Bank of America posts 1Q profit but stocks fall
2009/04/21, 4:38 pm
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CHARLOTTE, N.C. – Bank of America Corp. warned of worsening loan default problems Monday even as it posted a first-quarter profit of $2.81 billion. Investors concerned about the banking industry’s health sent financial stocks and the overall market sharply lower.

Although Bank of America said higher revenue from the purchase of Merrill Lynch & Co. helped offset a surge in credit costs, it took a $13.4 billion provision for credit losses during the first three months of the year. The amount of its problem loans more than tripled to $25.7 billion and CEO Ken Lewis said he couldn’t predict when the bank’s credit morass would end.

The bank’s stock fell $2.58, or 24.3 percent, to $8.02 as the overall stock market plunged. Last week Wall Street was happy with better-than-expected results from JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc., but investors have been rethinking that initial upbeat response. Banking companies generally benefited during the quarter from unusually strong bond trading, a trend not expected to continue, while recession-driven loan problems persist and are expected to worsen this year.

Also weighing on investors is uncertainty about the government’s “stress tests,” analyses of bank finances to determine if they’ll need more bailout funds if the economy worsens.

Over the weekend there were statements from administration officials that banks may need more government capital,” and “the markets are reacting,” said Gary Townsend, chief executive officer of Hill-Townsend Capital LLC.

Stress test results are due in the coming weeks.

“The economy hasn’t hit bottom, the credit cycle hasn’t run its course,” said banking industry consultant Bert Ely. “We have a few more quarters of touch and go on profitability because of all the credit losses that are being taken.”

Charlotte, N.C.-based Bank of America earned $2.81 billion after paying preferred dividends, or 44 cents per share, compared with a profit of $1.02 billion, 23 cents per share, in the year ago period. Analysts surveyed by Thomson Reuters expected profit of 4 cents per share.

Bank of America, as other banks have done, attributed its profit to trading activities on markets including bonds.

“Like it or not, capital markets is now a core business for Bank of America, and that has more volatile returns than other businesses,” said Celent banking analyst Bart Narter. “Bank of America is no longer exclusively a retail bank and there can be more fluctuations.”

But troubled loans, also known as nonperforming assets, increased to $25.7 billion from $7.8 billion a year ago. The bank also lost $1.8 billion on credit card services, after posting a profit a year ago.

“Credit is bad and we believe credit is going to get worse before it will eventually stabilize and improve,” Lewis said during a conference call with analysts. “Whether that turn is later this year or in the first half of 2010, I’m not going to hazard a guess.”

Lewis has been under intense pressure this year over the Merrill purchase, which closed Jan. 1. Shareholders approved the deal before learning of big losses at the New York-based investment bank and reports surfaced that Merrill paid billions of dollars in bonuses to employees before the deal was completed, even as Bank of America was begging the government for aid to complete the acquisition.

With the company’s acquisition last year of mortgage lender Countrywide Financial Corp. and its expansion into credit cards after buying MBNA Corp. in 2005, Bank of America is mired in two businesses that are suffering. Consumers are spending less and defaulting more often as they worry over declining home values and rising unemployment.

“Bank of America is more exposed than their competitors in these areas, and it hurts them on the consumer side of the business,” Narter said.

Bank of America recorded a $13.4 billion provision for credit losses in the first quarter and set aside $6.4 billion as additional reserves to cover future losses.

The first-quarter results include revenue from the company’s acquisitions of Merrill and Countrywide. Revenue more than doubled to $35.76 billion, mainly from the addition of Merrill. It was also helped by a $1.9 billion pre-tax gain from selling shares Bank of America owned in China Construction Bank. Bank of America continues to own about 17 percent of the common shares of the Chinese bank, it said. Analysts expected revenue of $27.13 billion.

Bank of America has received $45 billion in government funds as part of the Treasury Department’s $700 billion financial rescue package. Lewis has made remarks of his intentions to repay the government as soon as possible.

Townsend said he isn’t certain that Bank of America is able to come up with the money, unlike Goldman Sachs, which has already raised capital.

“Bank of America is not yet positioned to repay the TARP (Troubled Asset Relief Program) and move itself away from the rather uncomfortable embrace of the United States government,” he said.

In the investor conference call, Lewis said his bank won’t need more capital from the government, reiterating a theme he’s touched on often in recent weeks. Asked about the government converting its preferred shares in the bank into common, Lewis replied, “We think we’re fine but it’s out of our hands … This is in the hands of the regulators at the moment.”

An analyst at Standard & Poor’s equity research division, however, said Monday that “a capital raise can’t be ruled out.”

