May 29, 2020

DealBook: Bank of America Profit Rises 63%

A Bank of America branch in New York.Richard Drew/Associated PressA Bank of America branch in New York.

Bank of America on Wednesday became the latest large bank to report second-quarter financial results that exceeded Wall Street’s expectations.

Net income rose 63 percent, to $4 billion, or 32 cents a share, from $2.5 billion, or 19 cents a share, in the period a year earlier, while revenue increased to $22.7 billion from $22 billion.

Analysts had been expecting second-quarter earnings per share of 25 cents, according to Thomson Reuters.

The bank benefited from higher revenue from equities sales and trading and a reduction in expenses, but its mortgage unit continued to struggle.

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“We are doing more business with our customers and clients, and gaining momentum across every customer group we serve,” Brian T. Moynihan, the bank’s chief executive, said in a statement. “We must keep improving, but with the consumer recovering and businesses strong, we have lots of opportunity ahead.”

Despite the big rise in earnings, investors may question the strength of the quarter.

While revenue rose, much of the increase came from Bank of America’s Wall Street businesses, whose performance can be uneven over longer periods. Profit also received a lift from lower expenses. The bank paid substantially less interest on its own borrowings, compared with the second quarter of 2012. It also set aside less for its bad loan reserve and spent substantially less on mortgage litigation expenses.

Bank of America also provided estimates of how it would fare under a new, proposed rule that focuses on capital, the financial buffer banks are required to maintain to absorb losses.

Investors are fixated on this issue right now, fearing that the largest banks might have to raise large amounts of new capital to comply with the rule.

But Bank of America may already meet the requirements, according to estimates the bank provided on Wednesday. The rules require a so-called leverage ratio of 5 percent at a bank’s holding company.

Bank of America estimated on Wednesday that its leverage ratio would be 4.9 to 5 percent at its parent company. The proposed rules also require a 6 percent ratio at banking subsidiaries that are covered by federal deposit insurance. Bank of America’s chief financial officer, Bruce R. Thompson, said during a news briefing on Wednesday that he thought the two largest subsidiaries already had enough capital to comply with the 6 percent requirement.

A vast financial supermarket, Bank of America makes loans to consumers and companies and has a big presence on Wall Street. Since the financial crisis, the bank has struggled to reassert itself in crucial businesses. It was particularly hampered by large and lingering losses stemming from Countrywide Financial, the mortgage giant it acquired in 2008.

Some analysts thought the bank performed relatively well in the quarter but still needed to make further progress.

“This was a quarter in which Bank of America executed on the strategies it has laid out,” said Shannon Stemm, a banking analyst at Edward Jones. “But it’s still got work to do.”

One challenge is achieving revenue growth when interest rates are low and its balance sheet is not growing. Bank of America’s total assets fell slightly in the second quarter. Still, it managed to increase revenue by 3 percent. The bank also managed to cut costs, which helped drive an increase in earnings that far exceeded the growth in revenue.

“A lot of this is about expenses,” said Richard Ramsden, a banking analyst at Goldman Sachs. “People really want to see revenue stabilize and expenses drop.”

Some of the cost-cutting may be hard to sustain, though.

In the second quarter, Bank of America registered significant savings by paying less for the money it borrows. The main reason is that it is sharply reducing its long-term debt, which costs more than other types of borrowing. But the reductions may ultimately run into a new rule regulators are preparing that would require banks to hold set amounts of long-term debt.

Another big expense reduction may be hard to repeat. The costs related to the litigation of bad mortgages was $471 million in the second quarter, about half the amount a year ago. Adverse legal outcomes and new settlements could drive litigation expenses higher again, analysts said.

“The litigation expense is one that we are modeling down over time,” Ms. Stemm said. “But that doesn’t account for the one-off risk of a large settlement.”

Still, Bank of America appears to be making progress in the unit that deals with borrowers who have fallen behind on their mortgage payments. The expenses related to collecting payments and negotiating loan modifications have been high at Bank of America. But the bank said on Wednesday that it expected the number of mortgages that are more than two months past due to decline to 375,000 by the fourth quarter, compared with its previous estimate of 400,000 by the end of the year. Expenses in the unit are also expected to fall, the bank said.

Cutting costs can only go so far, so Bank of America also needs to find ways to generate some revenue growth.

