Bank of America Corp. yesterday said its fourth-quarter profit fell 95 percent after it took more than $6 billion in write-downs and losses tied to the turmoil in the subprime mortgage market.
Major banks and investment houses have now written off more than $133 billion since the problems in the subprime market began to surface late last summer, according to figures compiled by Bloomberg News. The fallout also has claimed the careers of top financial executives, including the chief executive of Merrill Lynch & Co., Stan O'Neal; Citigroup Inc. chief executive Charles O. Prince III; Morgan Stanley copresident Zoe Cruz; Bank of America investment banking chief Gene Taylor; and State Street Corp. investment chief William Hunt.
The charges and write-downs at some of the nation's largest financial institutions have battered their stocks. The KBW Bank index, which includes 24 of the nation's leading banks, is down 27 percent since early October.
In some cases, however, the charges have helped shore up confidence that the institutions are dealing with their problems. Bank of America's shares rose $1.42 yesterday, or 4 percent, to close at $37.39. Its Charlotte rival, Wachovia Corp., rose $1.11, or 3.6 percent, to close at $31.91 after disclosing $3.1 billion in write-downs tied to the subprime crisis.
The question now is whether the worst news is over, and whether the banks can prosper with many consumers at the limit of their ability to spend and business customers facing troubles of their own. Rob Lutts, chief investment officer of Cabot Money Management in Salem, said he plans to avoid buying US bank stocks and has purchased shares of overseas institutions, which have reported more growth.
Even though the domestic banks may have gotten beyond the problems tied to mortgage-backed securities, Lutts said, they could face more basic problems with traditional loans if consumers fall behind on credit card payments, mortgages, and home equity loans. "Many of the banks have written off a large portion of what they're going to, but how do the other assets hold up?" he asked.
Indeed, much of a conference call that Bank of America's executives held with analysts yesterday focused on basic business lines and the US economy, which chief executive Ken Lewis said he expects will slow to "minimal GDP growth" but not a recession in 2008, and an improving economy later in the year.
The bank's chief financial officer, Joe L. Price, said it has experienced rising delinquencies in its credit card portfolio in states most affected by housing problems such as California, Florida, Arizona, and Nevada, where payments that were overdue 30 days or more rose five times faster than in the rest of its portfolio.
Another area where the slowing economy affects the banks' bottom line is the percentage of bad loans in their portfolios. For Bank of America these rose to 0.68 percent of its total loan portfolio as of Dec. 31, from 0.26 percent at the end of 2006. Industrywide, bad loans sank as low as 0.78 at the end of 2005, then rose to 1.04 percent overall at the end of September 2007, according to RBC Capital Markets.
An RBC analyst in Portland, Maine, Gerard Cassidy, said he expects growing bad loans tied to the construction and commercial sectors to replace mortgage problems as the biggest problem facing banks. So far Bank of America "has avoided the biggest problems, due to conservative management of credit," he said, but the worst pressure is still to come.
Nancy Bush, an independent bank analyst in South Carolina, also cited high loss ratios in the bank's small-business portfolio. But she said Bank of America's outlook is still strong overall given the prediction of chief executive Ken Lewis that it would earn $4 per share this year. "They've got some issues, but they're not unmanageable losses," she said.
For the last three months of 2007 Bank of America said it earned $268 million, down from $5.3 billion in the same period a year earlier. Net interest income rose to $9.2 billion from $8.6 billion a year ago. But the other key component of the bank's revenue, noninterest income, plunged to $3.5 billion from $9.9 billion in the year-ago period.
The main cause was a $4.5 billion drop in trading profits following losses in collateralized debt obligations - a type of security that often includes bundles of mortgages - and $800 million in losses and write-downs it took to support money market funds that held shares of troubled securities.
Among its wealth-management businesses headquartered in Boston, Bank of America said net revenue at its US Trust private banking business rose 22 percent to $2.32 billion and net income rose 4 percent to $467 million. But at Columbia Management, which runs the bank's mutual funds, revenue fell 2 percent to $1.5 billion, reflecting support for cash funds. Columbia's net income fell 41 percent to $196 million.
Ross Kerber can be reached at kerber@globe.com.
