Updated from 9:49 a.m. EDT
Bank of America
on Monday reported a steep drop in first-quarter profit, fueled by a big writedown and a boost to its provision for credit losses.
The Charlotte-based bank posted a profit of $1.21 billion, or 23 cents a diluted share, vs. $5.26 billion, or $1.16 a diluted share in the year-ago period. Revenue, net of interest expenses, dropped 6% to $17.3 billion. Analysts polled by Thomson Financial had expected earnings of 41 cents a share on revenue of $16.46 billion.
BofA's disappointing results reflected an ailing U.S. economy that has hit consumers by stemming easy access to credit cards, auto loans and mortgages, as the credit-rich days of the earlier part of the decade are now just a distant memory. A significant portion of BofA's troubles in the first quarter came from its consumer business, while another portion came from its corporate and investment banking arm in which it had to significantly write down the value of securities backed by risky mortgages.
Dodgy Loans Hit BofA
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"First quarter was much worse than our expectations three months ago, with the most notable deterioration in the latter part of the quarter," CEO Ken Lewis said during a conference call. "The issues we faced in capital markets in the fourth quarter continued into the first quarter with March being particularly difficult."
The company does not plan to reduce its dividend, but if "the economy worsens over the next few quarters resulting in a prolonged recessionary environment, we will do what we think prudent to manage capital," Lewis says.
BofA wrote down $1.47 billion of collateralized debt obligations, or CDOs, and $439 million in leveraged loans, contributing to $1.31 billion in trading losses. In the year-ago period, the bank posted a profit of $1.66 billion through trading.
The bank increased its provision for credit losses to $6.01 billion, from $1.24 billion in the year-ago period, primarily to protect against increasing losses in its home equity, small business and homebuilder loan portfolios, it said. Total net charge-offs increased to $2.72 billion in the quarter, from $1.43 billion in the first quarter of last year. Nonperforming assets rose to $7.83 billion, compared to $2.06 billion in the year-ago period.
"Credit quality will continue to be an issue with charge-offs at least at first quarter levels but probably higher for the rest of the year," Lewis added. "While we don't expect to increase reserves with the pace we experienced cover the past two quarters, our reserving actions will correlated with the direction of the economy and the impact on our customers."
Like other banks struggling through the credit crisis, some analysts are becoming concerned with BofA's capital position. BofA, like rivals
posted sharp drops in profit in the first quarter as banks have dealt with souring loans.
Smaller rivals, like
have resorted to dilutive capital raising efforts to shore up their balance sheets. Earlier on Monday, Cleveland-based
said a consortium of investors led by private-equity firm Corsair Capital
"Our consumer credit recession call is playing out, with faster than anticipated credit deterioration," Morgan Stanley analyst Betsy Graseck writes in a note. "Additionally, Bank of America's Tier 1 capital is lowest among peers at 7.51% and we wouldn't be surprised by further capital raising."
Moody's Investors Service downgraded BofA's long-term senior debt to double-A2 from double-A1 and placed a negative rating outlook on the company, it said. The ratings agency also lowered the bank's so-called financial strength rating to A-minus from A.
"Today's downgrades address
Bank of America's relatively weak capital position, despite a substantial capital raise earlier this year," Moody's said. "Given a challenging operating environment, a weakened outlook for earnings, and a heavy dividend burden,
Bank of America's equity ratios are unlikely to expand meaningfully in the near term."
Credit crisis and housing decline aside, BofA has been busy with acquisitions over the last year, which has somewhat depleted its capital position. Still, it maintains its "well-capitalized" status.
Last year, BofA acquired Chicago-based LaSalle Bank from the break-up of ABN Amro as well as wealth management firm, U.S. Trust from
. The bank is expected to close its deal to buy struggling mortgage lender
in the third quarter.
CEO Lewis said in his opening remarks on the conference call that the company is committed to "getting back to our target of 8%" Tier 1 capital through "earnings generation and no share repurchases."
Fee income dropped 29% to $7.01 billion, the company said, as increases in service charges, card income, mortgage-banking income and investment and brokerage services were "more than offset" by trading losses and the CDO-related writedowns. Additionally BofA's equity investment income remain unchanged as the bank's $776 million gain in the sale of a portion of its
stake was offset by reductions in principal investing.
Profit from BofA's corporate and investment banking arm dropped 92% to $115 million, mostly fueled by losses in its capital markets and advisory services business. Revenue from the unit -- which also includes treasury services and business lending -- dropped by 41% to $3.2 billion.
Lewis said in a release the bank was "concerned" about the fate of consumers in the near term, given the housing slump, credit crisis, job market and rise in cost for food and gasoline. He noted that GDP was expected to grow minimally in the second quarter, picking up slightly in the second half of the year.
For the full year, BofA is expected to earn $3.30 a share on $76.21 billion in revenue, according to Thomson. Deutsche Bank analyst Mike Mayo is concerned about the bank's higher loan losses in home equity, cards, commercial real estate and small business. "With such negative problem loan and loan loss trends, the reserve build seems at least partly ongoing," he writes in a note.
BofA shares were down 95 cents, or 2.5%, to $37.61in recent trading.