Bank of America to a third quarter loss
Rising losses from consumer and commercial loans dragged Bank of America Corp. (BAC) to a third quarter loss of $1 billion despite impressive trading and investment banking revenues, which were helped in part by the Charlotte bank’s purchase last year of Merrill Lynch & Co.
The Charlotte bank took permanent losses on $9.6 billion from an array of bad debt, including mortgages, home equity loans, credit cards and loans tied to commercial real estate. The bank’s revenues fell for the third straight quarter, in part because Bank of America’s prior results included billions in asset sales, including a sale of shares in China Construction Bank (CICHY).
The results mark Bank of America’s first quarterly loss of the year, and give investors their first detailed look at Bank of America since its embattled Chief Executive Ken Lewis announced in September he will retire at year-end without a plan for who will succeeed him. The bank 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 very narrow third quarter profits.
Bank of America’s report holds signs of hope for the banking industry, which is struggling to hold down losses as rising unemployment and a U.S. economic recession have followed a nationwide slide in housing prices.
The bank’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.
In fact, Lewis told investors during a conference call that the bank’s total loan-related losses may be close to peaking.
Shares were down 3.7% to $17.39 in mid-morning composite trading. After hitting an historic low in March, the stock was up 29% for the year through Thursday.
Bank of America is considered particularly vulnerable to high U.S. unemployment, which climbed to 9.8% last month. The bank said Friday it expects unemployment to peak at 10%.
Continued weakness in BofA’s traditional retail and consumer lending businesses has been offset by newfound strength in investment banking, thanks largely to the controversial but beneficial takeover of Merrill Lynch. Merrill’s various businesses have been spread througout Bank of America, making it difficult to precisely gauge Merrill’s impact on stand-alone Bank of America. But Merrill’s core strengths in trading and investment banking accounted for part of Bank of America’s strong revenues in those ares.
The bank’s trading profits, for example, rose 57% over the second quarter to $3.4 billion.
Continued strength in such businesses will be crucial to Bank of America’s ability to continue absorbing losses from its traditional banking lines, which are struggling under loan losses. Even if the U.S. economy recovers quickly, banks will continue booking losses for loans in coming quarters, since bank typically post losses from loans months or years after borrowers stop making payments.
In fact, the bank’s levels of nonperforming loans – or loans that may soon become uncollectable – rose again during the quarter. Bank of America now has $21 billion in heavily delinquent consumer loans and $12.9 billion in nonperforming commercial loans.
