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

By Douglas A. McIntyre Updated Apr 27, 6:00PM EDT · Published Oct 6, 3:32PM EDT

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Bank_of_america_logo 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

About the Author Douglas A. McIntyre →

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.