Credit-Quality Talk Eases as Bank of America Beats Earnings Views - TheStreet

Credit-Quality Talk Eases as Bank of America Beats Earnings Views

Third-quarter earnings show corporate credit quality holding steady.
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Bank of America (BAC) - Get Report delivered above-target third-quarter earnings Monday that alleviated some credit-quality worries surrounding the giant bank.

For its third quarter, Charlotte, N.C.-based Bank of America earned $2.15 billion, or $1.23 per fully diluted share, well up from $374 million, or 21 cents a share, in the year-ago period, when turmoil in financial markets crushed most big banks' profits. Analysts surveyed by

First Call/Thomson Financial

had been forecasting earnings of $1.21 per share for the quarter. In heavier-than-average trading Monday, Bank of America stock was up 7/8, or 1.8%, to 49 1/16.

Nonperforming assets edged down to $3.04 billion at the end of the third quarter from $3.07 billion at the end of the second quarter. Domestic commercial loans, which saw a big jump in troubled credits earlier this year, also showed improvement. In the third quarter, the bank reported that nonperforming commercial domestic loans declined to $1.03 billion from $1.09 billion in the second quarter.

Two analysts were impressed with the numbers. "One of the most encouraging parts of third-quarter numbers was the stability in asset-quality numbers," said Joe Morford, banks analyst at

Dain Rauscher


Hal Schroeder, banks analyst with


, agreed the results "allayed fears" of commercial loan problems at Bank of America.

(Neither Dain Rauscher nor Schroder have performed recent investment-banking work for Bank of America. Both analysts have buy ratings on the stock.)

Acknowledging that credit-quality fears had weighed on the bank's stock in the third quarter, Bank of America's finance chief, Jim Hance, said in a conference call Monday that results from a recently completed examination of Bank of America's syndicated loans had been positive.


Office of the Comptroller of the Currency

examined 880 of Bank of America's syndicated loans and "was pleased with the outcome," Hance said. An OCC spokesman couldn't confirm Hance's remarks on the examination, citing the agency's practice of not commenting on matters pertaining to individual banks.


examined the question of whether the bank was potentially vulnerable to credit problems among its corporate borrowers.

Not all credit-quality indicators improved at Bank of America. Nonperforming consumer finance loans leaped 36% to $519 million in the third quarter from the previous quarter.

Charles Peabody, an analyst at New York-based

Mitchell Securities

, wasn't reassured. He pointed out that the third-quarter provision of $450 million was below total net charge-offs (or loan losses) for the same period. "Bank of America is treating credit quality as if it were at the beginning of the credit cycle rather than at the end of it," he says. (Mitchell has done no investment banking for Bank of America, and Peabody is advising clients to sell the bank's stock.)

Peabody has also alleged that Bank of America may be keeping its nonperforming-asset level down by continuing to lend to its troubled borrowers so that they stay current on their loans. For that reason, he finds the drop in nonperforming commercial loans to be "very suspect." Bank of America declined to comment.

But Dain Rauscher's Morford says: "If the

OCC examiners had requested writedowns of specific credits or additional

loan-loss reserves, that would have most likely have shown up in third-quarter numbers."