Bank of America

How Bank of America Got Credit Crunched

As we expected, Bank of America isn’t taking a huge hit this morning from its earnings disappointment. It’s down about 3.5% right now but still holding above the lows it hit in early August. Lots of people seem happy to concentrate on the positive signs and to write-off the losses as a function of “this summer’s credit crunch.”
Well, we’re not going to spend all day on this but we thought we’d spend a bit more time dwelling on the negative. In particular, we’re fascinated by how B or A’s corporate lending business and credit market related sales and trading illustrate just how bad the credit crunch hit the banks in the third quarter. After quickly flicking through the supplemental financial slides, here are a few points that stuck out.
Lower lending revenues and growth in risky and non-performing corporate loans. Revenue from corporate lending shrank from $179 million for the third quarter of 2006 to $175 million in this quarter. Risky, so-called “criticized” corporate loans grew from $1.4 billion to $1.5 billion. As a percentage of all corporate loans, however, this actually represents a slight improvement from 2006’s third quarter, from 2.12% to 1.98%. They can’t say the same for non-performing corporate loans, which grew in absolute terms—from $145 million to $269 million—and as a percentage—from 0.44% to 0.62%.
A Third Quarter Reversal. B of A’s lending balance sheet was steadily improving through the first half of 2007 but made a sharp reversal in the third quarter. To really get a sense of how the credit crunch hit the bank, it helps to look not just at the third-quarter to third-quarter comprables, but to see what happened from the second to the third quarter of this year. Non-performing corporate loans, for instance, grew ten-fold, from $21 million in the third quarter of last year to $269 million.
Sales and Trading Revenue Falls Off A Cliff. Revenues from sales and trading in structured products and credit products made a sharp reversal in the third quarter, creating huge losses. B of A made $521 million from structured products sales and trading in the second quarter of this year, and lost $569 million in the third quarter. Losses in credit products sales and trading were so severe that they wiped out all the year-to-date gains from this business for B or A. To look at it another way, in the third quarter of this year B of A lost more than 3.5 times what it made in the third quarter of last year from trading and sales in credit products. Even if it recovers to last year’s revenue levels in the fourth quarter, it will barely have made any money from this business in 2007.
93% Decline in Profits for Investment Banking. Profits at the corporate and investment-banking division were decimated. In the third quarter, they shrunk to $100 million from $1.43 billion a year earlier. That’s a 93% drop. We’d ask why they are even in this business but it might be too late for that. On a revenue basis, they almost aren’t. Wonder how much they’ll pay out in bonuses to their investment bankers?
Smaller Than Expected LBO Mark Down. It would be nice to know more about how the investment banking unit calculated the mark down on the value of its LBO financing. They’re reporting a mark down of just $247 million. They are the number 2 lender for leveraged loans, so it’s surprising that they haven’t taken more of a hit in this area. Analysts at Citigroup had predicted a writedown of as much as $700 million. It’s hard not to wonder whether there might be some rosy assumptions in their mark downs. But then again, with TXU loans pricing close to par, maybe this business isn’t in for the hit many predicted.

Bank of America posted terrible quarterly results this morning, managing to achieve even worse results than most analysts had expected.
Perhaps even more distressing than the actual results is the vagueness about what caused the losses. Lots of blather about “dislocations.” We should probably be grateful they didn’t actually say that the markets were “misbehaving” or mention a “28 sigma event.” Still when talking about this stuff Bank of America sounds like a quant fund manager in mid-August begging investors not to send in redemption notices.
The bank says it took a $607 million loss in trading revenue “due principally to the breakdowns in traditional pricing relationships, which made hedges ineffective, and the widening of credit spreads.” Which we take to mean that they were massively short volatility. You can call that a hedge, we guess. But keep in mind that when you ask a whore in Beijing what her name is, she almost always replies, “I make a name for you. What you want to call me?”
The results also imply that financial engineering may have passed the point of human comprehension. Does anyone understand how to trade CDOs? If so, they don’t work at Bank of America, which took a $527 million hit.
Just about the only bright(ish) spots on the earnings report was that Bank of America didn’t take too large a hit from losses in buyout loans. And, of course, they aren’t run by Chuck Prince. (As a side note, however, if B of A takes a large hit from the earnings report, which is might not since already people are saying trading revenues are unpredictable and might go up next quarter, it could lose it’s place just ahead of Citigroup in the race for who has the bigger market cap.)
And, hey, who knows. Maybe The Entity will make everything okay.

