Jeffrey Camarati/Bloomberg NewsBrian T. Moynihan, Bank of America’s chief executive, is reversing the legacy of Ken Lewis, his empire-building predecessor.
For Bank of America, it is the end of an era.
With the bank shrinking its balance sheet and selling off assets, the company, based in Charlotte, N.C., surrendered its title as the country’s biggest bank Tuesday, another sign of how a money-losing giant assembled over decades is being reshaped into a smaller and, investors hope, more profitable institution.
Bank of America, with $2.22 trillion in assets reported Tuesday in its third-quarter earnings, is now second to JPMorgan Chase, which has $2.29 trillion assets. It also ranks second to JPMorgan Chase in terms of branches and total deposits.
Analysts said it was more evidence of how Bank of America’s chief executive, Brian T. Moynihan, is reversing the legacy of his controversial predecessor, Ken Lewis, an empire builder who craved being the biggest in United States banking and whose creation ultimately needed two federal bailouts to survive the financial crisis.
“There’s been a huge philosophical change in who they want to be,” said Mike Mayo, a veteran bank analyst with Crédit Agricole Securities. “This is a milestone that marks the end of a two-decade-long period during which they aspired and eventually became the largest bank.”
In today’s slow-growth economy, though, bigger is not necessarily better. And the challenges Bank of America still faces were evident in the numbers it released Tuesday.
Buoyed by one-time gains from accounting changes and asset sales, Bank of America reported a $6.23 billion profit for the third quarter, but the headline number camouflaged weak results in many of its businesses. Still, investors cheered the news, pushing the bank’s shares up 10 percent to $6.64 a share.
Although its investment bank, Bank of America Merrill Lynch, has been a crucial source of profit recently as other businesses like mortgage lending hemorrhaged money, the slow trading environment and financial uncertainty in Europe caused trading revenue to drop. The company’s global banking and markets revenue fell to $5.2 billion from $7 billion, and the unit reported a $302 million loss in the third quarter, a sharp contrast to the $1.46 billion gain a year ago.
Mr. Mayo estimated that the bank’s underlying core revenues dropped 17 percent, as other businesses like global commercial banking, card services and consumer real estate services also posted declines from a year ago. One exception was the company’s wealth management business, where revenue and net income both rose.
Still, the story behind the $6.23 billion profit was mostly a tale of one-time gains from accounting changes and asset sales, including $4.5 billion from positive adjustments to the value of its outstanding debt, a $1.7 billion accounting gain on the perceived riskiness of its debt and a pretax gain of $3.6 billion from the sale of half its stake in China Construction Bank.
“It’s not like 2007 or 2008 where there are losses that threaten the bank’s capital’s position,” said Christopher Kotowski, an analyst with Oppenheimer. “But nothing was particularly great and trading was very weak.”
Without the special items, Bank of America would have earned about $2.7 billion, which included pulling back $1.7 billion it had set aside, largely for borrowers who fail to pay their consumer and credit card loans.
Jason Goldberg, an analyst with Barclays Capital, counted 15 special items in the quarter, down from 16 in the second quarter but more than the 12 in the first quarter. “It’s a big company undergoing a transformation.”
The bank reported net income of 56 cents a share, compared with a loss of $7.3 billion or 77 cents a share in the year-earlier period. Analysts had been expecting the bank to earn 28 cents a share in the third quarter. Revenue rose to $28.7 billion from $26.9 billion, although that too was pumped by one-time gains.
For investors, the red ink flowing from Bank of America’s disastrous 2008 acquisition of Countrywide Financial, the subprime mortgage giant, remains the biggest worry. Both the federal government and private investors are seeking compensation for tens of billions of dollars in losses on securities backed by subprime mortgages.
Part of the reason investors breathed a sigh of relief Tuesday was that the red ink from subprime mortgages eased in the last quarter. Provisions for so-called put-backs, in which investors try to force the bank to buy back soured mortgages by arguing they were improperly originated and bundled into securities, fell to $278 million. In the second quarter, these provisions totaled a whopping $14 billion, including an $8 deal billion with investors that include the Federal Reserve Bank of New York. Litigation costs fell to $290 million from $1.5 billion in the second quarter.
In 2006, Bank of America surpassed Citigroup to become the biggest bank by market capitalization, an event that can be seen as a high-water mark of Mr. Lewis’s era. Today, its $67 billion market value lags Wells Fargo, JPMorgan Chase and Citigroup.
Bruce R. Thompson, the company’s chief financial officer, said he expected assets to keep shrinking in the coming months, as some loans come due and are not renewed and the company’s Canadian credit card business is sold in the fourth quarter.
“We’re not focused on the size of the balance sheet, what we’re focused on is getting the balance sheet that’s best for our customers and best for us,” he said.
In fact, while JPMorgan Chase and Citigroup showed slight growth in terms of total loans in the third quarter, Bank of America’s overall loan portfolio declined by about 0.9 percent compared with the second quarter, Mr. Goldberg noted.
The company’s headcount is also set to drop sharply from the 290,509 recorded during the third quarter. Roughly 2,000 employees were told last quarter their jobs were being eliminated, and 30,000 more are set to go over the next three years as part of Project New BAC, an efficiency initiative aimed at cutting $5 billion in expenses in its first phase.
Mr. Moynihan defended Bank of America’s controversial new $5-a-month debit card fee Tuesday, arguing that customers who bring more of their banking business to the company will be able to avoid it.
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