Thursday, July 31, 2008

Bank of America - Sub Prime Fall out Management

Bank of America reported second quarter 2008 results that excluded $2.3B in losses and $3.7B in credit-related write-downs stemming from its merger with CountryWide. The bank reported that its net income fell 41 percent to $3.41B, down from $5.76B a year ago. Write-downs also fell substantially:

The corporate and investment bank earned $1.75 billion, a 3.2 percent increase from a year earlier. Writedowns on securities fell to $645 million from $1.47 billion in the first quarter.

So the bank is reporting second quarter write-downs of $645M due to CDOs and $575M to investment banking, totaling $1.2B in write-downs sans CounrtyWide for the quarter.

Second quarter 2007

Bank of America is the second largest bank in the United States, with a market capitalization of $217 billion. Citigroup is the largest, with a market cap of $252 billion (figures in July 2007).

In the second quarter 2007 the company's provision for credit losses ballooned 79.2%, to $1.8 billion from $1.0 billion. For comparison, the provision in the first quarter was $1.2 billion, indicating that the subprime sector's woes still pack a mighty punch. Bank of America said its total managed losses were $2.8 billion in the second quarter, a slight tick up from $2.6 billion in the year-ago period.

3rd quarter 2007 - October 2007

The investment banking division was hurt badly by the turmoil in credit markets, as the weak performance in virtually all of its fixed-income activities caused profit to plummet 93 percent to $100 million, compared with $1.43 billion a year earlier.

Bank of America's small investment banking unit was hit particularly hard, weathering trading losses the same size as those of its larger peers. Profit fell 93 percent to $100 million from $1.43 billion a year ago. The decline stemmed from nearly all of its fixed-income operations, contributing to a $717 million loss. It also absorbed a $607 million loss from bad trading bets.

The bank's large consumer banking business absorbed heavy losses as it reinforced its reserves by $865 million, or 52 percent, in anticipation of higher losses across all businesses. While the division's revenues grew slightly to nearly $12 billion, profit fell 16 percent to $2.45 billion. About half of the reserves increase was expected to cover anticipated losses in its small business loan portfolio, and about 30 percent of the increase was linked to the deterioration of home equity loans.

Bank of America's wealth management division increased 17 percent from a year ago, to $599 million. However, about 10 percent of that increase was related to its acquisition of U.S. Trust, which was completed in July.

Net income for the entire company in the third quarter was $3.7 billion, or 82 cents a share, compared with $5.42 billion, or $1.18 a share, a year ago. Revenue declined 12 percent to $16.3 billion.

The results caught Wall Street off-guard and suggested the extent to which the bank was under stress from the downturn in the housing market and a slowdown in the economy. The heavy trading losses also raised questions about its risk management practices.

The earnings drop came after several months during which Bank of America had been doing deals. In July, it took a $2 billion stake in Countrywide Financial, giving it an immediate paper profit and an option to buy the troubled mortgage giant if it was ever put up for sale. More recently, it took over LaSalle Bank to expand its presence in Chicago, outmaneuvering rivals in an intense bidding war. Still, it has struggled to find ways to grow.

Bank of America announced that it is cutting roughly 3,000 jobs and launching a strategic review of its investment banking business after recent poor performance from the unit.

Gene Taylor, head of Global Corporate and Investment Banking, will retire at the end of this year and be replaced by Brian Moynihan, who currently runs the company's Global Wealth and Investment Management business.

Bank of America is mainly a large retail bank and commercial lender. But it has expanded into investment banking in recent years. CEO Lewis said the company wasn't pulling back completely from capital markets and investment banking.
Bank of America remains "committed to providing our commercial, corporate and institutional clients with the financial products and services they need to run their organizations effectively," he said in a statement.

Keith Banks, president of Columbia Management, Bank of America's asset management business, will replace Moynihan as president of Global Wealth and Investment Management, the company said.

January 2008

Net income at the Charlotte-based bank dropped to $268 million, or 5 cents per share, in the three months ended Dec. 31, 2007 from $5.26 billion, or $1.16 per share, a year ago.

The bank's revenue fell 32 percent to $12.67 billion from $18.49 billion last year.
Analysts expected earnings of 18 cents per share on revenue of $13.24 billion, according to a poll by Thomson Financial.

The quarter included results from LaSalle Bank, which Bank of America purchased on Oct. 1.

Results reflected $5.44 billion of trading losses, compared with profits of $460 million a year earlier. This reflected a $5.28 billion write-down related to collateralized debt obligations, which the bank said reduced trading profit by $4.5 billion and other income by about $750 million. Bank of America said it also set aside $3.31 billion for possible future credit losses.

For the year, Bank of America reported earnings of $14.98 billion, or $3.30 per share, compared with $21.13 billion, or $4.59 cents per share, in 2006. Revenue fell to $66.32 billion from $72.58 billion a year earlier.

Bank of America announced scaling back its investment banking operations, shedding an additional 650 jobs after suffering heavy trading losses from bad mortgage investments.

Those layoffs are on top of 500 jobs that were eliminated in mid-October, when Bank of America executives signaled plans of a retreat in investment banking. Together, they represent about 19 percent of the investment bank’s 5,900 employees.

They plan to pare back coverage of certain investment banking customers and narrow the services it provides to corporate clients overseas. They are also ratcheting down their trading activities, scaling back their presence in packaging mortgages and other complex securities that have been hit hardest by the credit crisis.

The Bank of America also plans to sell its prime brokerage unit, which faced steep competition and massive investment requirements.

The retreat or retrenchment was reacting to the realities of the market as of today was the explanation of Kenneth D. Lewis, Bank of America’s chairman and chief executive at a new conference.

The investment banking follows a strategic assessment that began in October after Brian Moynihan, a longtime Bank of America executive, became the head of the corporate and investment bank. Lewis expressed full confidence in Mr. Moynihan, who had never managed a trading business before, to put the investment bank back on track. “I trust him. I know he is bright and detail-oriented,” Mr. Lewis said, noting Mr. Moynihan’s knowledge of markets and dedication to the bank.

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