Part of the problem is Bank of America’s conflicted relationship with mortgages after the financial crisis. It was inundated with Countrywide’s bad loans, and it was late to participate in the latest mortgage refinancing boom, which was a big source of revenue for many banks. And since the crisis, Wells Fargo has become the predominant mortgage bank, making it difficult for rivals to regain their precrisis foothold.

Bank of America wants to increase its share of the mortgage market, and it made some gains in the second quarter, but the challenges of the market were apparent.

Even though Bank of America originated more mortgages in the quarter than it did in the period a year earlier, its revenue from making home loans fell. The financial gain that banks make from selling mortgages to government entities has fallen, which hurts mortgage revenue.

The amount of refinancing has dropped off as interest rates have climbed. As a result, banks hope borrowers will take out more original mortgages if the housing recovery continues, but this business is still relatively quiet.

With consumer businesses lackluster, Bank of America had to rely on Wall Street for growth.

Fees from advising on mergers and acquisitions and underwriting stock and bond deals were up. Managing money for wealthy individuals was also strong. At the Merrill Lynch Wealth Management unit, revenue rose 10.5 percent, to $3.74 billion.

Wall Street businesses can be volatile, though.

That was apparent in Bank of America’s trading results. Revenue from trading stocks rose nearly 60 percent, to $1.2 billion. But the fixed-income unit that trades bonds, currencies, commodities and derivatives linked to those assets, didn’t fare as well. Its revenue fell 5 percent, to $2.3 billion.

Bank of America’s rivals have so far reported increases of more than 10 percent in fixed-income revenue growth in the quarter.

In a news release, Bank of America said fixed-income results were affected by the sell-off in bonds that took place in the second quarter after the Federal Reserve said it was contemplating reducing its stimulus policies.

Bank of America shares were up 3.6 percent in afternoon trading, suggesting investors were pleased with the results. Mr. Ramsden, the Goldman analyst, said the market was keen to see revenue stabilize, costs come down and strong indications that the bank has built up sufficient capital.

“They are doing all three,” he said. “The debate is going to be, are they moving fast enough?”

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DealBook: Profit Drops 63% at Bank of America After Mortgage Settlements

A Bank of America branch in New York.Richard Drew/Associated PressA Bank of America branch in New York.

10:12 a.m. | Updated

More than four years after the credit crisis, bad mortgages continue to weigh on Bank of America.

On Thursday, the bank reported a widely expected 63 percent drop in fourth-quarter profit after making huge payments to settle legal claims over its mortgage business. The bank’s earnings, a slim $732 million, amounted to 3 cents a share. That figure narrowly beat estimates of 2 cents a share, based on a survey of analysts by Thomson Reuters.

Bank of America’s quarterly revenue fell about 25 percent, to $18.7 billion, a drop that stems from the steep charges tied to mortgage settlements with the government. The figures underscored the extent of the bank’s mortgage woes, which it largely inherited from Countrywide Financial, the subprime lending giant it bought in 2008. Without the various charges, fourth-quarter revenue would have totaled $22.6 billion.

But the results also point to signs of a recovery for Bank of America. For the entire year, profit jumped to $4.2 billion from $1.4 billion in 2011. Delinquent loans declined in the quarter, another sign of health, and the bank’s wealth management unit continued to report huge gains.

Bank of America also noted that the one-time legal charges, which skewed the bank’s true performance, helped it to continue shedding the legacy of the crisis.

“We enter 2013 strong and well-positioned for further growth,” the bank’s chief executive, Brian T. Moynihan, said in a statement.

The bank’s stock was down more than 3 percent, to $11.34 a share, in morning trading.

Still, for investors, Bank of America’s bleak quarterly profit numbers come as no surprise. The bank previously announced that it incurred a $700 million charge on the perceived improvement in its debt, an accounting-related cost that actually indicated greater public confidence in the stability of the bank. (The charges were offset because of a one-time $1.3 billion gain from foreign tax credits.)

The bank’s recent legal settlements also weighed on its results. Bank of America had warned investors that it deducted $2.5 billion to settle with regulators over claims of foreclosure abuses.

The bank last week also struck an $11 billion agreement to resolve claims that it sold troubled mortgages to the government-controlled housing finance giant Fannie Mae, which experienced deep losses from the loans. As part of the announcement, Bank of America disclosed that its fourth-quarter pretax income took a $2.7 billion hit to cover part of the deal.

All told, the expenses wiped out $5.9 billion, or 34 cents a share, from fourth-quarter earnings.

