Syndicated Loan Woes No Surprise at Bank of America

Analysts have been leery of the bank's credit quality since a warning last month.
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The other shoe dropped Wednesday at

Bank of America

(BAC) - Get Report

, as the bank confirmed its big corporate lending operation is under siege from bad loans.

The bank said it expects to earn

between 85 and 90 cents a share in the fourth quarter, leaving it sharply below analysts' estimates. Speculation about the bank's credit quality has been rampant since Bank of America

warned of credit problems in a regulatory filing in mid-November. Fourth-quarter earnings estimates have been dropping ever since, according to

First Call/Thomson Financial

, to $1.17 today from $1.28 the day before the November filing. Bank of America shares slid $3.19, or 7.7%, to $38 Wednesday.

"This has been one of my major concerns for a while," says James Mitchell, a banks analyst at

Putnam Lovell

who rates Bank of America stock a hold. His firm hasn't underwritten for Bank of America. "They were one of the more aggressive syndicated lenders, but at the same time they didn't have the financial flexibility to add to their reserves and be aggressive with taking care of problem credits." Bank of America referred requests for comment to its press statement.

Vicious Cycle

Charlotte, N.C.-based Bank of America and New York's

Chase Manhattan

(CMB)

dominate the market for syndicated loans, or those shared among three or more banks. According to third-quarter data, Bank of America holds 26% of the market, second to Chase's 29%. The next contender,

Citigroup

(C) - Get Report

unit

Salomon Smith Barney

, has a 12% share.

When the economy is on the right track, as it has been for several years, syndications can yield lucrative fees and boost underwriting business. But syndicated credits have been increasingly problematic for banks in recent months, as slower economic growth continues to pressure corporate profits. And when the going gets rough, industry leaders like Bank of America can get stuck holding the bag. The most recent blowup for the bank was believed to be its

share of a hefty $1.7 billion credit to troubled consumer products maker

Sunbeam

(SOC)

.

We have been "very negative on Bank of America," says John Wimsatt, banks analyst at

Friedman Billings Ramsey

, which rates the stock a market perform. Wimsatt says his firm had "no confidence" in 2001 earnings estimates and originally estimated them at $5.25, the low end of the consensus range, because of the bank's issues with commercial credit quality. Following the bank's November regulatory filing, Wimsatt correctly predicted that "further deterioration in the credit portfoilio

will require higher provisioning and lower earnings growth going forward."

The Books

Mitchell thinks the bank had been lax in the way it handled its loan-loss reserve, which is essentially a financial cushion that banks keep on hand to protect against bad loans that must be written off. Boosting the reserve means taking a hit to profits. But Mitchell says that for a while the bank had been underprovisioning the reserve by adding less than the amount of loan charge-offs. And this year Bank of America has just been matching the reserve, he says.

The underprovisioning is especially troublesome considering Bank of America reported a nearly 50% spike in nonperforming loans in the third quarter, compared with the prior year. (Nonperforming assets are loans that are past due but haven't been charged off yet.) In a presentation at a New York investor conference Wednesday, the bank said it is experiencing continued deterioration in credit quality, and now expects nonperforming assets to be about 20% above the already lofty third-quarter level. Nonperforming loans totaled $4.2 billion in the third quarter.

"This has come back to haunt them," says Mitchell. "I thought they had taken care of this issue with their 10-Q filing. I'm a little surprised that it happened again."