Defaults on loans by cash-strapped customers and delinquent credit card debts sent Bank of America tumbling to a US$1 billion quarterly loss, the bank reported on Friday, offering a blunt reminder that finance on the US high street
The North Carolina-based bank, the largest in the US by deposits, fell into the red for the three months to September after two preceding profitable quarters. Its performance was worse than analysts had anticipated.
For Ken Lewis, the outgoing chief executive, the numbers were a setback. Under intense criticism over his leadership of the bank, Lewis recently announced that he would step down at the end of the year. The US administration’s “pay czar,” Kenneth Feinberg, has told him to give up US$1 million in salary and bonuses.
“Obviously, credit costs remain high, and that is our major financial challenge,” Lewis said. “However, we are heartened by early positive signs, such as the leveling of delinquencies among our credit card customers.”
Much of the shortfall arose at Bank of America’s 6,000 high street branches. The bank’s losses for failed loans came to almost US$10 billion and it added a further US$11.7 billion to its reserves to cover anticipated future defaults.
Meanwhile, General Electric, a bellwether for the US industrial sector, was also dragged lower by its financing arm, GE Capital, where earnings tumbled 87 percent in the quarter to US$263 million.
The group, whose businesses range from aircraft engines and power generation to credit cards, saw its overall profits drop 47 percent for the third quarter to US$2.5 billion.
However, GE chief executive Jeff Immelt said the global economic environment was improving and he expected a “gradual recovery.”
Bank of America’s credit card business lost US$1.04 billion, while its home loans and insurance division lost US$1.63 billion. But as optimism returned to Wall Street, its global markets division, which includes the brokerage Merrill Lynch, scored a US$2.19 billion profit.
The figures were greeted with disappointment by commentators.
“The adverse credit picture continues to weigh on the firm,” said Gary Townsend of Hill Townsend Capital. “There’s really a poor earnings prospect until they can turn that around.”
The fortunes of leading US banks have sharply diverged as the global financial crisis begins to ease. Aided by shrewd trading on capital markets, JP Morgan and Goldman Sachs produced strong results this week, but Citigroup and Bank of America, both of which have required huge injections of government money for survival, have struggled.
Bank of America was hampered by a US$402 million pre-tax charge to end a treasury guarantee program. Below the profit line, it paid out US$1.2 billion in preferred dividends, including US$893 million to the US government.
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