Bank Of America “Beats” But Credit Deteriorates Sharply

Bank of America (NYSE:BAC) reported its 2Q09 income at $3.22 billion, or $0.33 per share, down from $3.41 billion, or $0.72 per share, a year earlier. The results were down 5.5% on higher merger charges and credit costs, but were ahead of analysts’ expectations of $0.28 per share.

We may add that the analysts’ estimates ranged from a loss of 11 cents per share to a profit of 70 cents per share, and with so many one-time items it is difficult to conclude which items were included or excluded in the estimates and whether the results actually exceeded the expectations.

Results were driven by strong performance in the wholesale capital markets and home loans businesses, gains on the sale of China Construction Bank shares and the sale of the company’s merchant processing business to a joint venture, but were partly offset by high credit costs, and a special FDIC assessment.

During the current year, banks have seen record revenues from trading actives, as we saw in the recent results of Goldman Sachs (NYSE:GS) and JP Morgan (NYSE:JPM) and also from the ongoing boom in mortgage financing. For BAC, sales and trading revenue rose to a record $6.7 billion during the quarter. The bank funded $110.6 billion in first mortgages, of which approximately 29% were for purchases and rest for refinancing.

However, credit quality deteriorated sharply, with total nonperforming assets rising to 3.31% from 1.13% in the prior year and 2.64% last quarter while net charge-off rate jumped to 3.64% from 1.67% a year earlier and 2.85% in the first quarter. The provision for credit losses was $13.4 billion, flat with the first quarter. Credit-card managed losses increased to 11.7% from 5.96% a year ago.

Bank of America has a larger exposure to consumer credit than many other large banks, and is likely to suffer more in the coming quarters as housing prices fall and unemployment spikes.

The tangible common equity ratio rose to 4.7% from 3.2%, and the Tier-1 capital ratio increased to 12% from 8.3%. The bank was instructed to raise common-equity ratios by $33.9 billion following its stress test and it said that it had increased Tier-1 capital by nearly $40 billion.

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