While Bank of America benefited from stronger-than-expected trading and refinancing revenue, “we don’t think revenue is sustainable,” wrote Stuart Plesser in a research note. Plesser maintained a “hold” rating on Bank of America’s shares.


What do you think about AIG’S new bailout?
2009/03/03, 4:25 am
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Will it ever stop?

AIG Band-Aid offers no cure

The latest bailout of the struggling insurance giant did little to calm fears about the financial sector as investors worry about more troubles ahead.

Colin Barr, senior writer
March 2, 2009: 2:23 PM ET

NEW YORK (Fortune) — The government has a new remedy for sickly financial giants — but signs of healing remain scarce.

On Monday, the Treasury Department unveiled yet another plan to support struggling insurer AIG (AIG, Fortune 500), which posted a 2008 loss of $99 billion.

Treasury said the latest restructuring in AIG’s bailout — the third since the company first received an $85 billion loan last September — “will help stabilize the company, and in doing so help to stabilize the financial system.”

There was no such stabilization on Wall Street though Monday. Financial stocks plunged for the second straight session.

Investors are worried that more pain lies ahead as the economy deteriorates and policymakers struggle to devise a workable solution to the financial meltdown.

The Dow Jones industrial average is down 17% since Feb. 10, when Treasury Secretary Tim Geithner disappointed Wall Street with a vaguely worded financial stability package.

“The market wants to see the government get ahead of these problems, instead of receiving a drip feed of plans and possible plans,” said Benn Steil, director of international economics at the Council on Foreign Relations. “The next few weeks we’ll just keep hearing the same questions about what’s next.”

For now, the Treasury plans to provide New York-based AIG with a $30 billion equity line that can be drawn as needed. The government also will convert its $40 billion preferred-stock investment into new shares that “more closely resemble common equity and thus improve the quality of AIG’s equity and its financial leverage.”

The conversion plan resembles last week’s rescue of Citigroup (C, Fortune 500). In that case, the government agreed to convert as much as $25 billion worth of preferred stock into common shares, matching similar moves by private investors.

The latest moves to prop up AIG and Citi appeal to policymakers on two fronts. First, they add to the common equity bases of the two companies. Officials seem to hope this will relieve fears that shareholders will be totally wiped out in a government takeover.

Second, by converting from preferred shares to common stock, the government does not have to kick in much in the way of new funding upfront. That’s a key consideration as the government’s support for troubled banks grows more unpopular with the public.

But observers say the latest interventions fall short because they don’t answer two key questions: Will the government be forced to take full control of struggling financial firms? And if so, on what terms?

Geithner and other officials have repeatedly stated their preference for a privately owned financial system. But many economists doubt the U.S. can stage an economic recovery without first doing a sweeping restructuring of troubled financial firms – an option derided in some circles as “nationalization.”

Douglas Elliott, a fellow at the Brookings Institution, said Treasury is constrained in dealing with problems at firms like AIG by the decisions policymakers made in the earlier stages of the crisis.

“You could choose to stop the flow of money, but the likelihood is you’d lose huge amounts,” said Elliott, referring to the $150 billion the government poured into AIG in previous rescues last fall. “You really have no choice but to look at the money that has already been invested as water under the bridge.”

So AIG, which initially was paying a double-digit percentage interest rate on its Fed loan, has since had the rate sharply reduced in a bid to stem the bleeding.

In the same vein, the government is trading preferred shares that paid 10% annual dividends for shares that pay much smaller dividends.

What’s more, the dividends on the preferred shares were cumulative, which meant that if AIG missed a payment, it would be forced to pay it the following quarter. With the common stock, if AIG misses a payment, it will not have to make it up.

In essence, the government is giving AIG more latitude to conserve cash by cutting dividends. There was a similar agreement regarding some of Citi’s preferred shares last week.

But while the conversions will ease the cash drain at Citi and AIG, they have done nothing to quell investor fears that other firms are next for this new type of bailout. Shares of Bank of America (BAC, Fortune 500) and Wells Fargo (WFC, Fortune 500) each fell more than 10% in late afternoon trading Monday, while JPMorgan Chase (JPM, Fortune 500) was down 6%.

Steil said the Obama administration’s failure to lay out a comprehensive and detailed response to the financial sector mess is making matters worse and only serving to add to the cost of cleaning it up.

“The government has been in denial,” Steil said. “Right now, they’re trying to do a little bit of everything at once — and the risk is that you create a whole new phase in the crisis. There doesn’t seem to be any end game.” To top of page

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