Bank Of America - Higher Credit Costs And Worsening Credit Quality Will Be A Drag On Upcoming Results

In its latest quarterly Lending & Investing Initiative report, Bank of America Corporation (BAC) said on Monday that it has extended about $184 billion in credit during the third quarter of 2009 to support households and communities.

The report makes obvious how BofA is utilizing the bailout money to support the U.S. economy. According to the report, since the fourth quarter of 2008 when the Troubled Asset Relief Program (TARP) was initiated, BofA had extended $759 billion in new credit. This represents almost $17 for every dollar of the $45 billion it received under the TARP. BofA also continues to provide a significant return on investment to the U.S. taxpayers. The bank is expected to pay more than $2.5 billion in dividend to the U.S. Treasury through Nov 16, 2009.

The extension of home loans continues to be among BofA’s priorities. The company extended $96 billion alone in first mortgages during the reported quarter. The loans helped nearly 450,000 people purchase a home or refinance an existing mortgage.

BofA is also extending credit to the municipalities and non-profits and has already provided $7 billion to help meet local needs and serve communities across the country.

In the business sector, the company has extended $78 billion in small business and commercial loans in the quarter.

BofA’s quarterly loss came in at 26 cents per share, substantially worse than the Zacks Consensus Estimated loss of 10 cents. This compares unfavorably with earnings of 15 cents in the prior-year quarter.

The worse-than-expected results for BofA came in due primarily to continued weakness in the U.S. and global economies as well as stress on the consumer, which continues to result in high credit costs. The results for the quarter were negatively impacted by $2.6 billion in pretax mark-to-market and credit valuation adjustments on certain liabilities, including the Merrill Lynch structured notes, and a $402 million pretax charge to pay the U.S. government for termination of its asset guarantee term sheet. However, strengthening reserves, capital position and liquidity were key positives during the quarter.

We think that BofA is in a relatively good shape from a capital perspective. During this delicate period of market stress, the availability of significant private-sector capital is very limited. As a result, the management remains focused on managing asset levels efficiently, ensuring the deployment of TARP funds to core lending businesses and trimming other assets in non-core businesses. Also, the management is quite confident about its capital position as it has indicated paying back TARP funds in installments. We anticipate continued synergies from BofA’s large scale operation and balance sheet restructuring. However, higher credit costs, various legal issues and worsening credit quality will be a drag on upcoming results.

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