This summary is based on the third quarter fiscal 2007 earnings call conducted by Bank of America Corporation (BAC) on October 18, 2007.
Management:
President and CEO: Ken Lewis
Chief Finance Officer: Joe Price
Director of IR: Kevin Stitt
Key Investors Issues
- Tier 1 capital ratio declined to 8.22% due to the impact of the U.S. Trust acquisition.
- A cash dividend of 64 cents a share was paid out during the quarter.
- The bank closed the LaSalle in October.
Year-to-Date Highlights
- Net income decreased from $15.8 billion, or $3.44 a share in 2006, to $14.7 billion, or $3.25 a share, following an increase in provisioning levels to $5 billion.
- Total revenue fell marginally to $53.6 million, despite increase in non interest income.
- Loans were up 18.6% to $793 billion from $669 billion in 2006 as deposits increased 5% to $699 billion.
Third Quarter Highlights
Net income declined 32% to $3.7 billion, or 82 cents a share, from $5.42 billion, or $1.18 billion in the prior year, as market turbulence reduced fee revenue opportunities.
- Lower net income resulted from a $1.33 billion decline in earnings in Global Corporate and Investment Banking given the significant disruption in the financial markets.
- In addition, provision expenses increased $865 million due to consumer and small business credit costs rising from post bankruptcy reform laws, growth and seasoning in various portfolios and stress in several portfolios driven by the weakened U.S. housing market.
- Total sales of retail products rose 12%, generated by strong growth in sales of first mortgages, checking and savings accounts and online banking activations. Net new retail checking accounts grew to 757,000.
- Retail deposits increased $16.52 billion, or 4% while debit card purchase volume increased 11% percent and an increase in retail accounts drove service charge income higher by 8%
Revenues decreased from $18.2 billion in 2006 to $15.9 billion despite a marginal rise in net interest income to $8.61 billion.
- The benefits of good loan growth and one additional day of interest were offset by the negative impact of rates particularly the move in LIBOR as well as market based funding of asset growth.
- In addition, interest earning assets increased from $1.26 trillion in 2006 with an average yield of 6.25% to $1.35 trillion with a higher average yield of 6.61%.
- The interest rate positioning was less liability sensitive as the bank added $100 billion in pay fixed losses. However, this position help protect the bank if the forward rate cut don’t materialize, and also contribute to the lower liability sensitivity position.
The Tier 1 capital ratio was 8.22%, down from 8.48% a year ago, due to the impact of the U.S. Trust acquisition.
- The bank paid a cash dividend of 64 cents a share.
- The company issued 9.5 million common shares related to employee stock options and ownership plans and repurchased 9.6 million common shares.
- The bank will begin to mark-to-market its initial $3 billion investment in China Construction Bank, excluding the value of options, allowing it to increase its ownership stake from 8.2% to 19.1% in the fourth quarter.
Credit Quality:
- Credit costs continued to rise from the unusually low levels experienced in 2006 post bankruptcy reform. However, overall credit quality remained sound as credit card losses stabilized.
- Provision for credit losses rose from $1.17 billion a year ago to $2.03 billion due to higher net charge-offs of $1.57 billion, up from $1.28 in 2006 and increased reserves from the seasoning of the small business and home equity portfolios, reflecting growth in these businesses.
- The company also added reserves for its home equity and homebuilder loan portfolios in view of the impact of the weakened U.S. housing market.
Total managed net losses were $2.84 billion, or 1.3% of total average managed loans and leases compared with $2.20 billion, or 1.11% in 2006.
- Nonperforming assets increased by 103% to $3.37 billion, from $1.66 billion in the prior year driven by seasoning and higher loss expectations in several portfolios targeted for growth, including small business.
- In the $100 billion home equity portfolio, charge-offs and delinquencies are rising due to seasoning of recent advantages as well as decline in home values.
- Even though the FICO score remained strong at 721 and the cumulative of loan to value at 68%, the bank realized a rise in the percentage of loans that have a CLTV above 90%.
Performance of Segments:
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In Global Consumers Small Business banking earnings were $2.5 billion, down 16% from $2.9 billion a year ago due to higher provision which increased to $3 billion from $2 billion in 2006.
- Revenue rose 6%, reflecting strong fee growth muted by lower than interest income growth as total loans rose 13.9% to $331.6 billion.
- Revenue growth was offset by the higher provision expense, while charge-offs were in line with expectations, as the bank booked reserves due to seizing of several growth portfolios and the impact of the weak U.S. housing market.
- New customer generation continues with net new retail checking account openings of 757,000, while total retail deposit balances including wealth management balances were up $17 billion or 4% from last year.
