Bank of America's huge whiff

Posted Apr 21st 2008 8:12AM by Peter Cohan
Filed under: Earnings Reports, Bank of America (BAC), Countrywide Financial (CFC), Recession

Bloomberg News reports that Bank of America (NYSE: BAC) missed earnings expectations by 44%. Specifically, its first-quarter net income declined to $1.21 billion, or 23 cents a share, from $5.26 billion, or $1.16 a share in 2007. The 21 analysts surveyed by Bloomberg expected the bank to make 41 cents a share. The bank experienced a huge rate of late credit card payments in its $81 billion credit-card portfolio -- 5.8% compared with an industry average of 4.1%.

Bank of America's problem is its exposure to the housing market. Assuming 2% of its home-equity loans are uncollectible this year, the cost may be $2.3 billion according to a Fitch Ratings analyst. If the bad loans reach 5%, the damage could total $5.9 billion. Meanwhile, Bank of America is still on track to buy Countrywide Financial Corp (NYSE: CFC) which had $34 billion in home-equity loans at the end of 2007.

Both Bank of America and Countrywide have home-equity loans concentrated in the regions with the most foreclosure filings. California, Nevada, Arizona and Florida are the four states where housing prices are sliding faster than the national average -- ranking among the top 10 states with the most foreclosure filings in March.

Bank of America has been fortunate to gain access to the capital markets. Before today, Bank of America had raised $13 billion worth of capital from public investors after write downs and credit losses that totaled at least $8.2 billion. But with shares down 1.7% in pre-market, Bank of America's cost of capital looks to be on the rise along with the fall in the real estate market.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

Tags: bac, bofa, credit cards, credit crisis, credit crunch, CreditCards, CreditCrisis, CreditCrunch, featured, housing, recession

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Reader Comments (Page 1 of 1)

4-21-2008 @ 9:57AM

Harry said...

Another bank in trouble. What else is new?

4-21-2008 @ 10:00AM

Mike said...

Banks slowly dribble out ongoing problems. Problems will continue. Lots of bad decisions and greed...

7-15-2008 @ 1:58AM

Olivia France said...

I recently receive a letter in the mail from
Bank of America stating that they were reducing
my Home Equity line of credit reason unknown
the letter also stated that if I did not agree with
the changes' I should write a letter stating that
I do not wish to reduce the line of credit, I wrote
the letter, explaining that I did not wish to reduce
my credit line, Today I received another letter
from Bank of America stating that they are decreasing my line of credit anyway...
I then called the service center listed in the letter
the employee stated that the Bank was trying to
cover their lost; which has nothing to do with me
I have not been late or missed a single payment nor is there any derogatory statements on my credit report, It appears to be true, I contacted a broker who aquired information on several Banks' including Bank of America she stated that people were pulling their Home Equity credit lines in cash out B of A along with their depoists' Is it true, is Bank of America going Bankrupt...... I also found out I am not the only person who received the letter ;The Broker stated she had several phone calls' from clients' that B of A is reducing Home Equity lines of credit of previously opened line of credit accounts' ,my line of credit was in 2007 so the contract you have with B of A means nothing and they are in control of you.... beware of B of A I live in Nevada and I also have a home in Florida, I will be closing my account in B of A very soon, I suggest others' do too.

Nevada