September 22, 2020

DealBook: At Bank of America, an $8.8 Billion Loss

A Bank of America branch in Times Square.Andrew Gombert/European Pressphoto AgencyA Bank of America branch in Times Square.

8:34 a.m. | Updated Bank of America reported a loss of $8.8 billion in the second quarter as it doled out huge payments to settle legal claims related to its troubled mortgage division.

The loss, which amounted to 90 cents a share, was steep, but it was fully baked into expectations. Analysts predicted the bank would lose 90 cents a share, compared with a profit of $3.1 billion, or 27 cents a share, in the period a year earlier.

The mortgage problems also ate into revenue, which fell about 55 percent, to $13.2 billion. The drop came as the bank reported a large decline in noninterest income, the result of swelling mortgage provisions.

With the second quarter nearing a close, the bank agreed in June to pay $8.5 billion to a group of more than 20 big investors who bought billions of dollars’ worth of soured mortgage investments. The deal, which is still awaiting a judge’s approval, represents the single biggest settlement tied to the subprime mortgage crisis.

The bank also earmarked $5.5 billion in the second quarter to cover future claims linked to troubled loans and an additional $6.4 billion for a series of other charges, leading to an overall pretax mortgage-related hit of about $20 billion.

Excluding mortgage-related items, the bank would have earned $3.7 billion for the quarter, up slightly from the period a year earlier.

The results were in line with Bank of America’s own preliminary projections. After the mortgage settlement was announced in June, the bank offered an early peek at its results, indicating that it would have earned up to $3.7 billion, or 33 cents a share, absent its mortgage charges. The bank met the expectations, in part, thanks to its decision to release $2.4 billion from its reserves.

Brian T. Moynihan, chief of Bank of America.Jeff Kowalsky/Bloomberg NewsBrian T. Moynihan, chief of Bank of America.

“Obviously, the solid performance in our underlying businesses continues to be clouded by the costs we are absorbing from our legacy mortgage issues,” Brian T. Moynihan, the bank’s chief executive, said in a statement.

In some ways, the results painted two disparate pictures of the bank, with several divisions showing signs of digging out from the depths of the financial crisis.

On average, deposit balances rose 4 percent from the period a year earlier. Investment banking fees increased 28 percent, to $1.6 billion. And the bank’s global wealth management group, which includes Merrill Lynch, produced another strong showing, with asset management fees up 14 percent.

While revenue from sales and trading was down from the previous quarter, the business saw an improvement of $666 million from the second quarter of 2010.

Even the mortgage business showed signs of life, as the bank said the quality of loans improved.

“All signs point to continued improvement from here,” said Jason Goldberg, an analyst at Barclays Capital.

But the mortgage-related legal woes remained a serious burden. Many of the problems stem from the bank’s ill-fated acquisition of Countrywide Financial, the former subprime lending giant that came to represent the excesses of the housing boom.

Bank of America acquired Countrywide for $4 billion during the height of the crisis. The costs have been piling up ever since.

A range of institutional investors, along with Fannie Mae and Freddie Mac, want Bank of America to repurchase bad Countrywide mortgages, which they say failed to meet underwriting standards. The bank reached an $8.5 billion settlement with the likes of BlackRock, the world’s largest asset manager, and the Federal Reserve Bank of New York.

“It certainly is a big step in putting the problems behind them,” said Mr. Goldberg. But he noted that “it’s not done.”

The bank still has exposure to lawsuits by mortgage insurers and other claims from private mortgage investors.

Meanwhile, the uncertainty continues to stall the bank’s long-awaited revival and weigh on its stock price.

The bank’s shares have dropped 28 percent this year. On Monday, the stock dipped below $10, in sharp contrast with competitors like JPMogran Chase, whose stock is trading at nearly $40.

Last week, JPMorgan far surpassed the consensus estimate of analysts, posting a profit of $5.4 billion, or $1.27 a share. Even Citigroup, which has struggled to shake off the legacy of the crisis, said its earnings rose 24 percent in the second quarter.

So why does Bank of America continue to struggle?

“The others don’t have Countrywide,” Mr. Goldberg said.

Article source: http://feeds.nytimes.com/click.phdo?i=556e657fe878b14b03cb23f656a88050

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