Bank of America's profit shrinks 77%
Updated: 2008-04-22 09:57
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CHARLOTTE, N.C. - If the 77 percent drop in Bank of America's first-quarter earnings is any indication, the economy may have a long way to go before it works out the problems that began with the subprime mortgage crisis.
The nation's largest retail bank on Monday quintupled the money it set aside for loans that go sour, and hinted that consumer weakness and the housing slump means that things will not get better for it, or for the economy, for some time.
"I think first it would be too early to strike up the band and sing happy days are here again," Chief Executive Ken Lewis said on a conference call with analysts during which he said the situation in the capital markets was particularly tough in March.
Like many other banks, Charlotte-based Bank of America is besieged on two sides. Its bread-and-butter banking business is ailing because with home prices flagging, more people and real estate developers are failing to repay their loans.
The credit crisis is also hobbling the value of many bank investments.
Last week, crosstown rival Wachovia Corp. said it lost $393 million in the first quarter because of bad credit and tumultuous financial markets. Washington Mutual Inc. lost $1.1 billion.
Wells Fargo & Co.'s profit fell 11 percent, JPMorgan Chase & Co.'s profit slid 50 percent, and Citigroup Inc. posted a loss of $5.1 billion.
"It still remains unclear what ramifications the housing downturn, higher energy costs and subprime crisis will ultimately have and how long the downturn will persist," Chief Financial Officer Joe Price said on a conference call with analysts.
If the economy doesn't turn around -- and few expect it will -- more troubles could loom for Bank of America. It's set to acquire distressed subprime mortgage lender Countrywide Financial Corp. later this year, and it holds the nation's biggest credit card business and retail branch network.
"Earnings for the first half remain questionable and, at this stage, the focus must be on positioning the bank for the eventual recovery of the economy," said Walter O'Haire, senior analyst with Celent, a Boston-based financial research and consulting firm.
In January, Bank of America agreed to acquire Calabasas, Calif.-based Countrywide Financial in a deal valued at about $4 billion in stock when it was announced. Countrywide is among the dozens of mortgage lenders that have battled a spike in mortgage defaults and foreclosures.
Standard & Poor's analyst Stuart Plesser wrote in a research note this month that the proposed acquisition of Countrywide Financial and Bank of America's large exposure to consumer credit "increases (Bank of America's) risk profile in a weakened consumer credit market environment."
Financial stocks declined Monday after the bank's poor quarterly report, while equity markets broadly were mixed as some of the earnings optimism that carried stocks to strong gains last week dissipated.
Bank of America's shares dropped 95 cents, or about 2.5 percent, to $37.61.
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