Bank of America profit drops 95% on Merrill legal costs - Financial Post

Bank of America Corp., the second-largest U.S. lender, said third-quarter profit dropped 95% on litigation expenses and an accounting charge tied to the firm?s debt.

Net income fell to US$340 million, or 0 cents a diluted share, from US$6.2 billion, or 56 cents, a year earlier, according to a statement Wednesday from the Charlotte, North Carolina-based firm. Analysts surveyed by Bloomberg were predicting a loss for the quarter, and the shares rose in early trading.

Chief Executive Officer Brian T. Moynihan, who took over in 2010, has approved more than US$28 billion for settlements of legal and regulatory claims tied to his predecessor?s takeovers of Countrywide Financial Corp. and Merrill Lynch & Co. Last month, he agreed to pay US$2.4 billion to investors who said management hid Merrill losses ahead of the 2009 deal.

?There are several things floating to the top that reflect a continual clean-up at Bank of America,? said Marty Mosby, an analyst at Guggenheim Securities LLC, which manages more than US$100 billion including Bank of America stock. ?The Merrill settlement was yet another uncertainty that goes away, and at the same time the housing market is getting better, which helps because the lion?s share of their issues are from real estate.?

Tougher Rules

The quarter included increased sales and trading revenue, excluding accounting adjustments, higher income from mortgage banking and investment banking and better credit quality, according to the bank. Deposits and mortgage originations both rose, the bank said.

Banks face tougher rules on how to account for home-equity mortgages to troubled customers. Thomas Curry, who took over the U.S. Office of the Comptroller of the Currency in March, is pushing lenders for write-offs when borrowers have declared bankruptcy, even if payments on the home loans are still current.

The new guidance cost JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. about US$2 billion of write-offs in their third-quarter earnings reports. Bankers including Moynihan, 53, and Wells Fargo CEO John Stumpf, 59, have said borrowers tend to keep paying as long as they are able, even if home prices drop.

Bank of America, which rescued Countrywide Financial Corp. in 2008, had US$118 billion in home-equity loans at June 30, with 1.1% at least 30 days overdue.

Stock Reaction

?Our strategy is taking hold even as we work through a challenging economy and continue to clean up legacy issues,? Moynihan said in the statement. The stock rose 7 cents to US$9.53 at 7:17 a.m. in New York.

The bank said Sept. 28 the third quarter would include one- time events amounting to about US$3.5 billion in pretax costs and US$800 million in after-tax expenses. It cited the Merrill settlement, charges tied to debt accounting and a drop in the U.K. tax rate.

After preferred dividends, Bank of America showed a net loss for the quarter of US$33 million, according to today?s statement. In home mortgages, losses could be as much as US$6 billion above accruals on demands that the firm repurchase shoddy loans. The bank was able to reach the projection ?as the result of continued dialogue? with Fannie Mae and Freddie Mac.

Bank of America set aside part of the cost of the Merrill deal in advance and incurred more legal expenses during the quarter. The company denied misleading investors over Merrill?s health and said resolving the class-action suit was in the best interests of current shareholders.

Accounting Rules

A drop in the corporate tax rate in the U.K. means that the value of deferred tax assets diminished.

Accounting rules require companies to book losses when the market price of their bonds increases or a profit when the price falls, reflecting the hypothetical cost to repurchase and extinguish the debt.

Analysts often discount such adjustments because the cost remains theoretical unless the company conducts a buyback. Bank of America has been on a campaign to reduce interest costs since last year, cutting long-term debt by more than US$120 billion in the 12 months ended June 30 through redemptions and by not replacing debt that matures.

The debt-accounting charges are a reversal from last year?s third quarter, when Bank of America booked more than US$6 billion in gains as its credit deteriorated and concern swirled that its capital might not be adequate.

Expense Cuts

The bank?s stock plunged almost 60% in 2011, dipping below US$5 in December for the first time since 2009. The shares have led the Dow Jones Industrial Average this year with a gain that reached 70% this week as Moynihan boosted capital and the U.S. recovery strengthened.

Moynihan has vowed to cut US$8 billion in annual expenses and more than 30,000 jobs. The CEO sold more than US$50 billion in assets since taking over in 2010 from Kenneth D. Lewis, who announced his sudden retirement after clashing with investors and regulators over the Merrill Lynch deal, which threatened the bank?s stability.

JPMorgan and Wells Fargo, ranked No. 1 and No. 4 by assets, said record third-quarter earnings were aided by a rise in mortgage fees. JPMorgan?s profit climbed 34% to US$5.71 billion, while Wells Fargo?s rose 22% to US$4.94 billion.

Bank of America scaled back its mortgage business after the 2008 takeover of Countrywide saddled it with more than US$40 billion in costs from faulty mortgages and foreclosures. The bank became the biggest U.S. mortgage lender after the acquisition, then slipped to No. 4 and had about 4.4% of the U.S. market this year, compared with 33% for Wells Fargo and 11% for JPMorgan, according to industry newsletter Inside Mortgage Finance.

Bloomberg.com

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Source: http://business.financialpost.com/2012/10/17/bank-of-america-profit-drops-95-on-merrill-legal-costs/

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