Bank of America Corp. chief executive Ken Lewis said Wednesday that there are no plans to call off its $4 billion deal to acquire Countrywide Financial Corp. and that he believes charge-offs and delinquencies in the U.S. will peak in the third quarter.
Lewis also affirmed his commitment to his company's investment banking unit and said this quarter may be among its most profitable.
In the home loan market, Lewis pointed out that the Charlotte bank will control a 20 percent to 25 percent market share once the Countrywide deal is completed, and that will boost business once the housing crisis comes to an end. He believes there is still “a ways to go” before the credit crisis is over, but that the nationwide bank's business mix will help fuel earnings going forward.
“I knew there would be adverse publicity” to the Countrywide deal, Lewis said at a conference. “But, nothing has happened in some form or fashion that would make us call off the deal.”
Bank of America shareholders have been vocal during the past year that the acquisition of the Calabassas, Calif.-based mortgage originator was a bad decision. Countrywide has been the target of class-action lawsuits that allege it sold and approved loans knowing that borrowers could not afford them.
In defense of the deal, Lewis said there have been increased charge-offs and delinquencies on credit card accounts and other loans – but not with the ferocity of the past year. He said Countrywide had a “misguided focus on subprime,” but overall mortgage products continue to be a key consumer business that won't dissipate.
While Bank of America might have staved off bankruptcy for Countrywide, Lewis forecast that smaller banks around the country will begin to buckle under the weight of their mortgage inventories.
“I think we'll see some small banks fail to the extent we see deterioration in housing deals, and some of those small banks have a lot of concentration in that,” he said. “Over time, I'm not sure how the midsized banks can compete with Bank of America. The ubiquity of the branches, the brand, I'm just not sure how they can compete.”
Investment bank profits
Lewis' good vibes on the investment bank was a change in tone from last October, when he said he'd had “all the fun I can stand” as the unit posted a 93 percent plunge in third-quarter profit. Lewis has since said he regrets the comment, adding Wednesday that clients began to doubt the bank was committed to the business.
“I feel so much better now about our investment bank than I did, say, a few weeks ago, a few months ago,” Lewis said. The current quarter could be “one of the three or four best investment-banking quarters that we've had,” he said.
The investment bank's profits declined more than 90 percent over the past two quarters as the bank raised its reserve for credit losses and wrote down collateralized debt obligations backed by subprime mortgages and loans for leveraged buyouts. The corporate and investment bank made up 4 percent of Bank of America's net income last year, down from more than 25 percent in the previous year.
“We've narrowed down the focus on what we're really good at,” Lewis, 61, said at a session sponsored by The Wall Street Journal. Changes included cutting almost a fifth of the investment bank's 5,900 employees and Tuesday's sale of its prime brokerage, which caters to hedge funds, for $300 million to BNP Paribas SA, France's largest bank. Bloomberg News contributed.