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BofA, Wachovia profits plummet

Write-downs of bad debt nearly erase their earnings as consumers struggle to pay bills.

January 23, 2008|From Reuters

Bank of America Corp. and Wachovia Corp., the second- and fourth-largest U.S. banks, respectively, said Tuesday that quarterly profits were nearly wiped out by more than $10 billion of write-downs and credit losses.

Fourth-quarter earnings fell 95% at Bank of America and 98% at Wachovia and missed analysts' forecasts. Shares of both banks rose after their chief executives said they didn't expect to cut their common stock dividends.

"The environment is very tough, and we expect it to remain so for some months to come," Bank of America CEO Kenneth Lewis said in a conference call. "We stay concerned about the level of domestic consumption and spending given the prolonged housing slump, sub-prime issues and higher fuel and food prices."

Bank earnings are falling as a global credit crunch leaves more consumers unable to pay their bills, and banks with mounting losses on debt they own.

Fears of a U.S. economic recession this week fueled a global sell-off in stocks and an emergency interest rate cut by the Federal Reserve.

"It's going to take time for banks to clean up their problems," said Michael Mullaney of Fiduciary Trust Co. in Boston. "We hope we don't see further spillover from mortgages into other consumer lending, including credit cards and auto loans, and commercial properties."

Regional banks are also hurting. Quarterly profit fell 80% at Regions Financial Corp., which operates in the Southeast, and a respective 42% and 83% at Ohio-based Fifth Third Bancorp and KeyCorp. National City Corp., another Ohio bank, posted a $333-million loss.

Charlotte, N.C.-based Bank of America said quarterly net income fell to $268 million, or 5 cents a share, from $5.26 billion, or $1.16, a year earlier. Revenue fell 31% to $12.67 billion, the bank said.

Excluding merger costs, profit was 9 cents a share, Reuters Estimates said. Analysts on average had expected profit of 19 cents a share on revenue of $13.26 billion.

A $5.28-billion write-down for complex securities known as collateralized debt obligations was the main reason for the profit shortfall and led to $5.44 billion of trading losses.

Bank of America more than doubled the amount it set aside for credit losses, raising it $1.74 billion to $3.31 billion. It also incurred $800 million of losses and write-downs for losses in its money market mutual funds.

The bank made another bet on the U.S. consumer when it agreed this month to pay $4 billion for Calabasas-based Countrywide Financial Corp., the nation's largest mortgage lender.

Analysts expect Countrywide to report a fourth-quarter loss Jan. 29.

Wachovia, also based in Charlotte, said quarterly net income fell to $51 million, or 3 cents a share, from $2.3 billion, or $1.20, a year earlier.

Excluding merger costs, profit was $160 million, or 8 cents a share. On that basis, analysts had expected 32 cents. Revenue fell 17% to $7.2 billion. Analysts had expected $7.22 billion.

Some losses stemmed from housing weakness in California, home to the former Golden West Financial Corp., a mortgage specialist that Wachovia bought in October 2006 for $24.2 billion, an amount critics called too high.

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