Bank of America shocked investors today when it announced a 32 percent decline in third-quarter profits from the same period a year ago, pointing to disruptions in capital markets and extensive credit losses.
The Charlotte, North Carolina-based bank and mortgage lender said net income dropped 32% from $5.42 billion to $3.7 billion, as earnings per share dipped 31% from $1.18 to $0.82 in the same quarter a year earlier.
“While the significant dislocations in the capital markets have hurt most participants, we are still very disappointed in our third-quarter performance.” CEO Kenneth Lewis told analysts.
Earnings from its investment banking business plunged 93 percent thanks to turmoil in the financial markets, while the bank said it also set aside $2.03 billion for credit losses, up more than 73 percent from $1.17 billion a year earlier.
The unit chalked a $607 million trading loss, another $527 million loss related to mortgage and credit derivatives, and a $247 million write-down for leveraged loans.
Net charge-offs were $1.57 billion, or 0.80 percent of total average loans and leases, compared with $1.50 billion, or 0.81 percent, in the second quarter of 2007 and $1.28 billion, or 0.75 percent, in the third quarter of 2006.
“The next couple of quarters will be messy for Bank of America,” said Andrew Seibert, a fund manager at Stewart Capital Advisors which oversees $950 million and owns Bank of America shares. “You are only seeing the beginning. The banks will be putting up a lot of money for reserves.”
Interestingly, first mortgage loan origination rose 27%, while retail deposits also increased 4% to $16.52 billion.
But CFO Joe Price noted that he expects home equity loan (second mortgage) losses to persist as home prices continue to lose value.
Shares of Bank of America fell to a two-month low, closing at $48.85, a decline of $1.18 on the day.