Bad loans still a threat at B of A
With apologies to Buffalo Springfield, there's something happening here. What it is ain't exactly clear. But if Bank of America (BAC) first quarter numbers are sustainable, then it may not be long before the government is out of the business of bailing out banks. That's because Bank of America reported a $4.24 billion profit -- its 44 cents earning per share was 40 cents a share more than the 4 cents a share the average analyst expected.
How did Bank of America achieve this feat? Like its peers, the bank benefited from gains on home refinancing -- on April 9 President Obama said that refinancings rose about 88 percent in the last month -- and trading. But don't get too excited because Bank of America expects more credit problems, which is why it added $6.4 billion to its loan loss reserves.Meanwhile, the U.S. has invested huge amounts in Bank of America in various forms. The Treasury owns $45 billion of Bank of America preferred shares, the FDIC guaranteed $41.7 billion worth of debt that Bank of America sold, and the government guaranteed $118 billion of assets so it wouldn't back out of a deal to buy Merrill Lynch. But with stress test reports looming for May 4, the U.S. is now talking about converting such preferred shares into common equity so that it can avoid asking Congress for more bank bailout money.
Would such a partial nationalization be good for Bank of America? Maybe. If the government converted its $45 billion in Bank of America preferred into common shares, then it would become by far the bank's largest shareholder, which would further dilute the holdings of all the other common shareholders. Such a conversion would also boost the bank's tangible common equity and cut back on the $700 million in preferred dividends it paid the Treasury -- although it would presumably keep paying some dividend on the new common shares.
Does this mean that Bank of America is out of the woods? It's too early to tell. It depends on whether it can keep posting big profits while limiting the costs of charging off bad loans. And those bad loans look mighty costly now since its credit-loss provisions more than doubled to $13.38 billion, its net charge-off rate rose to 2.85 percent from 1.25 percent a year earlier; its credit-card losses increased to 8.62 percent from 5.19 percent and its total nonperforming assets jumped to 2.65 percent from 0.9 percent in the prior year.
It will take several quarters of results before an answer becomes clear. But if Ken Lewis keeps beating expectations by 1000 percent as he did this quarter, his job will be more secure.
Meanwhile, investors seem to be taking profits this morning -- the stock was down 7 percent in pre-market -- since its March 6 low the stock has risen 238 percent from $3.14 to $10.60 on Friday.
Peter Cohan is President ofPeter S. Cohan & Associates. He also teaches management at Babson College. His eighth book isYou Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.