July 21, 2008 8:47AM
Did BofA Really Beat the Street?
By Elizabeth MacDonald
Don’t get out the hats and horns on Bank of America’s results just yet.
Though it looks like BofA’s reported earnings of 72 cents a share on revenue of $20.6 bn beat analysts estimates of 53 cents a share on sales of $18.4 bn, the results do not include the colossal losses at Countrywide.
BofA (BAC) won shareholder approval to acquire Countrywide for $2.5 bn on July 1, so the losses from that acquisition will start bleeding through in BofA’s third quarter. Wall Street, so desperate to find a bottom to this mortgage and housing mess, so excited to see BofA beating estimates, has sent the stock chart on this one moving up and down today like an EKG heart monitor read of a 90-year-old on a Bowflex machine. Analysts’ chronic short-sightedness has drained them of all common sense.
Bank of America today reported second-quarter 2008 net income of $3.41 bn, down from a record $5.76 bn a year earlier.
Factor in Countrywide’s $2.3 bn in losses, and BofA’s profit plunges to $1.1 bn, just a little over a fifth of its income result in the year earlier period. Factor those losses in and BofA misses analysts estimates by a country mile.
Also, BofA has one of the biggest book of debt securitizations in the banking business at $227.4 bn, up 25% from a year earlier and swamping its net worth of $162 bn. That’s about twice the amount of debt securitizations at Wachovia (WB), and we know that slug of portfolios at too many banks hold massive stinkbombs as home loans continue to bellyflop.
Countrywide’s balance sheet is ugly, its book of loans held for investments alone is at $95 bn, more than a third of that is in home equity lines of credit and second lien mortgages which don’t have first dibs on a house if a mortgage goes under. Countrywide has $199 bn in assets and $185.9 bn in liabilities, against stockholders equity of a teensy $13 bn. Countrywide also has $15.6 bn in mortgage-backed and other securities it wants to unload, with $10.4 bn in level 2 or hard to pricetag assets because the markets for them are still in blackout mode, and $5.2 bn in assets, valuations based on the bank’s own models, not market prices because the markets for them are frozen solid.
That’s why the amount BofA is setting aside in cookie jar reserves soared higher to $5.8 bn, more than triple the sums a year earlier, reflecting net charge offs of $3.6 bn.
Driving BofA’s results was its acquisition of LaSalle Bank and US trust, with net interest income rising a sweet 25% v the same period a year ago.
Turning to Countrywide, through June, Countrywide is achingly, slowly going through its loan workouts at what seems to be a snail’s pace. It worked out 119,000 loans, nearly twice the number of its completed foreclosures. And it’s not half way done here. Bank of America estimates Countrywide will have to restructure about 265,000 home loans worth $40 bn during the next two years.
In sum, watch the net charge-offs figures for BofA, more than doubling to 1.67% from 0.81% of total average loans and leases a year earlier. This figure represents the loans it doesn’t think are collectable. Nonperforming assets nearly quadrupled to 1.13% presently from a year ago.
All of this, and also largely due to the Countrywide acquisition, are the reasons why Morgan Stanley (MS) slashed its investment rating on BofA shares last week, saying it expects the bank will have to raise $12 bn in capital and cut its dividend by a fifth.
Comment by Justin
Jul 21st, 2008 at 9:43 am
shh. Don’t ruin the hopes and dreams of the clueless permabulls with the facts. Let them keep bidding up the price. The higher the big banks go, the bigger their fall will be. I love bear traps.
Comment by Dean Goodman
Jul 21st, 2008 at 9:49 am
Still waiting for those other shoes to drop… not only have they not completed (or at least reported) their total mortgage lending blunder… they will have to face the music on the securities they packaged and sold too.
This is why they crafted the “bailout” language the Democrats are trying to push through Congress. To shift that load onto the taxpayers.
Comment by Sami
Jul 21st, 2008 at 11:36 am
it should not be included due to accounting rules. the acquisition closed after quarter end July 1 so it should not be included in BofA results. Hinting the BofA did this so they can beat is really bad journalism.
Comment by John
Jul 21st, 2008 at 12:33 pm
Factor in Countrywide’s 2Q numbers when Bank of America didn’t even own it then? What kind of silly accounting is that?