“Litigation expenses have taken a huge toll,” said James Sinegal, an analyst with the research firm Morningstar.

Bank of America’s results are a reminder of past mistakes, including the takeover of Countrywide, a company that symbolized the reckless lending practices before the housing market crash.

The results also come in contrast to earnings from the bank’s competitors, including Wells Fargo and JPMorgan, which reported record profit in recent days on the back of a booming mortgage business. As most banks capitalize on low interest rates, Bank of America is retrenching somewhat. It recently sold about 20 percent of its loan servicing business.

But the mortgage settlements are also helping the bank close a dark chapter in its history. The deal last week put to rest a bitter battle with Fannie Mae that had lingered since the housing bubble burst.

Bank of America also reached a $2.43 billion settlement with shareholders last fall. The agreement, stemming from its takeover of Merrill Lynch, resolved accusations that the bank misled investors about Merrill’s health.

“We put a lot of risk behind us in 2012,” Bruce R. Thompson, the company’s chief financial officer, said in a conference call on Thursday. “We just feel like we’re in a much better place going into 2013.”

In another retreat from the mortgage mess, the bank reported that the number of home loans delinquent for more than 60 days in the fourth quarter fell 17 percent. The bank’s provision for credit losses declined 24 percent from the same period a year ago.

The bank is getting leaner, too, as part of the broad “New BAC” cost-cutting initiative, which Mr. Thompson declared to be “on track.”

As of the end of 2012, the company had 267,190 full-time employees, down 5,404 from the third quarter. It had 14,601 fewer employees than it had at the end of 2011.

Aside from mortgages, the bank improved on a variety of fronts. It reinforced its capital levels and increased its consumer and business banking income.

The wealth management unit, which includes Merrill Lynch’s sprawling brokerage business, notched record profit of $578 million, up 79 percent.

“We feel very good about the momentum we’ve seen,” Mr. Thompson said.

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DealBook: Bank of America to Pay $10 Billion on Loan Claims

8:44 a.m. | Updated

Bank of America agreed on Monday to pay more than $10 billion to Fannie Mae to settle claims over troubled mortgages that soured during the housing crash, mostly loans issued by the bank’s Countrywide Financial subsidiary.

Under the terms of the pact, Bank of America will pay Fannie Mae $3.6 billion, and will also spend $6.75 billion to buy back mortgages from the housing finance giant at a discount to their original value.

The settlement will resolve all of the lender’s disputes with Fannie Mae, removing a major impediment to Bank of America’s rehabilitation. The bank had settled its fight with Freddie Mac, the other government-owned mortgage giant, in 2011.

Both Fannie and Freddie, which have posted billions of dollars in losses in recent years, have argued that Countrywide misrepresented the quality of home loans that it sold to the two entities at the height of the mortgage bubble. Bank of America assumed those troubles when it bought Countrywide in 2008.

By removing part of the bank’s mortgage albatross, the move on Monday is a continued retreat from home lending by Bank of America, even as rivals including JPMorgan Chase and Wells Fargo compete for the profitable refinance business that has boomed with interest rates persistently low.

Bank of America also agreed to sell the servicing rights on about $306 billion worth of home loans to other firms. In separate statements, Nationstar Mortgage Holdings and the Newcastle Investment Corporation announced they were buying the rights. Those servicing costs, which were roughly $3.4 billion in the third quarter, have weighed on the bank’s profits, especially as borrowers fall behind on their bills.

Brian T. Moynihan, the bank’s chief executive, said in November that he intended to sell off about two million loans the bank currently serviced.

“Together, these agreements are a significant step in resolving our remaining legacy mortgage issues, further streamlining and simplifying the company and reducing expenses over time,” Mr. Moynihan said in a statement on Monday.

Bank of America said it expected the settlement to hurt its fourth-quarter earnings by $2.5 billion because of costs tied to foreclosure reviews and litigation. The firm also expects to record a $700 million charge, an accounting move known as a debt-valuation adjustment, related to an improvement in the prices of its bonds.

The deal on Monday helps the bank move away from its troubled mortgage business. Still, the bank’s attempts to resolve other costly mortgage litigation have so far been stymied. Looking to appease investors that sued the bank for losses when mortgages packaged into securities imploded during the financial crisis, the bank agreed to pay $8.5 billion in June 2011. But the settlement, which would help mollify investors including the Federal Reserve Bank of New York and Pimco, has been stalled.

