Bank of America sought to reassure investors Wednesday that it won’t face billions in losses from fresh lawsuits and investigations, just as the Charlotte bank’s earnings are getting back to normal.
The second-largest U.S. bank reported that it narrowly beat Wall Street estimates in the third quarter, earning $2.2 billion for shareholders or 20 cents per share. Bank of America said an improving economy led it to set aside significantly less to cover bad loans.
But in a conference call Wednesday with analysts, executives faced repeated questions about the bank’s potential legal exposure, an issue that has haunted the company since it bought Countrywide Financial and Merrill Lynch during the financial crisis.
Investors have feared Bank of America could be put back in the cross-hairs after learning last week that JPMorgan Chase has set aside $23 billion to cover potential legal claims, including $9 billion in the third quarter.
JPMorgan has been reaching settlements with regulators over its “London Whale” trading debacle as well as for the sale of mortgage-backed bonds that later soured in the mortgage meltdown. Executives at the New York bank said the environment had become “highly charged and very volatile” over just the past few weeks.
But Bank of America executives said they’ve already taken their lumps in the litigation arena, paying out more than any other bank over the past three and a half years.
“Relative to our peers, we've tried to be out front and get through some of the larger settlements,” Chief Financial Officer Bruce Thompson told analysts on the conference call.
Bank of America has paid or set aside more than $55.8 billion in legal costs since the financial crisis. Analysts came in Wednesday questioning whether that would increase.
“Everyone was worried that they would, given their past struggles on the legal front,” said Shannon Stemm, a bank analyst with Edward Jones. “That discussion gave us a little bit more confidence that they have taken that pain and are ahead of their peers and are working past it.”
Bank of America’s third-quarter results were significantly better than the same time period a year ago, when the bank roughly broke even after settling a shareholder lawsuit over the 2009 acquisition of Merrill Lynch for $2.43 billion.
But the results were down from earnings of $3.6 billion for shareholders in the second quarter, or 32 cents per share – which was the largest profit for Bank of America since 2011.
Lower expenses and the absence of a major legal settlement helped the Charlotte bank overcome weaker mortgage banking income to beat that performance. Improving credit quality allowed Bank of America to bring back more than $1 billion the bank had previously set aside against losses.
Bank of America’s profit was also boosted by the sale of its stake in the China Construction Bank, which netted about $800 million.
The bank’s stock closed up more than 2 percent, to $14.56, on a good day for the markets as investors anticipated a deal in Washington to end the government shutdown and avoid a debt default. Bank of America shares are up more than 25 percent so far this year.
‘Not quite there’
Bank of America was the last of the nation’s big commercial banks to report its earnings.
The third-quarter results bested JPMorgan’s after the largest U.S. bank by assets swung to its first loss under CEO Jamie Dimon under the weight of higher legal expenses. But Bank of America’s earnings fell short of Wells Fargo, which posted another record quarter of $5.3 billion.
As it was across the industry, capital markets activity at Bank of America, such as bond trading, was slow. The bank’s mortgage income also took a particularly large hit, sinking more than 70 percent from a year ago. As mortgage rates rose over the summer, fewer people looked to Bank of America to refinance their loans. Overall, core revenue was down slightly.
“They’re not quite there yet,” said Stemm, the Edward Jones analyst. “When loan growth comes back, and the legal and housing-related headaches subside, you’ll see earnings more normalized.”
In response to the mortgage slowdown, the bank laid off more than 1,000 loan processors in the third quarter, executives said Wednesday, and will cut more jobs by the end of the year. Executives would not give a specific number they intended to cut.
The bank has also laid off thousands of workers in its unit that services delinquent mortgages. Bank of America said Wednesday it has brought the number of mortgages 60 or more days past due lower than 400,000, down from about 500,000 three months ago.
Other banks, including Wells Fargo, SunTrust and Citigroup, have also been paring their mortgage staffs as refinancings have slowed.
Across the company, Bank of America has about 9,000 fewer workers than it did a year ago, a reduction of about 3.5 percent.
Much of that is attributable to CEO Brian Moynihan’s cost-cutting program known as Project New BAC. The bank said it is still on track to cut $1.5 billion in quarterly expenses by the end of the year, and $2 billion by 2015.
Dunn: 704-358-5235; Twitter: @andrew_dunn
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