Charlotte's two big banks reveal their second-quarter earnings this week; Bank of America today and Wachovia on Tuesday. Here's a look at what experts say in advance of the releases:
Bank of America
The big question at Bank of America is the effect of its $2.5 billion purchase of Countrywide Financial. “All eyes on Countrywide,” Jeff Harte, an analyst at Sandler O'Neill + Partners, wrote last week. The bank's purchase has been criticized because Countrywide, a California mortgage lender, faces a raft of problems including defaults, lawsuits and congressional criticism.
However, it's unclear how much the bank will reveal today about the effect of the acquisition. The purchase closed on July 1, the first day of the third quarter. But Harte expects that Bank of America will use today to provide some updates on Countrywide, in hopes of calming any nervous investors.
Like the rest of the financial industry, the bank is suffering from the effects of a troubled mortgage market. In the first quarter, Bank of America saw its profits plunge a bigger-than-expected 77 percent, but – unlike Wachovia – it remained profitable, earning $1.21 billion. Home-equity loans, which emerged as a surprising problem in the first quarter, could continue to cause trouble. Bank of America is also the country's largest credit card issuer, and could face continued problems with defaults.
Ken Lewis, the bank's chief executive, said this month that he sees no reason to raise more capital (the bank raised $6.7 billion in the second quarter, according to Harte) or cut the dividend to shareholders – something that other banks, including Wachovia, have had to do.
Harte expects that Bank of America's credit losses will continue to rise, and that the state of the housing industry will determine whether the bank needs to raise more capital.
Tuesday will mark the first earnings call of Bob Steel, who took over as Wachovia's CEO less than two weeks ago. On July 10, his first full day on the job, Steel declined to specifically answer questions about whether the bank would cut its dividend for a second time this year or raise more capital, but he promised to provide more details on Tuesday's earnings call.
The bank has said it's going to cut costs and shrink its balance sheet, with a focus on its troubled mortgage portfolio. Analysts suspect it could sell some entities and lay off employees.
In the first quarter, the bank lost $707 million. On July 9, Wachovia said it expects a second-quarter loss of up to $2.8 billion, not including a noncash accounting charge. Analysts suspect that the charge, called a goodwill writedown, is related to the bank's ill-fated purchase of Golden West Financial, a troubled California mortgage lender. The bank has not specified how much that charge could be.
The cash losses are largely related to Pick-A-Payment mortgage loans, which Wachovia inherited from Golden West, and commercial real estate loans, which many banks are struggling with.
Mike Mayo, an analyst at Deutsche Bank, wrote that Wachovia's problems seem contained to “existing issues vs. big new problems outside of real estate.”
“Loan losses are not good but at least the areas that were holding up still seem to be mostly okay,” he added.
Analysts have applauded Steel's appointment but say there's no magic solution to turn around Wachovia.
Some wonder if it will be bought out, given its low share price. Others wonder if Steel will have to shake up senior management and the board of directors, who approved the Golden West acquisition.
In a memo to employees dated July 15 and titled “My First Week at Wachovia,” Steel offered an upbeat assessment, noting the bank's strong capital levels and record of customer service.
“I realize all too well that the decline in our stock price is concerning for us all,” he wrote.
“At the same time, I am confident in our ability to tackle the issues and emerge in a position of strength. I wouldn't have accepted this job if I thought otherwise!”