Bank of America, Wachovia Profits Slump on Writedowns

2008 January 22

January 22, 2008 - Bank of America Corp. and Wachovia Corp., the second- and fourth-largest U.S. banks, said earnings plummeted after more than $6 billion of combined mortgage- related writedowns.

Bank of America’s fourth-quarter profit dropped 95 percent to $268 million, while net income at Wachovia was almost wiped out, plunging 98 percent to $51 million.

“The revaluation of assets that initially looked like a very exclusive subprime problem is emerging to be something much more,” Kevin Fitzsimmons, a New York-based analyst at Sandler O’Neill & Partners, said today in an interview.

Kenneth Lewis, Bank of America’s chief executive officer, said market conditions are the “most stressful” since 2001 and forced the Charlotte, North Carolina-based company to double reserves for potential loan losses to $3.3 billion in the fourth quarter. The bank said earnings will improve this year. Lewis and Wachovia CEO Kennedy Thompson said they don’t expect to cut their dividends.

Bank of America gained 4.3 percent to $37.50 at 11:54 a.m. in New York trading and Charlotte-based Wachovia rose 1.1 percent to $31.15 after the Federal Reserve lowered its benchmark interest rate in an emergency move.

Federal Reserve

“The Fed can alleviate the amount of losses they take and make a recession shorter-lived, but the problem with Fed cuts is that it takes three to four quarters for it to pass through to the real economy,” said James Ellman, who oversees $200 million at Seacliff Capital in San Francisco.

Wachovia and Bank of America reported the lowest quarterly profits in at least six years during the country’s worst housing slump in more than two decades. The world’s biggest banks and brokerages have disclosed more than $120 billion of writedowns and credit losses since June, mostly caused by the collapse of the subprime mortgage market.

Lewis, 60, and Thompson, 57, said today that the companies were battered by the fixed-income markets. Lewis said he expects economic growth to “be anemic at best in the first half.”

Bank of America earned 5 cents a share in the fourth quarter, excluding merger and restructuring costs and a gain from the sale of Marsico Capital Management LLC, falling short of the 21-cent average estimate from 21 analysts surveyed by Bloomberg. Wachovia’s profit of 8 cents a share, excluding takeover-related costs, also missed analysts’ estimates.

National City, KeyCorp

National City Corp., Ohio’s largest bank, reported a loss, and Fifth Third Bancorp and KeyCorp, the state’s No. 2 and No 3 lenders, said profit declined.

“Our fourth-quarter results were severely impacted by ongoing dislocations in capital markets and the slowing economy,” Lewis said in today’s statement. He added that the company is “cautiously optimistic about 2008.”

Bank of America increased its bet on the faltering U.S. economy earlier this month by agreeing to acquire Countrywide Financial Corp., the largest U.S. mortgage lender, for about $4 billion in stock.

Countrywide would give Bank of America a 25 percent share of U.S. mortgage originations, Lehman Brothers Holdings Inc. analyst Jason Goldberg wrote in a Jan. 11 report to clients. Almost two-thirds of Countrywide’s loan originations in 2007 came from mortgage brokers and other third parties, a practice that Lewis has said Bank of America expects to curtail.

Investment Banking

The corporate and investment bank lost $2.76 billion, compared with a profit of $1.4 billion a year earlier, and earnings at the consumer and small-business banking unit declined 28 percent to $1.87 billion. Lewis has scaled back investment banking by cutting 1,150 jobs since October and putting the hedge-fund brokerage unit up for sale.

“Investment banking isn’t Ken Lewis’s core competency and he doesn’t need it,” said Bruce Foerster, a former Lehman Brothers managing director who’s now president of the South Beach Capital Markets advisory firm in Miami.

Profit will be “well above” $4 a share this year, compared with $3.30 in 2007. Lewis and

Bank of America’s total fourth-quarter revenue fell 31 percent to $12.7 billion, while non-interest costs rose 15 percent to $10.1 billion. Return on equity, a gauge of how effectively the company reinvests profit, declined to 11.1 percent for the year from 16.3 percent in 2006.

Full-year earnings dropped for the first time in Lewis’s tenure since he succeeded Hugh McColl Jr. in 2001, with net income sliding 29 percent to $15 billion.

Lowest Since 2001

Wachovia’s fourth-quarter earnings were the lowest since 2001 after $1.7 billion of writedowns, including $1 billion for subprime mortgage-related holdings. The company’s corporate and investment bank had a loss of $596 million after the costs.

“The continued turmoil in the capital markets and the dramatic change in the credit environment diminished our fourth- quarter results substantially,” Thompson said in the statement.

Fourth-quarter revenue fell 17 percent to $7.2 billion. Return on equity was 0.28 percent, down from 13.1 percent a year earlier. The net interest margin, the difference between what Wachovia pays for deposits and what it charges on loans, narrowed to 2.88 percent from 2.92 percent on Sept. 30.

Wachovia has dropped more than 45 percent in New York trading since the company acquired Golden West Financial Corp. for $24.6 billion in October 2006 just before the housing market peaked. Since then, U.S. home sales slumped 21 percent to the lowest in 26 years.

Tiger by the Tail

“They’ve got a tiger by the tail in Golden West and I don’t think they know what to do,” said Nancy Bush, an independent bank analyst in Aiken, South Carolina, who has a “hold” rating on Wachovia.

Most U.S. lenders rose today as the central bank cut the target overnight lending rate to 3.5 percent from 4.25 percent after stock markets tumbled from Hong Kong to London amid increasing signs of a U.S. recession. It’s the biggest single reduction since the Fed began using the rate as the principal tool of monetary policy around 1990.

National City Corp. gained 8.6 percent in New York Stock Exchange composite trading. The Cleveland-based lender reported a fourth-quarter loss of $333 million compared with profit of $842 million a year earlier after more loans went bad and the lender increased money set aside to cover them. The company said Jan. 2 that it would cut 900 jobs and reduce by half the quarterly dividend, the first reduction since the payout began in 1935.

California, Florida

KeyCorp’s net income declined 83 percent to $25 million on soured loans to homebuilders in California and Florida. The Cleveland-based bank is halting lending to construction companies in some regions and said on Dec. 20 it would eliminate 740 jobs. The company, which previously projected it could have a fourth-quarter loss, climbed 9 percent to $23.01.

Fifth Third Bancorp, based in Cincinnati, said fourth- quarter earnings dropped 42 percent to $38 million on an increase in costs for bad loans and an insurance-related writedown. The bank gained 1.4 percent to $22.92.

Citigroup Inc., the nation’s largest bank by assets, posted a fourth-quarter loss of $9.8 billion on Jan. 15, the biggest in its 196-year history, as surging defaults on home loans forced it to write down the value of subprime-mortgage investments by $18 billion. The company fell 8 cents today to $24.37.

JPMorgan Chase & Co. said Jan. 16 that profit dropped 34 percent after it put aside $2.3 billion for credit reserves. The bank gained 2.4 percent to $40.54. Citigroup and JPMorgan are both based in New York.

Bank of America, Wachovia Profits Slump on Writedowns
By David Mildenberg and Hugh Son | Bloomberg

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