3rd UPDATE: Bank Of America Posts $1 Billion Loss On Bad Loans
17 October 2009 - 5:01AM
Dow Jones News
In Bank of America Corp.'s (BAC) third quarter, bad loans beat
out Merrill Lynch.
Losses on loans at the Charlotte bank, the nation's largest bank
by assets, more than offset strong revenues from trading and
investment banking, businesses bolstered by its controversial
acquisition of Merrill Lynch.
The bank reported a $1 billion net loss for the third quarter,
its first this year, as it posted $9.6 billion in permanent losses
tied to an array of bad debt, including mortgages, home equity
loans, credit cards and loans tied to commercial real estate. Its
levels of nonperforming loans - or loans that may soon become
uncollectible - also mostly rose across the board.
Bank of America executives did deliver some encouragement for
the banking industry, as well as for investors who seem to believe
the U.S. economy is now on a path to recovery. The bank's embattled
chief executive, Ken Lewis, who announced in September he will
retire at year-end, said Bank of America's quarterly levels of
losses from bad loans may have finally reached their high-water
mark.
"We believe we may have peaked in total credit losses this
quarter," Lewis said during a conference call, "although the levels
going forward will continue to be elevated and certain businesses
will still experience higher losses." Banks typically post losses
from loans months or years after borrowers stop making payments,
which means losses for many banks will remain high even after the
U.S. economy recovers.
Bank of America is working to keep pace with strong rival
JPMorgan Chase & Co. (JPM) - which on Wednesday posted
third-quarter profits of $3.6 billion - and to demonstrate it's in
better condition than beleaguered rival Citigroup Inc. (C), which
on Thursday posted a very narrow third-quarter profit.
Shares in Bank of America were recently down 3.9% to $17.40.
Even as loan losses hurt the bank, there were signs Merrill
Lynch was helping.
Bank of America's trading profits rose 57% during the third
quarter to $3.4 billion. Revenue fell at its wealth management
unit, which includes Merrill's "thundering herd" of brokers.
An improvement in investor sentiment toward Bank of America
paradoxically cost the bank $2.6 billion in the quarter due to an
arcane accounting rule that reflects the amount at which a company
could hypothetically purchase its own debt. As financial firms
crumbled last year and early this year, banks took credits as their
debt fell in value, but they have lately posted losses as
confidence in their debt has recovered.
"I'd rather see the operating improvements and take the
accounting loss," said Lewis.
Bank of America's credit card business took permanent losses of
$6.5 billion from bad debt - a hefty amount, but about equal with
last quarter. The bank also withdrew cash from its account for
future loan losses tied to credit cards, instead of adding to the
reserve, which suggests the bank expects troubles with its credit
card accounts to begin slowing in the near future.
The bank said Friday it expects unemployment, which climbed to
9.8% last month, will peak at 10%. The bank's loans tied to credit
cards and mortgages, as well as businesses large and small, are all
vulnerable to a further sharp rise in the nation's jobless
rate.
The bank's results provide investors their first detailed look
at Bank of America since Lewis abruptly announced his upcoming
retirement. After facing months of criticism over the bank's
purchase of Merrill Lynch, Lewis said three weeks ago he will leave
the bank at year-end, even though the bank has no planned
successor.
One analyst asked Lewis when the bank's board of directors would
name his replacement.
Lewis said the board, which has formed a committee to look for
candidates inside and outside the bank, has "an appropriate sense
of urgency."
"But I can't give you a date," he said.
-By Marshall Eckblad, Dow Jones Newswires; 212-416-2156;
marshall.eckblad@dowjones.com
(Joan Solsman contributed to this article.)