Bank of America Corporation (NYSE: BAC) stated today that they have undergone a 77% drop in net income, as provisions for credit losses quintupled to $6 billion and investment banking write-downs will cost at least another $1.91 billion.
The large increase in credit costs was driven by weakness in home equity loans and borrowing by small businesses and home builders. The largest retail bank in the U.S. said credit costs will continue to be an issue through 2008. In the case of this past year’s damages to banks’ profits, all major US banks are finding themselves in some trouble.
"We remain concerned about the health of the consumer given the prolonged housing slump, subprime issues, employment levels and higher fuel and food prices," Chief Executive Kenneth D. Lewis said in a release. Bank of America saw results much lower than the company expected, even amidst the previously lowered expectations.
Now Bank of America has less cash on-hand, causing Moody’s to lower their rating one notch to Aa2 on Bank of America’s senior debt, even though it raised $13 billion in fresh capital by selling preferred stock this past January. Moody’s negative outlook also took into consideration the bank's plans to acquire Countrywide Financial Corporation, a sub-prime mortgage lender that found itself in serious financial trouble. This acquisition is set to take place in the third-quarter.
However, that is not the most serious of concerns for the economically-fatigued Bank of America. Bank of America's stipulation for credit losses soared to $6.01 billion from $1.24 billion amid rising credit costs in the home-equity, small-business and home-builder portfolios. The figure was sharply higher than the $3.31 billion provisions in the fourth quarter.
Bank of America holds a large number of consumer-issued credit cards and bank-branch networks. Within this consumer unit of the company, revenues rose 17% despite earnings that fell 59% due to increased credit costs. Credit Suisse analyst Matthew O'Connor said that the big reserve build shows the bank "seems to be more aggressively dealing with credit than some."
Bank of America is not alone in the weakening economy. Other major retail bank competitors, such as Citigroup Inc. and J.P. Morgan Chase & Co. also reported serious losses. Citigroup reported a loss of $6 billion in the first-quarter credit costs. J.P. Morgan Chase reported last Wednesday that it had set aside loan-loss provisions of $4.4 billion for its consumer loans, a nearly threefold increase from the $1.5 billion it set aside a year ago.
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