B of A Earnings Outline Recession Impact on Credit (BAC)

Bank of America Corporation (NYSE: BAC) issued earnings early and simultaneously announced new capital raising and preservation initiatives.  The banking giant said that quarterly net income was $1.18 billion, or $0.15 per share.  The good news is that it made a profit.  The bad news is that it is a sharp drop from last year’s Q3 of $3.70 billion, or $0.82.  Targeting an 8% Tier 1 capital ratio, B of A is going to sell $10 billion worth of common stock.  As you will see below, the bank is seeing tighter and tighter performing assets and its comments are getting very cautious to almost alarming.

It is also setting this quarter’s dividend of $0.32 per share, which is a 50% cut.  Slashing its quarterly dividend will add $1.4billion to capital each quarter.  Retail deposits increased $56 billionto $586 billion in the quarter including the addition of $35 billionfrom Countrywide. 

CEO Ken Lewis offered very cautiouscomments.  He noted, "These are the most difficult times for financialinstitutions that I have experienced in my 39 years in banking…. Weknow many investors in our stock are quite disappointed with a dividendreduction…"

Credit quality continued to weaken and the economy and the risk of a prolonged recession hasincreased.   Higher levels of bankruptcies are occurring anddelinquencies and losses have increased in all consumer portfolios.Increased loss and delinquency trends have now spread into the firstmortgage, unsecured consumer lending and credit card portfolios.  B ofA has added almost $2 billion to the allowance for loan and leaselosses during the quarter.  Provision for creditlosses was $6.45 billion, up from $5.83 billion in Q2 and netcharge-offs were $4.36 billion (1.84% of total average loans andleases) compared with $3.62 billion last quarter.Nonperforming assets were $13.36 billion or 1.42% of total loans,leases and foreclosed properties, compared with $9.75 billion just onJune 30.  The allowance for loan and lease losses was $20.35 billion,or 2.17% of loans and leases measured at historical cost compared with$17.13 billion at June 30.

Shares closed down 6.5% to $32.28.  Until those credit metrics get marginally better or show somesign of slowing trends, there are many who will be questioning why they want toown any bank stocks.

Jon C. Ogg
October 6, 2008