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Bank of America (BAC)
Bank of America's Second-Quarter Earnings Boost Investor Confidence
Bank of America joined the ranks of Citigroup (C: Charts, News, Offers), JPMorgan Chase (JPM: Charts, News, Offers), and Wells Fargo (WFC: Charts, News, Offers) as a lender that beat earnings expectations in spite of reporting a serious loss for the second quarter. Shares are surging as investors are re-inspired by the state of the credit markets and the Dow Jones Industrial Average can thank the welcome news from the financial sector for the gains it posted last week. Bank of America is still digging itself out of the hole created by the swell of bad loans and is in the midst of a major restructuring after its recent acquisition. Do today's results mean the company's latest decisions are paying off, or are these earnings just a reflection of broader market trends?
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The much-anticipated earnings statement from Charlotte, North Carolina-based Bank of America is helping to pacify investor fears over the credit markets by posting a lower-than-expected decline in quarterly profit. Profit fell about 41 percent during the second quarter as compared to the same period last year due to the overall increase in bad debts from the sluggish economy and weak housing market. Today's earnings report showed profit of $3.41 billion, or 72 cents per share, which is down from $5.76 billion, or $1.28 per share, during the second quarter last year. Profits increased over the first quarter, though, when results of $1.2 billion, or 23 cents per share, were posted and surpassed analysts' expectations of 53 cents per share, giving investors reason to rally. Revenue for the quarter also grew to $20.3 billion.
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With the number of bad debts mounting, how was Bank of America able to post these results? Luckily, the company, which is the largest U.S. retail bank and mortgage lender, had enough success in its other areas of business that these bad loans were offset. In particular, the wealth management unit and the investment banking division were strong enough to overcome the weaker consumer and small business divisions, which have suffered the most from the shaky credit market. The second quarter results also include $212 million worth of pre-tax restructuring costs from the recent deal to purchase Countrywide Financial, which closed on July 1, 2008. Countrywide faced a $2.33 billion net loss during the second-quarter on $3.7 billion of credit-related losses and write-downs. These results were not included in Bank of America's second quarter earnings.
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Bank of America, which is now the second-largest bank by assets in the U.S., expects a brighter future with the Countrywide acquisition. Although the company previously stated that the merger would not affect the yearly earnings per share, Bank of America now forecasts profits to increase as a result. Bank of America has also updated its estimated cost savings from the acquisition from $670 million to $900 million by 2011. The optimistic outlook has also led the company to confirm that they will not be reducing the sizeable dividend any time in the near future.
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Company CEO Ken Lewis is confident that the company is properly positioned to stay strong regardless of market conditions, "We are pleased with these solid results in a difficult financial environment. Outside of real estate-related products, our operating results were quite good virtually across all business segments. This performance demonstrates not only the advantages of our company's diversity and scale, but also the ability of our associates to differentiate Bank of America in the eyes of customers and clients." The numbers agree, providing investors the reassurance that the company is well-capitalized. Aside from the earnings data, Bank of America's Tier 1 capital ratio, which marks the bank's ability to absorb and withstand losses, was 8.25 percent. As a standard, a ratio higher than 8 percent is a good sign for financial institutions. Investors have one more major bank to hear from this week as Wachovia (WB: Charts, News, Offers) reports its quarterly earnings Tuesday, before they can feel fully secure in the financial market.
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