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Bank Of America Q1 Profit 2010: Bank Pulls In $2.8 Billion On Strong Trading

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CHARLOTTE, N.C. — Even as the nation's big banks report more losses from mortgage loans, they're seeing signs of an economic recovery.

Bank of America Corp. on Friday followed JPMorgan Chase & Co. in reporting a big first-quarter profit and that it sees a healing economy. Bank of America said its earnings rose 0.7 percent to $2.83 billion from $2.81 billion a year earlier. Strong revenue from trading in securities including bonds, currencies and commodities helped the bank offset its losses from failed consumer loans.

CEO Brian Moynihan said in a statement, "the 2010 story appears to be one of continuing credit recovery, and our results reflect a gradually improving economy." On Wednesday, his counterpart at JPMorgan Chase, Jamie Dimon, said the economy is showing "clear and broad-based improvements."

Still, both companies added money to their reserves against loan losses loans during the January-March period. And Bank of America, the nation's largest mortgage servicer, said its home loan operation was its only money-losing unit.

But Charlotte, N.C.-based Bank of America also said it saw improvement in its other consumer loan portfolios. And that's contributing to its more upbeat take on the economy.

"After what happened, everyone swung to the opposite side of the spectrum with saying they were 'overly cautious,'" said Shannon Stemm, a financial services analyst with Edward Jones. "Now seeing these management teams be 'openly optimistic' is certainly indicative that conditions are improving."

Wells Fargo & Co. was the actually the first bank to voice its optimism about the economy. When it issued its fourth-quarter results in January, the bank described the economic outlook as "more favorable."

Some banking analysts aren't so sure. Loan losses are still high and likely will be for the remainder of the year.

"The hard thing right now is we are not seeing loan growth," said Alan Villalon, senior research analyst at Minneapolis-based First American Funds. "Every economic recovery has been coupled with loan growth."

Banks have become more reluctant to lend after millions of home and consumer loans went into default during the recession. And many consumers and small businesses are unwilling to take on more debt, a trend that reduces demand for loans.

But the improving credit picture at Bank of America offers hope that financial markets are recovering, Moynihan said during a conference call with investors.

The bank expects modest economic growth through the rest of the year, he said, but added that loan growth will be weak.

"On the good side of that, we're seeing the consumer and commercial health return which we believe will continue as the year progresses and add some momentum," Moynihan said.

Bank of America earned 28 cents per share after paying preferred dividends. That compared with 44 cents per share a year ago. Revenue totaled nearly $32 billion in the quarter.

Analysts expected profit of 9 cents per share in the most recent quarter, according to Thomson Reuters.

Bank of America set aside $9.8 billion to covered soured loans during the quarter, down 3 percent from $10.1 billion the previous quarter. A year earlier, it had set aside $13.4 billion. Many analysts predict loan losses should peak some time in the first half of 2010.

Bank of America's stock fell $1.07, or 5.5 percent, to $18.41 as the broader market also fell. Financial stocks were hurt by news that the Securities and Exchange Commission filed civil charges against Goldman Sachs Group Inc. The SEC accused Goldman of defrauding investors by failing to disclose conflicts of interest in mortgage investments it sold.

Bank of America set aside less money for overall loan losses than in previous quarters, it increased the amount set aside for home mortgage loans, to $3.6 billion, as mortgage losses widened. Net revenue in the unit fell 31 percent, as the bank saw lower mortgage production volume and a drop-off in refinance activity.

"Our work in progress remains mortgage," Moynihan said.

The bank reported a $2.1 billion loss in its home mortgage business.

It had income of $952 million for its credit card business, compared to a loss of $1.8 billion in the year-ago period. Bank of America said money set aside for credit card losses fell 57 percent due to the "improved economic outlook." However, net revenue fell 9 percent to $6.8 billion as less loans and lower fee income were seen because of new credit card federal legislation.

Bank of America reported that income from its global banking and markets business, which includes the Merrill Lynch investment banking operations, rose $709 million to $3.2 billion. That reflects the jump in revenue from securities trading.

Banking analyst Nancy Bush of NAB Research said that while trading profits have boosted quarterly profits, the question remains whether the banks can sustain them.

"I think the answer is no," Bush said. "There is a very large component from these trading results that is coming from this continued low interest rate environment we are in. That's going to change sooner than later."

While the Federal Reserve keeps its federal funds rate near zero, banks are able to borrow cheaply and make money off higher-yielding investments in the financial markets. That has fed their big trading profits.

The bank was among the hardest hit during the credit crisis, and received $45 billion in bailout funds from the federal government. Bank of America said in December it had repaid the money. Like nearly all banks in the country, the company faced waves of loan defaults as more customers fell behind and investments soured.

Earlier in the week, JPMorgan Chase said it earned $3.3 billion in the first quarter even as consumers continued to struggle to repay loans. The bank said it set aside $7 billion to cover bad loans during the most recent quarter. Its investment banking division and other businesses enabled it to more than overcome the ongoing weakness in lending.

Citigroup Inc. and Wells Fargo will report first-quarter earnings next week.

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