How about giving BofA even a day to run the company before adding Countrywide’s past losses? For example, we still don’t even know how much, if any, of Countrywide’s debt BofA will pay. That could have a huge effect on future earnings.
As for the future potential loan losses and write downs, look at the massive increases BofA has allocated to provide for this over the last three quarters.
It astonishes me how so-called “analysts” focus on the hypothetical, but ignore the obvious: BofA’s making billions in profit each quarter. Its ALWAYS paid a dividend, NEVER cut the dividend and ALWAYS had yearly dividend increases.
Focus on the simple and obvious: BofA makes billions each quarter for its shareholders and pays them a huge dividend, while other financials post billions in losses, and slash dividends.
Comment by Greedom
Jul 21st, 2008 at 1:48 pm
Justin, I’m sure bear traps aren’t anything like the killing room floor at a bull slaughter house.
But Liz,
thanks for the creative insights.
I ‘intuit’ that BoA ‘ain’t all that purty’ neithers !
off to raise 12 billion they are I suppose.
Article leaves me asking WHY did they file CW and BoA seperately then.
Perhaps so as not to scar BoA from CW.
I wonder how people would react if Paulson began talking about federalizing the Bank of America heh.
I think people would start to take more responsibility in trying to learn what’s going on.
While we are even ENTERTAINING federalizing Fannie and Freddie ? Hey, let’s federalize everything else too while we’re at it ? why not ?
?
ugh!
Comment by Ray in PA
Jul 21st, 2008 at 1:54 pm
Great story…
When are we going to see the big impact of consumer debt defaults for companies like BoA and Citi? Right now, everyone seems to be concentrating on the mortgage defaults. Isn’t the other shoe about to drop?
Comment by Dave Anson
Jul 21st, 2008 at 7:02 pm
Why in the world would I take Morgan Stanley’s advice or judgement about anything seriously?
They have enough problems of their own
Comment by Greedom
Jul 22nd, 2008 at 9:23 am
Odd humor just hit me
federalize ?
but deregulate !
Comment by Greedom
Jul 22nd, 2008 at 9:34 am
I think Federalize but Deregulate is hitting the printer, then some elmers glue - and then it’s time to go to Piggly Wiggly and find some new automobile candidates for the message !
They actually let you give bumper stickers away - so long as you don’t loiter for more than 20 minutes a day - OR if you can get a different manager.
I think we had some 20 people that had ‘Remember: Vote Partial AND Full birth’ glued onto their bumper right there.
I was surprised, only 3 people let us glue on ‘Only You can prevent an identity crisis’.
the ‘Vanity’ stickers fly well - it’s a black and white sticker - cross in red dripping down into a black ground around a big black walnut tree, where a man in a black dinner jacket is sitting with walnuts in hand. - not ‘too’ bad really- SOMEONE had too much time on their hands - that’s for sure.
btw- did you know black walnut pieces are used in sand blasting ? they are that strong ? and abrasive.
Other strange things about black walnut I won’t go into -
either way - it’s a bumper sticker day I think.
I do wonder if rubber cement would be better - heavy rain seems to do a number on elmer’s ESPECIALLY if it’s hot.
Last week ‘Breath My Exhaust’ was tested, 2 takers had it glued on their bumper at the supermarket.
I can’t wait to get behind one of those cars - will be a blast.
Comment by Greedom
Jul 22nd, 2008 at 9:42 am
“Why yes Celia, I support federalized deregulation”
“Oh ? what’s that ? do I suppose deregulated federalization too ? why ? I suppose - why do you ask ? “
Comment by John
Jul 22nd, 2008 at 4:38 pm
The fix is in. I saw a mope at the home workshop in DC sponsored by the Government on MNBC. She said she had a 10% interest only mortgage from Countrywide. She said they have reworked it into a 3.3% fixed rate. Thats right 3.3% Guess who’s going to fund this? It’s the taxpayer. Paulson has told the Banks not to worry and to turn everything into a fixed rate mortgage and Freddie and Frannie will take them onto their books and off their balance sheets. That’s why BOA didn’t divulge any Countrywide figures. They are going to dump them all onto the American taxpayer and then report much rosier numbers. If the Gov’t is going to keep the housing bubble going then get ready for hyperinflation just like a banana republic.