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Citi, Wells and JPMorgan Chase have all taken substantial chargeoffs in response to new OCC guidance on treatment of home-equity loans, and several other large and regional banks are likely to do the same.
October 15 -
Bank of America (BAC) swung to a profit in the second quarter largely by slashing expenses and releasing reserves, but the nation's second-largest bank remains hobbled by continued repurchase requests on soured loans.
July 18
Bank of America's earnings were once again bogged down by buyback requests on soured loans, and executives say the pattern could continue for several more quarters, if not longer.
The nation's second-largest bank had $5 billion new repurchase requests in the third quarter while total claims rose 12% from the second quarter, to $25.5 billion. Reserves for such claims rose slightly, to $16.3 billion.
"Bank of America's tail legacy costs are really what's holding them back," says Erik Oja, a bank analyst at S&P's Capital IQ. B of A's earnings also were dragged down by $1.6 billion in litigation costs including a charge for its previously-announced Merrill Lynch investor class-action.
On a conference call Wednesday, Bruce Thompson, B of A's chief financial officer, said B of A is in "an ongoing disagreement" with Fannie Mae about what constitutes a valid repurchase claim.
At issue is more than $9 billion of outstanding claims involve borrowers that made at least two years of mortgage payments. Though the loans are in default, B of A argues that it should not have to repurchase them because the borrower made payments for at least two straight years. B of A officials gave no indication that the dispute would be resolved anytime soon.
"There are two ways that this gets resolved...and the most likely outcome is there is a settlement of sorts," Thompson said. "There are ongoing discussions but obviously nothing's been done."
Analysts generally refrained from badgering the company about reserves, as they did in the second quarter, because other indicators show a rebound in housing that is helping the bank move homes quickly even as it whittles its legacy assets through loan modifications and short sales.
Still, "I just don't know if it's going to be enough because they still have a lot of work to get through," said Paul Miller, a managing director at FBR Capital Markets. Miller, who said he and he expects the bank to face more mortgage-related litigation down the road, remains concerned that it's not reserving enough for all its "liabilities."
B of A reported a negligible profit of $340 million, or zero cents per share, in the third quarter, a 95% drop from the $6.2 billion it earned a year earlier. Revenue fell 8% to $20.6 billion. Analysts surveyed by Bloomberg had predicted a loss for the quarter.
Brian Moynihan, B of A's chief executive, tried to put the quarter's results in perspective.
"We basically had a break-even quarter, we passed a major milestone in putting behind us a major piece of litigation (Merrill Lynch) and we still built capital," he said. (B of A
Though hardly sounding upbeat, Moynihan said B of A will be working through the portfolio of problems it inherited from Countrywide Financial through at least the end of 2014. The bank is reporting fewer delinquent loans, and improving home prices have allowed then bank to clear its inventory foreclosed properties more quickly.
"I think we've shown strong results and are moving in the right direction in every area," Moynihan said on the conference call. "Costs were down while revenues were solid. This quarter shows the progress our company continues to make."
B of A reported a 42% jump in investment banking income compared with a year earlier. The bank also highlighted an 8% jump in mobile banking customers in the quarter to 11.1 million, and its lowest credit card loss rate since 2006, which now stands at 4.6%.
B of A had $4.1 billion in net charge-offs in the third quarter. The bank took a $478 million charge for home equity and second liens that had been discharged in bankruptcy. Thompson said 91% of borrowers were current on their payments, but regulators forced a change in accounting treatment for borrowers who have gone through a Chapter 7 bankruptcy, The bank reduced reserves by $139 million and took a $339 million provision for the quarter.
B of A also took a $435 million charge related to the extinguishment of underwater junior liens loans as part of the national mortgage settlement in March with the Department of Justice and 49 state attorneys general.
Moynihan declined to comment when an analyst asked when B of A would return capital to shareholders in the form of dividend or stock repurchases.
"We have made it clear that the capital we have in this company is sufficient to run the company," he said. "We frankly have built the capital levels, it's all your capital, it's all shareholders' capital, and after we hit the [Basel III] levels minus a cushion, it's all going back one way or the other."
