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BofA Posts Record Quarterly Loss on Costs of Bad Home Loans

Tuesday, 19 Jul 2011 09:14 AM

Bank of America Corp. posted the biggest quarterly loss in the lender’s history after Chief Executive Officer Brian T. Moynihan booked more costs tied to defective mortgages. The shares rose 1 percent in early trading as the outlook for credit losses improved.

The second-quarter loss of $8.83 billion, or 90 cents a share, compared with profit of $3.12 billion, or 27 cents, a year earlier, the Charlotte, North Carolina-based lender said today in a statement. Provisions for future credit losses dropped 60 percent, the bank said, and profit excluding one-time gains and losses was 33 cents a share, beating the 29-cent average estimate of 21 analysts surveyed by Bloomberg.

Moynihan, 51, is working to move Bank of America past the fallout from lax home lending by reaching settlements with bond investors and insurers and setting aside funds for future claims. The loss was smaller than the most pessimistic forecast given last month by the company, which estimated the deficit could range from $8.6 billion to $9.1 billion.

“At least they’re making progress,” said Brian Charles, an analyst at R.W. Pressprich & Co. in New York. “Their losses do continue to come down away from mortgages.”

Mortgage Costs

Bank of America told investors June 29 it would book more than $20 billion in second-quarter charges from faulty mortgages. The sum includes $8.5 billion to resolve claims from institutional investors that the Countrywide unit used false or missing information to create home loans that later defaulted. Regulators criticized Countrywide’s lax underwriting, which left the firm near bankruptcy before Bank of America bought it for $2.5 billion in July 2008.

The settlement followed a $3 billion accord in January to resolve similar claims from Fannie Mae and Freddie Mac, and an April agreement with bond insurer Assured Guaranty Ltd. valued at $1.6 billion. If home prices decline beyond internal company estimates, the bank may need to set aside more capital for soured mortgages, executives have said.

The costs make it harder for Moynihan to keep pledges that he’ll boost the company’s dividend ahead of new international standards. The firm has to achieve a 9.5 percent ratio of capital to risk-weighted assets between 2013 and 2019 under rules from the Basel Committee on Banking Supervision.

Capital Needed

Using guidance given by Bank of America on June 29, the company may need to raise about $50 billion to conform to the rules, which were designed to build a buffer against losses and avert a repeat of the 2008 financial crisis. Firms can get to their goals by retaining earnings or reducing riskier assets that require a lender to hold more capital against losses.

The bank is weighing the sale of at least part of its $21 billion stake in China Construction Bank Corp., three people briefed on the plans said last month. The sale would simultaneously raise cash and reduce assets that are penalized under the capital rules.

Banks have been releasing reserves for loan losses set aside during the recession, helping some firms beat analysts’ estimates for second-quarter results. JPMorgan Chase & Co. said last week that profit for the three months ended in June rose 13 percent to $5.43 billion on a surge in investment banking and more on-time payments by credit-card customers. Citigroup Inc. said earnings increased 24 percent to $3.34 billion on higher investment-banking fees and reduced reserves.

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