Bank of America fails to convince with $4.2 billion Q1 profit

Bank of America yesterday announced a return to profitability for the first quarter of 2009, but had to rely on the brokerage unit at controversially acquired Merrill Lynch for most of its gains. Meanwhile, losses on the bank's loans continue to increase, forcing it to raise provisions.

The North Carolina-based bank reported that net income attributable to ordinary shareholders more than doubled to $2.81 billion, or 44 cents per share, from $1.02 billion or 23 cents per share in the first quarter of 2008. Net revenue rose to $35.76 billion. Before payments to preference-share holders (the US government), net income was $4.25 billion, compared with $1.21 billion a year earlier. The Merrill Lynch brokerage division contributed $3.7 billion from trading profits and capital market fees.   

The results were also boosted by one-off items, which included $1.9 billion gained from the bank's sale of China Construction Bank shares and $765 million from job cuts.

The bank's non-performing assets were up 41% from December 31, and amounted to $25.74 billion. It set aside $13.38 billion during the quarter to cover future loan losses, 57% more than in the fourth quarter of 2008.

Bank of America reported its first quarterly loss in 17 years for the October-to-December period 2008. With yesterday's results it joined Wells Fargo, J.P. Morgan Chase, Goldman Sachs and Citigroup in reporting first-quarter earnings higher than analysts' predictions.

Bank of America's shares have plummeted by more than two-thirds since the merger with Merrill Lynch was announced in September, and were down more than 14% by mid-morning Monday, New York time. Other bank shares also fell amid doubts about the sustainability of the first-quarter earnings and renewed concerns about loan losses.

Bank of America set aside $3.4 billion in reserves for mortgage loan failures, up from $1.8 billion a year earlier, but more worrying is the prospect for its other lending businesses. The bank's credit card operation lost $1.77 billion in the first three months of 2009 due to a rise in the rate of managed credit card losses to 8.62% from 7.16% recorded at the end of December. This loss compares with a gain of $867 million a year earlier, and suggests that non-payment and default is now clearly migrating from subprime mortgages to other credit categories. The bank has allocated $8.2 billion in reserves for further credit card losses, nearly twice the amount set aside a year earlier.

But, Bank of America seems to have heeded calls from Washington to start lending again. Mortgage loans and refinancings were up 79% from the previous quarter to $89.26 billion, and losses in the home loans and insurance segment fell to $498 million from $732 million in the first quarter of 2008.

However, pressure is likely to remain on the bank's chairman and chief executive, Kenneth Lewis. He has faced sustained and often vehement criticism from shareholders because of Bank of America's purchase of Merrill Lynch, which was agreed last September when they were unaware of the extent of Merrill's losses, and also for his acquiescence to bonus payments worth $3.62 billion paid to Merrill employees at the end of the year. Bank of America, the largest bank in the US by asset value, spent around $30 billion on ill-fated takeovers in the past 12 months, which also included the acquisition of Countrywide Financial in July.

But Lewis remains defiant, claiming in the statement yesterday that "we are especially gratified that our teammates at Countrywide and Merrill Lynch had outstanding performances that contributed significantly to our success".

The bank has accepted a total of $45 billion from the federal government in the form of Treasury-owned preference shares since October, including $20 billion in new capital to help absorb Merrill's fourth quarter losses of $16 billion. The government also agreed to guarantee $118 billion worth of assets when the extent of Merrill's losses became clear in December.

In order to raise additional capital, Bank of America has issued bonds with a face value of more than $40 billion, backed by the Federal Deposit Insurance Corporation. Along with 19 of the country's biggest lenders, Bank of America is currently undergoing a "stress-test" by the Federal Reserve, which is expected to reveal on May 4 which banks will be able to manage if the recession were to worsen, and which may need further capital.

Lewis himself also faces a day of reckoning soon as shareholders are to vote in a ballot on April 29 whether to re-elect him to the board of directors and whether to split the jobs of chairman and chief executive.