Bank of America Still Choking on Poisoned Loans
Bank of America's (BAC) $8.8 billion quarterly loss -- its worst ever -- shows a company pushing a boulder up a hill. Simply, the nation's mortgage lender is unlikely to recover so long as the housing sector continues to flag.
True, almost all of that loss was expected, reflecting the company's recent $8.5 billion deal to pay off burned investors in mortgage-backed securities. B of A also has sought to cuts its costs, while its investment banking and wealth management unit have rebounded strongly in recent quarters. Deterioration in the bank's loan portfolio also is slowing.
Still, there's little reason to think the company has turned the corner on its mortgage woes, which largely stem from B of A's 2008 acquisition of failed subprime lender Countrywide. The fallout from that deal has resulted in a barrage of litigation on everything from mortgage "putbacks," to mortgage insurance, to foreclosures. B of A had to set aside a total of roughly $20 billion to cover future home loan and related charges, according to its latest earnings report. Barron's writes:
The company is making progress at reducing its risky assets, but it's clear that Bank of America's results will swing up and down based on decisions by judges and lawyers as much as by strategic decisions the company makes and shifts in the macro economy.Net interest income, a key measure of profitability for banks, also fell, as consumer loan balances declined. Another looming concern for B of A: capital. CEO Brian Moynihan took pains in the company's conference call to assure analysts that the bank won't have to raise money to comply with the Basel III standards.
But some observers aren't so sure. Two analysts recently estimated that B of A may need as much as $50 billion to meet the regulatory requirements. That underlines a related problem for B of A's management -- regaining investor confidence:
"The credibility of company has been damaged over the past few years," said Raymond James bank analyst Anthony Polini. "They may have to say something two to three times in a row for the Street to believe them."Moynihan said B of A will have a "tier 1 common equity" ratio (a standard measure of a bank's financial strength) of 6.75-7 percent by 2013, which would exceed Basel's 3.5 percent capital requirement. But that figure presumes that the company is anywhere close to resolving its legal problems, a major question mark. Meanwhile, another downturn in the housing market would renew pressure on the bank's core lending business. It's not out of the woods yet.
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