million.
Bank of America’s ratio of tangible common equity to tangible assets advanced during the quarter to 3.13 percent from 2.93 at the end of 2008. The ratio is a measure of a bank’s ability to absorb sudden losses. Tier 1, a ratio used by regulators to monitor financial strength, climbed to 10.09 percent from 9.15 percent three months earlier.
Shareholder Vote
The bank’s board of directors is counting on better profits from the two units to quell a campaign against Lewis at next week’s annual shareholder meeting, said people with knowledge of the matter. Investors will cast ballots April 29 on whether to re-elect Lewis to the board and split his roles as chairman and CEO. Directors are concerned the vote will be close, said the people, who declined to be identified because board discussions aren’t public.
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.
Lewis, CEO since 2001, has been criticized by shareholders including Jerry Finger’s Finger Interests LLC in Houston, as well as proxy advisers Glass Lewis & Co. and RiskMetrics Group Inc. for not telling investors that Merrill’s fourth-quarter loss was spiraling 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.
Creating Value
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 April 17.
The board remains “solidly” behind Lewis, who will probably will continue to serve the rest of this year and perhaps yield one of his titles in 2010, said Marshall Front, who oversees about $500 million in Chicago as chairman of Front Barnett Associates LLC, in a Bloomberg Television interview.
Capital Raising
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 percent ratio of tangible common equity to risk-weighted assets and approach the 6.3 percent 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 U.S. program 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.
Regulators are in the midst of a “stress test” on 19 of the country’s largest banks, including Bank of America, to see how they would fare in a deeper recession and whether they need more capital. The Federal Reserve plans to give results May 4.
Nationalization
Investors and analysts, including Paul Miller of Friedman, Billings, Ramsey Group Inc., speculated earlier this year that regulators would have to seize Bank of America before it collapsed.
“Nationalization 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.”
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