NEW YORK — Things keep getting worse for Bank of America.
On Tuesday, the largest U.S. bank reported a loss of $9.1billion during the second quarter, partly due to an $8.5 billion settlement with investors. That agreement, reached in June, settled claims that the bank had sold the investors poor-quality mortgage bonds. The bank had already announced several other settlements this year. The total so far to settle investor claims: $12.7 billion.
The large settlements and protracted losses related to mortgage loans is causing investors to worry about something bigger: Bank of America’s overall financial strength. In a conference call to discuss the earnings report, analysts grilled the bank’s executives.
At the top of their list of concerns? Whether the bank will need to raise more money to comply with new international requirements that large banks hold more capital. If Bank of America needed to boost its capital reserves, it might look to raise more money by issuing more common shares of its stock. That would dilute the value of stock owned by current shareholders.
The stock is already down more than 35 percent for the year and is the only large bank whose shares trade below $10 per share.
Bank of America CEO Brian Moynihan tried to ease those worries. He said that the bank’s finances were stronger between March and June than they were the same period last year.
“We don’t need to raise capital,” he said. Bank capital — made up of reserves plus shareholders’ equity — serves as a cushion against unexpected losses.
The reassurance didn’t go far with investors. Bank of America is down nearly 3 percent in early afternoon trading, to $9.43.
“Investors are clearly not convinced that Bank of America is in a comfortable position financially,” said Shannon Stem, Financial Services Analyst for Edward Jones, a financial advisory firm. “The margin of safety is clearly lower than at other banks, which leaves them more exposed to an economic slowdown or shock to the financial system.”
Investors already had cause for concern. In addition to the massive settlements, in March, the Federal Reserve didn’t allow Bank of America to increase its dividend, citing uncertainty about the depth of its mortgage problems. It was the only denial issued among the four largest U.S. banks. The move raised questions about whether the bank was strong enough to withstand another economic downturn.
In the quarter, the bank set aside an additional $1.9 billion to fight litigation from investors. That brought the total mortgage-related charges in the second quarter to $20.7 billion. The bank does not disclose the total amount that it has in reserve for litigation costs.
Almost all of the bank’s divisions saw declines in revenue in the second quarter.
The bank’s revenue declined 54 percent to $13.2 billion from $29.1 billion in the same period last year. Excluding charges related to investor settlements, Bank of America Corp. earned $3.7 billion, or 33 cents per share. That compares with net income of $3.1 billion, or 27 cents a share, in the same quarter last year.
Countrywide purchase lingers
Bank of America is in worse shape than other major banks like JPMorgan Chase & Co. and Wells Fargo & Co. The main reason is its 2008 purchase of Countrywide. The $4 billion price the bank paid for the country’s largest mortgage lender seemed like a bargain at the time. But the purchase has cost the bank tens of billions more in mortgage losses, regulatory fines, repurchases of poorly-written loans and expensive litigation.
Once bright spot for the quarter: more of the bank’s customers paid loans on time. That led to a 60 percent decline in the amount of money the bank puts aside for credit losses from last year. Loan losses in its consumer businesses dropped for the fifth consecutive quarter.
Several other divisions, including commercial banking and the Merrill Lynch investment banking unit reported positive earnings. Bank of America’s credit card division reported income of $2 billion, up $1.2 billion from the year-ago quarter, as customers paid on time. Commercial banking was another bright spot, reporting net income of $1.4 billion, up $566 million from a year ago. Its Merrill Lynch investment banking unit reported a 28 percent increase in fees to $1.6 billion from a year ago.
But for any positive news to be a focal point for investors, analysts say the bank will need to spend time thinking about its other businesses. Many investors are concerned that Bank of America’s mortgage problems have pulled management’s attention away from its other businesses.
“Management is too focused on cleaning up historical problems that they inherited,” said Cassandra Toroian, president and chief investment officer at Bell Rock Capital. “It’s now time for the management to create the story of what is the forward picture and vision for the company.”