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Bank of America beats expectations with $2.4-billion second-quarter profit

Although troubled loans are still a drag on its business, Bank of America gets a boost from its mortgage-writing business. Citigroup Inc. also reports a better-than-expected performance today.

July 18, 2009|Jerry Hirsch

Bank of America Corp. joined this week's parade of financial giants reporting huge second-quarter profits, but only with the help of a one-time gain.

The Charlotte, N.C., bank earned $3.22 billion in the April-to-June period, but continued to struggle with serious problems in its loan portfolio.

"Difficult challenges lie ahead from continued weakness in the global economy, rising unemployment and deteriorating credit quality that will affect our performance for the rest of the year and into 2010," Bank of America Chief Executive Ken Lewis said in a statement accompanying the earnings report Friday.

Lewis said he was pleased that the bank could post a profit in "an extremely challenging environment." The company recorded a $5.3-billion pretax gain in the quarter from selling part of its stake in China Construction Bank Corp.

The second-quarter profit amounted to 33 cents a share, exceeding the expectations of analysts, who on average had forecast earnings of 28 cents a share. A year earlier, the company earned $3.41 billion, or 72 cents. The sharp decline in per-share profit reflects a big increase in the number of shares outstanding stemming from the bank's aggressive capital-raising this year.

By substantially improving its balance sheet with that fresh capital, analysts said, Bank of America is better positioned to sustain lending losses expected until the economy improves.

"We expect that more cleaning up of the balance sheet will suppress reported earnings in 2009, but ultimately [Bank of America] should emerge in 2010 with really strong numbers," said Michael Williams, an analyst at research firm Gradient Analytics in Scottsdale, Ariz.

Based on what he called "more solid capital levels," Steve Plesser, an equity analyst at Standard & Poor's, raised his projection for Bank of America's stock by $1 to $14.

The stock jumped 2.3% early in the day Friday after the earnings were released, but soon fell back and ended down 28 cents, or 2.1%, at $12.89.

Among the quarter's bright spots, Bank of America's mortgage-writing revenue more than tripled to $4.5 billion, reflecting the company's acquisition last summer of Countrywide Financial Corp. in Calabasas and an industrywide surge in home refinancing spurred by lower interest rates.

A rising stock market also helped Bank of America, which acquired brokerage Merrill Lynch & Co. at the start of the year. Profit in the company's global markets unit, primarily the Merrill Lynch business, increased by $1.1 billion to $1.38 billion.

But declining home values, rising credit card defaults and growing commercial-lending problems contributed to mounting loan losses.

Troubled loans, also known as nonperforming assets, more than tripled from a year earlier.

"Consumers remained under significant stress as unemployment and underemployment increased and individuals spent longer periods without work," the bank said in its news release.

Regulators concluded this year after a "stress test" of Bank of America that it needed to raise $33.9 billion in capital. The company exceeded that goal, raising $38 billion as of last month.

Bank of America has received $45 billion in federal bailout funds. Unlike some other big banks, the company hasn't said when it would repay the money.

Citigroup Inc., another major financial institution with significant problems, also reported a multibillion-dollar profit Friday made possible by a one-time gain. Earlier in the week JPMorgan Chase & Co. and Goldman Sachs Group Inc. posted strong second-quarter earnings.

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jerry.hirsch@latimes.com

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