Bank of America profits roar, but loan losses loom

Monday, April 20, 2009 at 9:17 PM Posted by Beijing News


Bank of America on Monday reported a surge in first-quarter profits, the latest upbeat results from a major US bank, but its hefty bad-debt provision sent shockwaves through Wall Street.

Bank of America, the largest US bank by assets, posted a net profit of 4.2 billion dollars with a big contribution from newly acquired Merrill Lynch.

Bank of America said the government-engineered acquisition of the ailing Wall Street investment bank had contributed more than three billion dollars to its bottom line.

After positive earnings results from Citigroup and Goldman Sachs last week, Bank of America's robust earnings for some suggested that the reeling financial sector may be on the mend.

But Bank of America, which has received 45 billion dollars in government aid to weather the financial crisis, said it had added a hefty 6.4 billion dollars to its loan loss reserve, signaling it is bracing for further turbulence as the world's largest economy struggles with recession for a second consecutive year.

"The fact that we were able to post strong, positive net income for the quarter is extremely welcome news in this environment," said Kenneth Lewis, chairman and chief executive.

Lewis acknowledged in a conference call that "credit is bad and will get worse" for both consumers and businesses, and the bank would "continue to grow" its loan loss reserve, which now stands at 13.4 billion dollars.

But Lewis said the bank had "no need for additional capital." He did not comment on the ongoing federal stress tests of 19 major banks that have received public aid to determine their viability, the results of which were expected soon.

The bad-debt provision roiled Wall Street, with investors worrying that the recent spate of profits reported by major banks that received public aid could prove a temporary respite in the face of mounting bad debt.

Despite reporting first-quarter earnings per share of 44 cents, 11 times higher than analysts' expectations and nearly triple that of a year ago, shares in Bank of America plunged 24.34 percent to close at 8.02 dollars in New York trade.

Paul Nolte at Hinsdale Investments said that even though banks have returned to profitability, the source of these profits may not be sustainable.

"With much of the gains coming from the benevolent government aid -- that is not likely to be repeated in subsequent quarters -- the above-average and positive earnings may be nothing more than a one-quarter phenomenon," Nolte said.

Bank of America, based in Charlotte, North Carolina, included results from Merrill Lynch, which it acquired on January 1, and mortgage lender Countrywide Financial, which was purchased on July 1, 2008.

Merrill Lynch added 3.7 billion dollars to net income, excluding certain merger costs, "on strong capital markets revenue," Bank of America said.

Countrywide also added to net income because of increased mortgage lending and refinancing volume.

For the 2008 first-quarter, the bank posted net income of 1.2 billion dollars, or earnings per share of 23 cents. In the fourth quarter of 2008, the bank had a net loss of 1.7 billion dollars.

The bank said it had paid 402 million dollars in preferred dividends in the January-March period to the US government.

In January, the government announced it would invest another 20 billion dollars in the bank to help it absorb Merrill Lynch and guarantee against the possibility of losses on 118 billion dollars in shaky assets.



REUTERS/Mario Anzuoni

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