BofA cost-cutting helps its profit, but loan ills persist
Bank of America Corp.’s cost-cutting binge is reviving profit, but Wall Street remains wary of the financial giant’s persistent mortgage woes.
The Charlotte, N.C., bank posted a $2.5-billion second-quarter profit thanks to an aggressive plan to reduce expenses across a number of businesses. But that has done little to help expand revenue as the bank navigates more signs of trouble in its massive lending business.
Troubling analysts is that BofA’s profit margin on lending and deposit-taking shrunk to less than 2.4%, the lowest of any of the nation’s biggest banks. There are also fears that margins may shrink further as the industry is squeezed by record-low interest rates.
“We’re fighting the trend. This is the trend that’s held on a little longer than most people expected,” Chief Executive Brian Moynihan told analysts on a conference call. “But we’re fighting it with all the arrows in our quiver.”
Investors remained unconvinced, sending BofA shares down nearly 5% to $7.53.
Already sideswiped by low rates, the bank is also facing a wave of investor disputes over bad mortgages and mortgage-backed bonds. The claims are from investors who felt BofA misled them about the quality of mortgages made before the 2008 crisis — and want the bank to compensate them or face lawsuits.
These claims suggest the mortgage problem, which has cost the bank more than $40 billion, is growing.
Four years after BofA acquired aggressive Calabasas home lender Countrywide Financial Corp., demands that it buy back flawed mortgages surged 40% in the quarter. Government-supported Fannie Mae and Freddie Mac, along with private investors, have lodged nearly $23 billion in repurchase demands with BofA.
“You’re just not going to get revenue growth in this environment,” said Paul J. Miller, an analyst for FBR Capital Markets. “And investors are worried about over-regulation. So why would you own [ bank stocks] at this point?”
What’s more, loans on BofA’s books were down 5%, falling nearly across the board. That contrasts with overall growth in loan portfolios at rivals JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co., which already had reported their second-quarter earnings.
Bank of America, the nation’s second-largest bank after JPMorgan Chase, said its profit amounted to 19 cents a share, handily beating the analyst consensus of 16 cents. That contrasted sharply with the year-earlier period when the bank took $8.5 billion in charges to cover mortgage liabilities and reported a loss of $8.8 billion, or 90 cents a share, on revenue of $13.2 billion.
Revenue rebounded in the latest quarter to $22 billion. But that was below Wall Street projections of nearly $23 billion.
Moynihan said the bank’s capital cushion against losses continues to rise, putting it into early compliance with rising international standards. He told analysts that the bank is fulfilling promises that cost cuts would produce a leaner, more efficient company that is poised to weather any new financial shock waves.
Moynihan’s New BAC initiative, named after the company’s stock symbol, is aimed at reducing expenses by $8 billion a year. Its first phase, cutting $5 billion, will reduce job rolls by 30,000.
The bank hasn’t disclosed how many jobs will be lost in a second round, which it said Wednesday would result in $3 billion in annual savings. That latter effort is aimed at reducing costs in its capital markets, investment banking, commercial lending and wealth management businesses.
BofA said it had paid down its long-term debt by $53 billion during the quarter, leaving it with $302 billion compared with $427 billion a year earlier. It said its cleanup of troubled loans had progressed enough to allow it to release $1.9 billion in funds held in reserve against losses.
The released reserves dropped straight to the bottom line and accounted for three-quarters of the bank’s profit.
Improved second-quarter earnings were also arriving from Southern California’s larger banks this week, including:
East West Bancorp in Pasadena, which said Wednesday that it earned $70.6 million, or 47 cents a share, up 17% from $60.5 million, or 39 cents, a year earlier. The nation’s largest bank focused on Chinese Americans, which beat analysts’ estimates, said it grew commercial and trade-finance loans.
Cathay General Bancorp in Los Angeles, which said Tuesday that it earned $29.9 million, or 33 cents a share, up 23% from $24.3 million, or 26 cents, a year earlier. RBC Capital Markets analyst Joe Morford said Cathay appears on track to repay its bank-bailout debt of $258 million to the U.S. Treasury by year’s end.
PacWest Bancorp of Los Angeles, which reported earnings of $15.6 million, or 42 cents a share, on Wednesday, up 21% from $12.8 million, or 35 cents, a year earlier. Aggressive in acquisitions, PacWest recently bid $212 million for First California Financial Group in Westlake Village, which has spurned the offer despite pressure from some large shareholders to accept it.
The Associated Press was used in compiling this report.
