Bofa Sinks Despite Profit Beat

 

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TheStreet.com

20 April 2009 Monday 17:18 PM EST

SECTION: NEWS & ANALYSIS; banks

LENGTH: 1129 words


TITLE: Bofa Sinks Despite Profit Beat

Signature: Lauren LaCapra, TheStreet.com Staff Reporter



Updated from 2:09 pm EDT

Bank of America (BAC: NYSE) has proved Monday he does not return to profitability last quarter - he has climbed.

However, when one-time items, preferred dividend payments and unusual gains were stripped of the enormous $ 4.2 billion profit Bofa indicated, the image becomes darker.

On a conference call, executives Bofa expected a little more tense quarters of credit terms before the economy begins to improve - forecasts that do not bode well for basic banking transactions. And investors began to realize that the profits reported growing from the end of financial powers, which resulted in a major market rally, may not be strong enough to support it.

Bank of America plunged from 24.3% to $ 8.02 at the close Monday, its low for the day. The firm was among the biggest drags on the market with other financial stocks like Citigroup (C: NYSE), Wells Fargo (WFC: NYSE) and JPMorgan Chase (JPM: NYSE). The Dow Jones Industrial Average closed 3.6%.

Bofa blown away the expectations of Wall Street Monday, reports first quarter earnings attributable to common shareholders of $ 2.8 billion, or 44 cents per share. The figure was 11 times the average estimate of analysts by 4 cents per share, according to Thomson Reuters.

Excluding the preferred dividend payments, the Charlotte, NC-company would have earned $ 4.2 billion. During the same period a year ago, Bofa posted $ 1.2 billion profit, or 23 cents per share.


Bofa results benefited from its two huge acquisitions of Merrill Lynch and Countrywide and the large margins on assets due to a relaxation of fair value accounting standards. Bofa reported $ 2.2 billion to the positive adjustment of Merrill troubled assets, and 1.5 billion before tax on the gain of other debt. The company also posted a gain of $ 1.9 billion on the sale of its stake in China Construction Bank.

In addition, Bofa and its counterparts are reaping rewards from an interest rate environment in which the cost of borrowing and lending rates have plunged in debt in some consumers has increased. This rate has also led to a resurgence of the sort in the housing market, as owners flock to refinance mortgages and new home buyers begin to enter a market with falling prices and rates.

Bofa extended $ 85 billion in loans to 382,000 customers for a new home or refinance the purchase, and the addition of 5,000 employees to cope with record application volume.

But while its net interest income increased 25% to $ 12.8 billion, the credit quality has deteriorated in all lines of business Bofa. The company's net charge-offs rose to $ 6.9 billion, or 2.85% of its loan portfolio, $ 5.5 billion, or 2.36% at the end of 2008. Bofa also increased its provision for future credit losses by 57% to $ 13.4 billion, as nonperforming assets rose to 25.7 billion dollars, or 2.65% of the book Bofa dollars, against 18, 2 billion, or 1.96% at the end of last year.

CEO Ken Lewis predicted that charge-offs will "continue the upward trend" with the rest of the year, the company continues to build up reserves, but at a slower pace.

"Make no doubt: The credit is bad," Lewis said on a conference call. "And we believe credit will worsen before stabilizing or improving."

There was a series of speculations as to whether Bofa - and other behemoths of the bank as Citi, JPMorgan and Wells - requires additional funds to enhance the levels of capital and tangible shareholders. Bofa said its TCE ratio - which is closely monitored metric of a bank's financial health - improvement of 3.13% from 2.93% at the end of 2008.

However, reports surface that Sunday evening in May the government require companies to convert its large cache of preferred shares into common shares. The potential of such an approach also stoked fears that the holders of common shares would be considerably weakened.

Lewis sought to assure investors about the company's capital requirements, on Monday, the market has more weight on Bofa deteriorating credit quality of the record first quarter revenues.

On the call, Lewis said: "we are not absolutely need more capital," according to internal testing and analysis Bofa has done. But he also noted that the decision to convert the preferred shares was finally rests in the hands of regulators, who have conducted their own stress tests on banks that have received funding TARP.

"It is now out of our hands, in others," said Lewis. "Thus, from every way we looked, he thought that we had, but again this is in the hands of the regulators."

Bofa is the latest financial firm to the top of expectations, a trend that began with Wells Fargo (WFC: NYSE) announced April 9, followed by Goldman Sachs (GS: NYSE), JPMorgan Chase (JPM: NYSE), Citigroup ( C: NYSE) and General Electric (GE: NYSE), whose financing arm raised concerns. But while those companies market reports has prompted rallies, it appears that the underlying trends of credit have become the main concern of investors on Monday.

"When you look at the Bank of America, when you look at Citigroup, you have concerns about what are the skeletons in their closet," said Matt Lloyd, chief strategist of the investment advisors for Asset Management. " Actions speak louder than words. The words are positive - "We do not need more capital - but it is falling on deaf ears."

Lloyd, who has different positions in the bank stocks, JP Morgan believes that the reported sales of $ 3 billion in debt to private investors and Goldman $ 5 billion stock offering are signs of strength between the giants of the bank. He believes that the winners will be able to recover market share and support of investors, while others work to wean the government rescue.


"In general, those who lead you in what you are, but I think with the funding, it will be more Darwinistic," says Lloyd.

On the bright side, the report of May have Bofa allay some concerns about his big-ticket acquisitions. Merrill has contributed more than $ 3 billion for Bofa the bottom line, excluding preferred dividend payments, and the integration and cost savings in both divisions are on track or ahead of schedule .

Banking Celent senior analyst Bart Nartea noted that "Wall Street - not Main Street" has helped make the bottom line last quarter Bofa. Global banking, global wealth management and results delivered $ 3 billion in revenue, while banks, credit cards, mortgages and insurance operations lost $ 1.7 billion .

Nartea note that these exchanges can profit "swing sharply in either direction, as evidenced by the recent dips and peaks in the equity markets. Therefore, he argues, the first quarterback boom does not guarantee of future profitability.

"Bank of America has a great retail franchise," said Nartea ", and they need to make it profitable."