(Updated, 10:15 a.m.)
NEW YORK – Bank of America Corp. reported first-quarter profit that missed analysts’ estimates as lower mortgage banking income and higher legal costs slowed the firm’s turnaround. The shares dropped 3 percent in early trading.
Net income advanced to $2.62 billion, or 20 cents a share, from $653 million, or 3 cents, a year earlier, according to a statement today from the Charlotte, N.C.-based company. The consensus of 25 analysts surveyed by Bloomberg had predicted 23 cents a share.
CEO Brian T. Moynihan, 53, has sold more than $60 billion in assets, settled more than $40 billion in mortgage claims and repaired the bank’s balance sheet since taking over in 2010. He’s now focused on trimming $8 billion in annual expenses and adding revenue, which dropped 8.4 percent on an adjusted basis to $23.9 billion.
“It’s going to be very hard for these banks to generate revenue, and mortgage is continuing to shrink,” Chris Whalen, managing director at Carrington Investment Services LLC, an asset manager in Greenwich, Connecticut, said in an interview. “The regulatory environment for mortgage is so hostile.”
Mortgage banking
Lower mortgage banking income and declining gains from the sales of debt securities weighed on results, the bank said. The quarter included a $500 million settlement of claims tied to faulty home loans. Last year’s first-quarter profit was reduced by $4.8 billion in pretax-accounting charges.
The net loss at consumer real estate services widened in this year’s quarter to $1.31 billion from $1.14 billion a year earlier. Adjusted revenue slipped at the unit while noninterest expenses climbed 4.5 percent to $4.06 billion and margins narrowed, the bank said.
Profit from global banking slipped 15 percent to $1.34 billion as the provision for credit losses increased. In the markets division, income fell 20 percent to $1.39 billion excluding the impact of accounting charges.
“As they’re fighting back the losses, they’re doing a good job,” said Marty Mosby, an analyst at Guggenheim Securities LLC in Memphis, Tennessee, who has a buy rating on Bank of America’s shares. “What’s becoming more apparent is that the core earnings power is still under pressure.” Mosby’s firm manages assets that include Bank of America stock.
Shares react
Bank of America slipped to $11.91 at 8:24 a.m. in New York. After leading the Dow Jones Industrial Average in 2012, the stock is trailing broad market benchmarks and most of its peers this year. The firm’s 5.8 percent advance through yesterday to $12.28 a share compares with 13 percent for the Dow and 8.5 percent for the 24-company KBW Bank Index.
The bank was the last of the four biggest U.S. lenders to report results. JPMorgan Chase & Co., the largest U.S. bank, said earnings rose 33 percent to a record as credit quality improved. Wells Fargo & Co.’s record income increased 22 percent aided by cost cuts and Citigroup Inc. posted a 30 percent rise as results from fixed-income trading and investment banking beat estimates.
Moynihan has spent his tenure as CEO cleaning up financial, legal and regulatory quagmires inherited when he was promoted to the top job in 2010. Slimming the firm has meant letting Bank of America fall out of first place among its peers in terms of assets and workforce, and the asset sales put more pressure on revenue, which has been hurt by sluggish borrowing.
The most troubled assets include loans made by Countrywide Financial Corp., the mortgage company purchased in 2008, whose lax standards were blamed by lawmakers and regulators for fueling the housing bubble. The bank has been bombarded by legal claims tied to faulty mortgages and foreclosures, and some of the settlements negotiated by Moynihan’s team still face court challenges.
Litigation costs rose 11 percent to $881 million as the bank reached a preliminary settlement for class-action lawsuits targeting Countrywide. The claims focused on Countrywide’s disclosures in 429 offerings of mortgage-backed securities from 2005 through 2007, with an original principal balance exceeding $350 billion, according to the statement. The accord requires court approval.
“The revenue stories for the banks have never developed the way the bulls would have liked it, but the economy hasn’t turned around yet,” said Paul Miller, an analyst with FBR Capital Markets in Arlington, Virginia. Moynihan’s cost-cutting has begun to show results, and the company is “heading in the right direction,” said Miller, who rates the stock neutral.
Marketing plan
To improve revenue, which slid 11 percent to $84.2 billion last year, Moynihan is setting new targets for regional managers to boost sales and pushing them to get existing customers to take more products, people with knowledge of the effort have said. Moynihan summoned more than 100 of the leaders to Chicago this month to discuss the initiative, said the people.
The CEO’s plan coincides with Bank of America’s marketing campaign introduced this month. Advertisements emphasize the ways people and corporations are assisted by the lender with the tagline “Life’s better when we’re connected.” The firm’s previous slogan was “Bank of Opportunity.”
Efforts to repair the bank’s reputation with investors and regulators got a boost last month when Moynihan won Federal Reserve approval to buy back as much as $5 billion in shares, the firm’s first repurchase program since the 2008 financial crisis.
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Bank of America, the lender seeking to trim $8 billion in expenses, reduced staff by 4,378 workers in the first quarter, the most among the four largest U.S. banks.
The reductions amounted to almost 2 percent of the lender’s workforce. The job cuts left Bank of America with 262,812 employees as of March 31, the firm said today in a statement.
Moynihan has said that those handling delinquent mortgages and foreclosures would face the biggest job cuts as the number of late borrowers dwindles. The lender said it serviced 667,000 overdue loans as of March 31, compared with 1.6 million at the height of the financial crisis.
Moynihan told analysts on Jan. 17 that the bank will slice deeper into its mortgage team. “There’s nothing more important in our company than getting this done as quickly as possible,” he said.
Bank of America, the second-biggest U.S. lender by assets, has told state regulators it intends to close or shrink mortgage-processing facilities in New Jersey and New York. The firm cut 5,400 workers in the fourth quarter, most from the so- called legacy assets and servicing unit.
Wells Fargo & Co., the biggest U.S. home lender, added 5,100 employees in the first quarter to help process mortgages and staff branches. That cemented its rank as the lender with the most full-time workers, with 274,300.
Other firms made cuts. JPMorgan Chase & Co., the biggest U.S. lender by assets, eliminated 2,855 employees in the first quarter, leaving it with 255,898. Citigroup Inc., the No. 3 bank, trimmed about 2,000 workers and had a workforce of 257,000 as of March 31.
