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 $1.70, or 16 percent, to $8.90 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.
"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," Ely added.
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.
"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.
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.