Bank of America earnings drop 32%

By Ross Kerber, Globe Staff | October 19, 2007

Bank of America Corp., the nation's largest retail bank, reported yesterday that third-quarter earnings plummeted 32 percent because of problems in mortgage and credit markets. But analysts said the bank's woes are unlikely to have an effect on consumers or businesses in Massachusetts, a market the bank dominates.

The dichotomy reflects the vast reach of the Charlotte institution, from global financial services to neighborhood bank branches.

Bank of America stumbled in the first area, suffering growing credit losses and poor results at its investment banking unit. But at the same time the bank's lending to consumers and businesses remained on track. So did results of its big Global Wealth and Investment Management unit, the Boston operation that includes its Columbia mutual funds brand.

Morningstar analyst Jaime Peters said there is no reason the local units would be held back by Bank of America's other issues, or that New England operations would suffer as a result. "They're using the power of their balance sheet to continue to lend," she said. "There's no reason to expect a pullback is going to happen."

Shares of Bank of America fell 2.4 percent to $48.85 in trading yesterday after the company's morning earnings release. For the three months ended Sept. 30 the bank had net income of $3.7 billion, down from $5.4 billion a year earlier.

The chief reason was a $1.3 billion fall in earnings from the bank's Global Corporate and Investment Banking division, largely based in New York. The costs of provisions for bad loans rose $865 million, which the bank partly blamed on a weaker US housing market that required it to add reserves for home equity and home builder loans whose borrowers were falling behind on payments.

Those problems were only partly offset by brighter spots such as its Global Wealth and Investment Management division, whose assets under management rose to $710 billion from $517 billion a year earlier, including the acquisition in July of US Trust, the big private banking company. Net income for the division rose to $599 million for the quarter, from $513 million a year earlier.

Michael Mullaney, a portfolio manager at Fiduciary Trust Co. in Boston that owns 1.2 million Bank of America shares, said he was troubled by the results and that the company likely will review whether to sell the stock.

Before yesterday, Mullaney said, he had considered Bank of America a better bet than the country's two other giant banks, Citigroup and JPMorgan Chase. But now it seems the two New York banks have been able to weather the summer's credit problems more smoothly than Bank of America, he said.

"Clearly they've been able to operate through this a lot better," he said.

Bank of America's results also showed how a bank that held relatively few securities backed by subprime mortgage investments could still suffer financially as equities markets grew volatile this summer over concerns about the insecurity of the instruments held by other banks. The volatility ruined many of the bank's trading strategies and wiped out nearly all the Global Corporate unit's profits of $1.4 billion in the year-ago quarter, even though Bank of America had mostly stopped originating subprime mortgages three years ago, NAB Research analyst Nancy Bush said.

"The problem for them isn't subprime holdings, the problem is what happened in the markets because of subprime," Bush said.

On a conference call yesterday, Bank of America executives struck an apologetic tone with analysts who had expected better results, but indicated overall lending will continue. "Although we are very disappointed at the magnitude of the hit we took, the strength in our other businesses allowed us to maintain our strategic direction," said chief executive Kenneth D. Lewis.

Later Lewis and the bank's chief financial officer, Joe Price, defended the quality of its loan portfolio and dismissed a concern that problems could spread as in previous economic slowdowns. "These are really good-quality numbers" in the lending portfolios, Lewis said. "To say that we're concerned about overall credit quality would be going way too far."

Because of its size, Bank of America's lending terms matter more than most banks in Massachusetts. In a recent survey of business executives here, about 20 percent said they felt access to loans has grown more expensive, according to the Associated Industries of Massachusetts, a trade group representing manufacturers. Its spokesman, Brian Gilmore, said the lending market seems competitive with rivals such as Citizens Bank and Eastern still making loans. "It's a mixed picture," he said.

Bank of America had 198,000 employees worldwide as of Sept. 30, down from 200,220 employees a year earlier. In August, the bank said it had 9,000 Massachusetts employees, a figure a spokesman did not update yesterday.