Further thwarting Bank of America’s retreat from the mortgage business, federal prosecutors sued the bank in October, accusing it of churning through loans so quickly that quality controls were virtually forgotten. The Justice Department sued the bank under a law that could mean Bank of America could pay well more than $1 billion to settle.

Bank of America is among 14 banks said to be negotiating with federal regulators to resolve such claims related to foreclosure abuses.

Ben Protess contributed reporting.

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DealBook: Bank of America Sells Stake in China Construction Bank

Bank of America's Hong Kong headquarters looms over a real estate project operated by China Construction Bank.Bobby Yip/ReutersBank of America’s Hong Kong headquarters looms over a real estate project operated by China Construction Bank.

Bank of America announced on Monday that it would offload about half of its China Construction Bank holdings to a group of unidentified investors, in a deal expected to raise $8.3 billion.

The deal, which came just days after Warren E. Buffett agreed to invest $5 billion into the bank, is the latest asset sale for the beleaguered financial firm. Over the last month, Bank of America has sold its Canadian credit card division and has put its European card operation on the block, as it continues to clear noncore assets from its books.

The moves come amid recent fears that Bank of America lacks sufficient capital, concerns that its chief executive, Brian T. Moynihan, has tried to allay.

On Monday, Bank of America highlighted the deal’s effect on capital levels.

“This sale of approximately half of our shares of C.C.B. stock is expected to generate about $3.5 billion in additional Tier 1 common capital and reduce our risk-weighted assets by $7.3 billion under Basel I,” Bruce R. Thompson, the bank’s chief financial officer, said in the statement.

Under the terms of the deal, Bank of America will sell 13.1 billion common shares of the China Construction Bank Corporation to a group of unidentified investors. The bank on Friday was in negotiations with a collection of sovereign wealth funds in Asia and the Middle East, The New York Times reported. The deal is expected to close later in the quarter.

Even after the sale, Bank of America will still hold about 5 percent of China Construction Bank. According to its statement, Bank of America is in talks to expand a separate existing “strategic assistance agreement” between the two banks.

“Our partnership with China Construction Bank has been mutually beneficial,” Mr. Moynihan said in the statement.

Shares of Bank of America were up more than 5 percent in late morning trading on Monday.

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DealBook: Bank of America Sells Canadian Credit Card Business

Bank of America took steps on Monday to exit the international credit card business, agreeing to sell off its $8.6 billion Canadian card venture to the TD Bank Group for an undisclosed amount and putting its remaining European card portfolio on the block.

With the announcements, Bank of America continued the push to overhaul its credit card business as the bank reels from hefty losses in its troubled mortgage division. While dumping the international card business, Bank of America has largely retained its card loans in the United States, among other core assets. The bank said it hopes the deals will shore up its capital ratios.

“Our strategy is clear: We have been transforming the company to deliver the franchise to our core customer groups, and building a fortress balance sheet behind that,” Brian T. Moynihan, the chief executive, said in a statement. “While the credit card remains a fundamental core product for our U.S. customers, an international consumer card business under another brand is not consistent with that strategy.”

Since Mr. Moynihan took over in early 2010, the bank has sold some 20 different businesses for roughly $30 billion. One big deal was announced in May, as the bank shed its remaining stake in BlackRock for $2.5 billion.

The moves come as Bank of America, the nation’s biggest bank by assets, struggles to regain its footing in the aftermath of the financial crisis. The beleaguered bank announced an $8.8 billion second-quarter loss after it agreed to settle huge legal claims surrounding its ill-fated acquisition of the subprime mortgage lender Countrywide Financial.

The bank’s stock price has been beaten down, too, hovering around $7 for much of the month. Bank of America shares rose more than 2 percent on Monday in premarket trading.

The announcements on Monday are Bank of America’s latest attempts to shed portions of its sprawling credit card business.

Earlier this month, the bank agreed to sell its Spanish credit card portfolio to Apollo Capital Management, the giant private equity firm. In April, Bank of America sold its $200 million small business credit card loans to Barclays.

The TD Bank Group, in addition to buying Bank of America’s $8.6 billion Canadian credit card business, agreed to purchase various other assets and liabilities for an undisclosed amount, according to a bank statement. The bank said it expected the deal to close in the fourth quarter.

The remaining European card portfolios are even bigger assets for Bank of America. The bank manages a combined $19 billion in credit card loans in Britain and Ireland, which it now plans to sell. That business employs about 4,000 people.

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