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Sunday, July 19, 2009

BAC : Nonperforming assets surged 21 percent to $30.98 billion

Bank of America Profit Drops as Credit Losses Climb (Update4)

By David Mildenberg

July 17 (Bloomberg) -- Bank of America Corp., the biggest U.S. lender, said second-quarter profit declined on higher credit-card and home-loan losses as Chief Executive Officer Kenneth Lewispredicted the weak economy will persist into 2010.

Net income fell 5.5 percent to $3.22 billion, or 33 cents per diluted share, from $3.41 billion, or 72 cents, a year earlier, the Charlotte, North Carolina-based bank said today in a statement. The stock slipped as much as 3.1 percent in New York trading.

Bank of America’s report follows better-than-expected results from JPMorgan Chase & Co. and Goldman Sachs Group Inc. this week. While competitors repaid U.S. rescue funds and freed themselves of extra U.S. scrutiny, Lewis must repair relations with regulators after clashes over the bank’s pursuit of Merrill Lynch & Co. and demands that he raise $33.9 billion in capital.

“We have to get through the next few quarters,” Lewis said on a conference call. “Profitability in the second half will be much tougher,” he said, citing more loan losses and the anticipated absence of one-time gains that boosted results so far this year.

Bank of America declined 28 cents, or 2.1 percent, to $12.89 at 4:15 p.m. in New York Stock Exchange composite trading. Citigroup Inc. said today it had a second-quarter profit, beating analysts’ estimates.

Unit Performance

Profit in global banking rose 74 percent to $2.49 billion at Bank of America, aided by a gain from selling the merchant processing business into a joint venture. Earnings at the unit that includes trading of bonds, equities and currencies more than quadrupled to $1.38 billion on improved credit markets.

The home loan and insurance unit lost $725 million, even as revenue tripled, on credit costs and expenses to help homeowners modify their loans. The bank sees signs that some loan losses may abate, with late payments flattening and home prices stabilizing in California’s hardest hit markets, Lewis said. Card services swung to a loss, and the new federal law curbing interest rates and fees may slice revenue, the bank said.

The provision for credit losses, money set aside to cushion against bad debts, was $13.38 billion, the same as the previous quarter. Assets no longer collecting interest rose to $30.98 billion from $25.6 billion on March 31 and debts the bank doesn’t expect to be repaid jumped 25 percent to $8.7 billion.

Credit-Card Law

The credit-card unit’s $1.62 billion loss compared with a $582 million profit last year. New regulations approved by Congress may trim revenue from cards by as much as $700 million in 2010, Lewis said.

“It’s enough to get your attention,” he told analysts, adding that the bank is looking for ways to mitigate the damage.

Bank of America reported rising defaults on real-estate loans tied to retail and office properties, while the level of troubled loans to home builders and developers stabilized, Chief Financial Officer Joe Price said on a conference call with reporters.

Corporate loans declined $7.8 billion during the quarter as demand softened, the bank said. “As consumer spending stays down, we don’t see middle-market companies and others building inventories and going to capital expenditures,” Price said.

One-time items included a gain of $5.3 billion from the sale of a stake in China Construction Bank Corp., a $3.6 billion accounting charge related to the increased market value of structured notes acquired in the Merrill Lynch purchase and a $1.3 billion writedown of the value of corporate loans and securities.

Stress Tests

Bank of America posted its second straight quarterly profit after a $1.7 billion loss in the last period of 2008, its first losing quarter in 17 years. Federal Reserve stress tests in May found the company may face as much as $136 billion in losses through 2010, and regulators told the bank to raise capital.

Lewis, 62, said U.S. officials were underestimating the bank’s earnings power, and then raised more money than they demanded, ending the campaign with about $38 billion.

Regulators and lawmakers have pressured Lewis to prove that agreements last year to buy Countrywide Financial Corp., the biggest U.S. home lender at the time, and Merrill Lynch, the largest brokerage, can pay off asunemployment reaches the highest level since 1983. Countrywide was acquired a year ago after the home lender almost collapsed under the weight of defaulting subprime home mortgages.

Merrill’s acquisition “is going to work out,” said Bill Fitzpatrick, an equity analyst at Optique Capital Management, which manages $900 million, including Bank of America shares, in Racine, Washington. “That’s why they are profitable here in the second quarter. They would not be, outside of the Merrill Lynch revenue.”

Merrill Lynch

Lewis had considered backing out of the Merrill Lynch purchase in December as losses spiraled toward more than $15 billion in the fourth quarter. The bankcompleted the deal in January after then-Treasury Secretary Henry Paulsonthreatened to have Lewis ousted if the deal was scuttled because regulators feared Merrill would collapse and threaten the financial system.

Bank of America recently started discussions with regulators on repurchase of the $45 billion of preferred shares sold through the Troubled Asset Relief Program, the bank said. “We don’t think we’d be allowed to do it all at once,” Lewis said, declining to speculate on when the repurchase will begin.

‘Intrusive Review’

Shareholders stripped Lewis of his chairman’s title in April after criticism that he withheld information about Merrill’s mounting losses, and his tenure may face more scrutiny from the U.S. Documents tied to the Merrill bailout, dated Dec. 21 and released at a congressional hearing yesterday by RepresentativeDennis Kucinich, an Ohio Democrat, show regulators planned “more intrusive review and involvement by the U.S. government in the selection of management” and the board in return for U.S. funds to salvage the Merrill deal.

The resulting package included $20 billion in new capital and $118 billion in asset guarantees. The latter accord was never signed or tapped, generating another clash with regulators over whether Bank of America owes part of a promised $4 billion fee to the U.S. The bank told analysts that issue will probably be resolved within the next 30 days.

Separately, regulators told the bank in a May memorandum of understanding to overhaul its board and improve risk and liquidity management, said a person familiar with the matter.

Board Changes

Former lead director Temple Sloan and five other former bank directors resigned since the April annual meeting, while four new directors with banking and regulatory experience joined the board. Chief Risk Officer Amy Brinkleyalso announced her resignation during the quarter as a Congressional investigation of the Merrill transaction revealed Fed and Treasury officials’ criticism of Bank of America’s risk-management practices.

“Both Merrill Lynch and Bank of America are on a healthy track and the $38 billion capital raise shows the markets gave a resounding endorsement of thecompany, which in combination is a very strong report card on Ken,” bank spokesman James Mahoney said yesterday. “The board has also strongly endorsed Ken’s leadership.”

While Lewis faces pressure from regulators, bank investors believe government is delving too much into a private company’s affairs, said Bill Andrews, a senior vice president at C.S. McKee LP, a Pittsburgh firm that holds about 6.9 million Bank of America shares.

“The more the government leans on Ken Lewis, the more investors are going to rally around him,” he said.

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