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Bank of America Misses

A change in the bankruptcy law hits the quarter.

Updated from 9 a.m. EST

Bank of America

(BAC) - Get Bank of America Corp Report

said profits fell in the fourth quarter, missing Wall Street estimates because of lower trading revenue and losses related to the new bankruptcy law.

Bank of America's fourth-quarter earnings fell to $3.77 billion, or 93 cents a share, from $3.85 billion, or 94 cents a share, a year ago. Adjusted for one-time charges, Bank of America earned 94 cents a share in the latest quarter, missing the Thomson First Call Wall Street consensus of $1.02 by a wide margin.

"This is the first time in a long time we failed to meet our own expectations," said CEO Ken Lewis. Lewis stressed, however, that the adverse effects on the business this year -- a change in bankruptcy laws and negative trading conditions in the fixed income market -- should not represent a trend at the bank.

As anticipated, charge-offs and the bad debt provision rose in the fourth quarter as bankruptcy filings reached record levels in anticipation of legislative changes in October. The provision expense for credit losses was $1.4 billion in the fourth quarter, more than doubling from a year ago and rising 20% from $1.16 billion in the third quarter.

Bank of America's purchase of MBNA, a credit card unit, was completed on Jan. 1, 2006, and results from the company were not included in the 2005 earnings report. Bank of America Lewis said in an interview on


that the bankruptcy filings for MBNA in 2005 looked similar to those of Bank of America's credit card unit. Credit quality was generally stable, the company said in its earnings release.

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The fourth quarter results included an estimated $524 million in incremental charge-offs and $143 million in provision expense attributable to bankruptcy reform.

Total revenue inched up 3% from a year ago, driven by higher card income, mortgage banking income and equity investment gains, and a slightly lower noninterest expense.

"With double-digit year-over-year growth in net income, earnings per share and revenue, 2005 was another successful year for Bank of America. However, we were impacted, like others, by several items in the fourth quarter," said Lewis. "The impact of the change in bankruptcy laws and changes in our practices for overdraft charge-offs and over limit credit card fees reduced pre-tax results by about $320 million.

"In addition, we had a weak trading quarter that was well under our performance in recent quarters. The bankruptcy issue will not recur and should actually benefit us going forward as we expect a reduced level of bankruptcy filings under the new law. We fully expect trading to do better in the coming quarters. Apart from those issues, our businesses had a very good year and a solid fourth quarter, which sets a good foundation for 2006."

Revenue in Bank of America's biggest segment -- consumer and small business banking -- grew by 4% to $7.43 billion from $7.12 billion. Net income rose 9% to $1.76 billion. Card income increased 8% and service charge income grew 6%.

Revenue in the global business and financial services division grew almost 7% from the previous year to $2.90 billion from $2.72 billion, but net income fell to $1.13 billion from $1.21 billion a year ago. Strong loan and deposit growth was slightly muted by a $391 million loan provision in the quarter.

Bank of America's capital markets and investment banking division was the only division posting declining revenue in the quarter, falling 11% to $1.95 billion from $2.19 billion in the same quarter in 2004. Investment banking results increased slightly throughout the quarter while depressed activity in fixed income and foreign exchange markets weighed down the gains.

In the global wealth and investment management division, Bank of America revenue increased 15% to $1.93 billion from $1.68 billion last year. Net income rose 32% to $636 million from the previous year. Most of the boost came from a rise due to the acquisition of Fleet's business, but asset management fees, which increased 21% from 2004, also helped float the segment.

For the year, Bank of America earnings rose 19% to $16.9 billion, while earnings per share rose 12% to $4.21.

Over the past two years, Bank of America has carried out two major acquisitions: the purchase of Fleet in 2004, and the acquisition of MBNA in 2005. The company does not expect to make any further acquisitions in 2006, said Lewis. Instead, the company hopes to return to the stable growth stage it had from 1998 through 2003, and focus this year on the integration of MBNA, which it expects to complete by October.

The company said the MBNA acquisition should be neutral to earnings in 2006.