Bank of America Earnings Drop on Loan Writedowns (Update7)

By David Mildenberg

Oct. 18 (Bloomberg) -- Bank of America Corp., the second- largest U.S. bank, plans to cut back investment banking after about $4 billion in trading losses, defaults and writedowns caused third-quarter profit to drop 32 percent, more than analysts estimated.

Net income fell to $3.7 billion, or 82 cents a share, according to a company statement, missing the $1.06 a share average estimate from 16 analysts surveyed by Bloomberg. The Charlotte, North Carolina-based company set aside $2.03 billion in the quarter to cover bad loans amid the worst U.S. housing slump in 16 years.

Bank of America declined 2.4 percent to $48.85 in New York trading after Chief Executive Officer Kenneth Lewis called the results unacceptable. Lewis said during a conference call that the company plans to curtail investment banking after trading mistakes led to $717 million of losses.

``I've had all the fun I can stand in investment banking,'' Lewis said. In February, the company's goal was to become one of the top three U.S. investment banks.

The bank's shares have lost 8.5 percent this year, compared with Citigroup Inc.'s 21 percent decline and JPMorgan Chase & Co.'s 5 percent drop.

Revenue Misses

Third-quarter revenue was $16.3 billion, falling short of analysts' estimates of $17.9 billion. The year-earlier profit was $5.4 billion, or $1.18 a share.

Lewis, 60, has helped transform Bank of America into the nation's largest by deposits, and the company derives more than 85 percent of its revenue from the U.S. He has spent about $25 billion this year to buy ABN Amro Holdings NV's LaSalle Bank in Chicago and U.S. Trust Corp. from Charles Schwab Corp. to expand in retail banking and asset management.

He also earmarked $675 million for investment banking to compete with companies including New York-based Citigroup and JPMorgan for leveraged buyouts, merger advice and trading.

Profit at the corporate and investment-banking division plummeted 93 percent in the quarter to $100 million from $1.43 billion a year earlier. The unit marked down the value of financing for LBOs and other lending by $247 million. Analysts at Citigroup had predicted a writedown of as much as $700 million.

Investment Banking

Lewis said the bank deserves ``about two-thirds of the blame'' for its trading losses, with the rest attributed to volatile market conditions.

Gene Taylor, 60, heads the bank's investment banking unit. Thomas White became head of global markets in June, replacing Mark Werner. Three other senior executives left with Werner.

``There's a question whether they have the right people in place,'' said Gary Townsend, an analyst at Friedman, Billings, Ramsey Group Inc. who rates the stock ``outperform.'' ``They didn't move quickly enough to react to what was happening in the market.''

Chief Financial Officer Joe Price declined in an interview to discuss possible management changes or staff cuts. The unit employs more than 20,000 people, according to spokesman Scott Silvestri.

Bank of America is building a new $2.2 billion, 54-story skyscraper at Sixth Avenue and 42nd Street in Manhattan with closely held developer Durst Organization Inc. The bank reserved 80 percent of the building for its own use and has not told Durst, which is acting as leasing agent on the property, of any plans to cut back, said Durst spokesman Jordan Barowitz.

The bank avoided larger writedowns on LBO loans because it isn't involved in some of the biggest deals that are near collapse, Lewis said.

Credit Markets

The company joined JPMorgan and Citigroup this week to set up an $80 billion fund that may help revive the asset-backed commercial paper market. Credit markets froze in July, when the collapse of subprime mortgage trading led investors to shun bonds linked to home loans as well as LBO debt and commercial paper.

The new fund will buy assets from structured investment vehicles, units set up to purchase securities such as bank bonds and subprime mortgage debt.

Return on equity, a gauge of how effectively the company reinvests profits, shrank to 11 percent, from 16.6 percent a year earlier.

Citigroup's return on equity dropped to 7.4 percent from 18.9 percent a year earlier, and JPMorgan's return on equity was unchanged at 11 percent. Citigroup, the biggest U.S. bank, reported earlier this week that third-quarter earnings slumped 57 percent after about $6.5 billion of costs for fixed-income trading and underwriting losses and bad consumer loans.

Consumer Banking

Earnings at Bank of America's consumer and small-business banking unit fell 16 percent to $2.45 billion.

Interest income rose 1 percent as the year-over-year decline in long-term rates and a move of customer deposits into higher- yielding accounts curbed profit.

Bank of America's net interest yield -- the difference between what it pays on deposits and earns from loan interest -- narrowed to 2.61 percent from 2.73 percent a year earlier.

With almost 10 percent of total U.S. bank deposits, Bank of America should benefit from the Federal Reserve's move to cut its benchmark rate by a half a percentage point because the company can pay less to savers, Merrill Lynch & Co. analyst Edward Najarian said in a Sept. 18 report.

Bank of America invested $2 billion in Countrywide Financial Corp., the biggest U.S. home lender, in August when the Calabasas, California-based company was running short of cash. Bank of America's share of total U.S. mortgage originations climbed to 7.1 percent as of June 30 from 5.7 percent a year earlier, Credit Suisse Group analyst Moshe Orenbuch said in an Oct. 2 report.

More Foreclosures

U.S. foreclosures set a record in the second quarter and overdue subprime loans, made to people with the worst credit, reached a five-year high, according to data compiled by the Washington-based Mortgage Bankers Association. Bank of America has avoided making subprime loans, which have the highest default rate, said Keith Gumbinger, vice president of HSH Associates, a mortgage research firm in Pompton Plains, New Jersey.

``Bank of America stayed outside the mortgage fray for a couple of years when things were getting liberal and loose,'' Gumbinger said. ``Citigroup was much more involved in subprime than Bank of America.