BofA’s profit plunge jolts Wall Street
Bank of America Corp.’s plunging profit shocked Wall Street on Thursday and prompted a clearly frustrated Chief Executive Kenneth Lewis to hint that an exit from investment banking was possible at the nation’s second-largest bank.
“I’ve had all of the fun I can stand in investment banking at the moment,” Lewis said. “So to get bigger in it is not something I really want to do.”
As the last of the nation’s top three banks to report results this week, Bank of America’s news suggests that problems in the credit market may be closer to the beginning than an end. Although Lewis blamed some of his bank’s problems on those market conditions, he acknowledged that his traders had made plenty of mistakes.
“What I can’t say is that we’ll stay the course,” Lewis said in a call with analysts after his company posted a 32% profit drop in the third quarter. “The probability of changes and eliminations of some businesses and infrastructure. . . is very high.”
Bank of America’s shares fell $1.18 to close at $48.85 on Thursday after the Charlotte, N.C.-based bank said net income declined to $3.7 billion, or 82 cents a share, in the three months ended Sept. 30 from $5.42 billion, or $1.18, a year earlier. The bank’s revenue fell 12% to $16.3 billion.
Analysts expected earnings of $1.06 a share on revenue of $18.3 billion, according to a poll by Thomson Financial. The earnings estimates typically exclude one-time items.
Bank of America has spent heavily in recent years to build an investment banking group, but it is still much smaller than Wall Street peers.
“Results reflect a decade- long struggle to improve the investment bank,” Deutsche Bank analyst Mike Mayo wrote.
The unit’s quarterly earnings fell by $1.33 billion, or 93%, and revenue dropped 44% from a year earlier as sales and trading revenue declined. The bank wrote down $247 million for leveraged loans and other financing commitments and suffered a $607-million trading loss.
Lori Appelbaum, a Goldman Sachs analyst, said the trading hits “were significant and also worse than peers.”
“While it is logical for the bank to downsize its investment banking platform on the heels of such a disappointing trading performance, this comes after significant investments in the business over the years of about $600 [million] to $700 million,” Appelbaum wrote in a research note.
Lewis said that the analysis of the unit would become “more clear” in the weeks ahead and that changes could be announced this year or early next year.
Bank of America, considered a bellwether for the banking industry because it has branches across the country, said “significant dislocations” in the capital markets also led its profit to fall.
The disappointing results follow similar reports from other financial firms, including Citigroup and Washington Mutual Inc.
In Bank of America’s largest consumer unit, which includes the nation’s biggest credit card business and bank branch network, net income dropped 16% to $2.45 billion. Earnings were hurt by higher managed-credit costs, the bank said. The bank also said it had set aside $2.03 billion for credit losses, up more than 73% from a year earlier.
