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Bank of America reports quarterly loss of $8.8b

By Staff | Jul 20, 2011

CHARLOTTE, N.C. – As expected, Bank of America Corp. on Tuesday gave investors an historically bad quarterly earnings report.

The Charlotte-based bank said it lost $8.8 billion in the second quarter, as more than $20 billion in previously disclosed mortgage-related charges walloped its bottom line. The loss was the company’s worst ever, but in line with the estimate it gave last month of between $8.6 billion and $9.1 billion.

The red ink demonstrated, once again, that the nation’s biggest bank is laboring to shed mortgage-related troubles inherited from its 2008 Countrywide Financial purchase. A large portion of the mortgage losses stem from an $8.5 billion settlement announced last month over investor claims related to Countrywide loans sold off during the housing boom.

The ongoing mortgage woes have left analysts wondering if the bank has enough capital to absorb future losses and to meet stricter international standards that are being implemented through 2019. In a conference call with analysts, the bank’s executives noted that the company’s capital ratios exceeded estimates outlined last month and listed ways the bank can meet the higher requirements over time.

For these reasons, Bank of America Chief Executive Brian Moynihan said he has confidence that “we don’t need to raise capital,” reiterating previous statements that the bank doesn’t have to issue more shares. Raising capital by selling more stock dilutes the holdings of existing shareholders.

Bank of America’s second-quarter loss compared to a $3.1 billion profit in the second quarter of 2010. Including dividends paid to preferred shareholders, Bank of America posted a loss of $9.1 billion applicable to common shareholders, compared to a gain of $2.8 billion a year ago.

In addition to the bank’s mortgage troubles, Tuesday’s report also highlighted how banks are struggling to increase revenue in a time of slow economic growth and tighter regulation. Bank of America’s total revenue, when adjusted for the mortgage charges and other items, slipped to $26.5 billion in the second quarter from about $27 billion in the first quarter and more than $29 billion a year ago.

Contributing to the shortfall, revenue from sales and trading in the bank’s Wall Street operations fell by $1.1 billion from the first quarter to $3.8 billion. Looking ahead, the bank expects to lose $475 million in revenue in the fourth quarter due to a new regulation limiting fees banks can charge merchants for debit card transactions, said Chief Financial Officer Bruce Thompson, who replaced Chuck Noski at the end of June.

Excluding mortgage-related items and other charges, Bank of America said it posted a profit of $3.7 billion in the second quarter. The bank’s results were boosted by lower loan losses in other businesses, gains from selling noncore assets and securities and increased revenue in investment banking, trading and wealth management.

Bank of America’s mortgage unit posted a $14.5 billion loss, while its other businesses made $5.7 billion.

The bulk of the bank’s mortgages woes are tied to the $2.5 billion Countrywide purchase executed under former Chief Executive Ken Lewis as the financial crisis was still burgeoning. Since that deal closed in July 2008, the bank’s mortgage unit has lost $30.4 billion.

“Obviously, the solid performance in our underlying businesses continues to be clouded by the costs we are absorbing from our legacy mortgage issues,” Moynihan, who replaced Lewis in January 2010, said in a statement. “But it is clear that – from deposits to wealth management to investment banking – our customers and clients are choosing to do more with us every day. We intend to continue our efforts to put the mortgage uncertainty behind us, build capital through the strength of the franchise, and deliver the returns for shareholders that we owe them.”

The mortgage charges announced last month mostly address requests by investors to buy back loans Countrywide sold off during the housing boom. The bank stuck by its estimate that it could still take another $5 billion in losses related to these requests.

That estimate doesn’t include “reasonably possible” litigation losses, the bank said in its earnings presentation. Bank of America and other large lenders are in settlement talks with the U.S. Justice Department and state attorneys general over allegations of faulty foreclosure practices.

Thompson said the talks remain “fluid” although “everyone realizes this would be a good thing to get this wrapped up.” The bank set aside $1.9 billion for litigation expenses in the second quarter, up from about $800 million in the first quarter. Some of those reserves could be applied to a mortgage settlement, Thompson said.

The bank reported a tier 1 common equity ratio – a measure of capital against assets weighted for risk – of 8.23 percent, which was down from 8.64 percent in the first quarter but up from 8.01 percent a year ago. The bank had said last month that the ratio would be above 8 percent.

Bank of America, which is at the beginning of a cost-cutting campaign, saw its total employment dip to 287,839 from 288,062 in the first quarter. While the bank has added financial advisors in growing areas such as wealth management, the company has “reduced positions in various other areas of the company,” Thompson said, without giving further details.

The bank’s total branches declined to 5,742 from 5,805 as the bank works to reduce total locations by 10 percent. Moynihan said the bank is completing an analysis of expenses in the consumer side of the company and will provide more details when it reports third-quarter earnings in October.

Also Tuesday, Wells Fargo & Co. said it earned $3.7 billion after paying dividends to preferred shareholders, up nearly 30 percent from a year ago. New York-based Goldman Sachs Group Inc. said it made $1.1 billion for common shareholders, up from $453 million a year ago, but less than analysts had expected.

Last week, New York-based JPMorgan Chase & Co. said it earned $5.3 billion for common shareholders in the second quarter, up about 14 percent from a year earlier. New York-based Citigroup Inc. reported a second-quarter profit for common shareholders of $3.3 billion, up 23 percent.

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