Bank of America Has Record Loss on Bad Loans

 Bank of America Corp. (BAC) 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 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. Adjusted revenue slid 10 percent from the same period last year.

Moynihan, 51, is working to move Bank of America past the fallout from lax home lending by reaching settlements with mortgage 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. The shares were little changed in early New York trading at $9.72.

“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.”

Revenue plunged by more than half to $13.5 billion because of previously disclosed mortgage costs. Excluding that charge, revenue slid 10 percent from the year-earlier period and 2.2 percent from the first quarter.

Mortgage Costs

The mortgage unit’s loss widened to $14.5 billion from $1.5 billion a year earlier, on the previously announced settlement costs and additions to provisions. Moynihan split management of the division in February, giving Terry Laughlin responsibility over soured mortgages and leaving Barbara Desoer in charge of performing loans. Laughlin, 56, will take over as chief risk officer later this year.

Profit at global banking and markets, run by Thomas K. Montag, advanced 73 percent to $1.56 billion from a year earlier. Sales and trading revenue of $3.8 billion was $666 million more than a year earlier, the bank said. Investment banking fees of $1.6 billion, excluding self-led deals, rose 28 percent from a year earlier. Fixed-income, currency and commodities revenue was $2.7 billion, $467 million higher than a year earlier.

The wealth and investment management business run by Sallie L. Krawcheck reported a $506 million profit, 54 percent higher than a year earlier when it had a charge related to an asset sale. Revenue rose 7 percent from a year earlier to $4.5 billion as the unit added deposits and financial advisers.

Lower Provision

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 has called his company a “tale of two cities” because its non-mortgage operations are making money. He is seeking to boost results from commercial lending, wealth management and investment banking and limit damage from home loans originated before he became CEO. Global commercial banking reported the highest net income since the second quarter of 2009, according to the bank.

Bank of America told investors June 29 it would book more than $20 billion in second-quarter charges from faulty mortgages. The sum includes funds to settle 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.

Settlement Sums

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. (AGO) 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. (JPM) 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. (C) said earnings increased 24 percent to $3.34 billion on higher investment-banking fees and reduced reserves.

With asset quality improving, “I’m not concerned about releasing reserves,” Charles said. “That’s pretty much what all the banks are doing.”