Bank of America stock dives despite good earnings report
NEW YORK -- Even though Monday's headline was that the nation's largest bank posted strong first-quarter earnings that blew past Wall Street estimates, a peek behind the numbers raised questions about the quality of its earnings and the prospect of rising losses for both BofA and the rest of the banks.
BofA earned $4.2 billion on record revenue of $36 billion in the first quarter. But there were concerns that those earnings were helped by one-time gains or accounting adjustments.
For example, the bank booked $2.2 billion in gains just by placing a higher value on some structured notes (which some analysts call "toxic assets") that came with its acquisition of Merrill Lynch.
"Now, we're seeing write-ups rather than write-downs of structured assets, and you have to question how true the value of those assets are," says Sydney Finkelstein, management professor at the Tuck School of Business at Dartmouth.
What especially spooked investors was a 41% increase in non-performing assets or loan delinquencies to $25.7 billion from the previous quarter and a 229% jump from the same period last year, stemming from consumer-related losses, especially in its credit card and mortgage division.
BofA, which is based in Charlotte, increased its provision for future loan losses to $13.4 billion from $8.5 billion in the previous quarter.
These worries sent most financial stocks lower and also brought down the broader stock market: BofA shares traded down 24% to $8.02; the Dow Jones industrial average fell 290 points to close at 7842.
"Credit losses were worse than our worst expectations, and this is just the tip of the iceberg, given that unemployment continues to rise," says Paul Miller, an analyst at Friedman Billings Ramsey.
He says the income gains were "unsustainable," because "people won't keep refinancing loans and trading gains were an anomaly."
Like its peers Citi, JPMorgan Chase, Wells Fargo and Goldman Sachs, all of whom reported positive earnings in the last couple of weeks, BofA, too, saw huge gains from mortgage refinancing and capital market gains related to trading bonds and equity derivatives. Its mortgage banking income increased $1.8 billion to $3.3 billion, and there was a similar gain in sales and trading revenue.