Bank of America Third Quarter Earnings Per Share Decline 31% to 82 Cents
[PR Newswire]

Will Sallie Mae Eat The Big Mac?

bigmacattack.jpg Update: Yep. It’s over. This post has the honor of almost certainly being the last thing ever published on this deal before the world learned that it wasn’t happening. That’s special.
That’s what folks are wondering today. Now that First Data has closed and Harman International Industries and Genesco have fallen apart, eyes are on Sallie Mae. Which way will it go? Will the buyers call a MAC and bail on the deal?
The MAC speculation arises from legislation Congress passed this summer that expands financial aid to students while cutting back on subsidies to student loan lenders. But the odds of the deal falling apart went way up this morning when Bank of America chief executive Ken Lewis made comments that seemed to indicate that the legal changes were causing the buyers to re-evaluate the price they agreed to pay for Sallie Mae.
“We obviously have seen the change in the (education lending) laws. We are trying to assess the impact that might have on the price,” Lewis told the Charlotte Observer. Bank of America part of a group of investors led by buyout firm J.C. Flowers & Co. that agreed in April to by Sallie Mae.
Shares of Sallie Mae sunk on the news. And the price of bond insurance for Sallie Mae’s debt sunk to the lowest levels since July.
Things could get ugly. If the buyers do call a MAC, the sellers may well sue. This morning’s Deal Journal outlines the legal argument that Sallie Mae might make if the buyers tried to walk away. “At stake is the $900 million reverse break-up fee the buyers are on the hook for if they want to walk and can’t prove a MAC,” Deal Journal writes.
Sallie Mae shares fall on Lewis comments [Charlotte Observer]
Sallie Mae Credit Protection Costs Fall Amid Buyout Doubts
Sallie Mae CEO’s Counterattack Against Waffling LBO Buyers [Deal Journal]

Who Does #2 Work For? America.

Bank of America, the #2 bank in the U.S. by market value, reported a subprime-loss free net income gain of 5% over the same period last year to $5.76 billion, up 9 cents a share. Net income of $1.28 a share beat analyst estimates by 8 cents. The bank’s revenue jumped 7.4% to $19.56 billion, beating analyst estimates by about $1 billion.
Bank of America is the same story, different bank with regards to the drivers of Q2 earnings. Throughout the banking sector, strong capital markets (driven by investment banking) and wealth management results drove earnings during the quarter, tempered by weakness in retail and credit cards. Bank of America’s wealth management unit is poised to continue its strong growth with the Q2 acquisition of U.S. Trust from Charles Schwab.
Bank of America doesn’t have much exposure to the subprime market because it doesn’t directly serve the segment. Instead, the bank takes more of a hit from personal delinquencies in its credit card unit.
Bank of America’s Net Rises 5.2% On Capital-Markets Activity [Wall Street Journal]

bankofamerica.jpgIt’s Second-Quarter Earnings Results Week (hi-ooo) and Bank of America is poised to disappoint a lot of shareholders as a result of its insistence on doing business almost exclusively in ‘Merica. (Yes, B of A spreads the love in 45 countries but derives only 13% of its revenue from abroad). Analysts estimate that the Bank in America will report a 2% drop in profit, its first decline in 2005. Citigroup, which is among the biggest banks in Mexico, Poland and South Korea and gets nearly half of its sales from abroad, is expected to post an increase of 7.7%. JP Morgan, deriving twenty five percent of revenue from outside the U.S., is predicted to be up 6.4%.
Responding to allegations that B of A has dug its own grave by taking its name too literally (and that it’s not necessarily a great idea to put all your eggs in the ‘Merican basket when the domestic economic has been “growing at sub-3 percent”), CEO Kenneth Lewis offered: “We do better when we play to our strengths, and our strengths are in the U.S.”
Bank of America Profit Trails as Citigroup, JPMorgan Go Abroad [Bloomberg]

Bank of America agony pricing UPDATE

Yesterday we mentioned that we heard through the Streetvine that BoA was paying a bunch of analyst recruits $50k to defer BoA employment for a year. We wondered if there was something BoA wasn’t telling us, and if the move is an indication that entry level hiring across the Street is contracting.
It turns out, according to some BoA folk, most of the deferrment offers are due to space limitations at 9 W 57th. These limitations will be solved by the new Bryant Park building, but that won’t open for at least another year or two. What ended up happening – a fair chunk of the incoming BoA analyst class (around 30-40 people) was offered relocation to a non-NYC BoA office. The people who didn’t want to relocate got $50k to start up in NYC next year.
How does BoA overestimate its entry level capacity by that many people? Were they expecting that much more end of year attrition? Did they hire a bunch of sadists over the past several years who mostly decided to stay in banking?

Bank of America prices anticipation of agony at $50k

unemployedandonthebeach.gifThe paring down of personnel on trading desks across the Street has been well documented over the past year. Are I-banking analysts next? We’ve just heard that Bank of America is paying at least 18 analyst recruits from this year $50k to take a hike and come back next year. Is this a sign of an impending “healthy correction” in the entry level job market on Wall Street or isolated to BoA? Regardless, $50k is a pretty sweet deal in our opinion. That’s a good non-financial entry level job in Manhattan. Or, better yet, a super sweet share our east within walking distance to the beach.
The price of agony deferral has more than doubled in the past 5 years. The last time this happened to bulge bracket firms was after the bubble burst in 2001, when JPMorgan (we believe other banks did the same), gave analysts $20k to defer full-time ankle holding for a year.
Accenture did the same thing (when it was trying to distance itself from Enron-smacked Arthur Andersen) with a bevy of 2001/2002 consultant recruits, but only paid $10k and didn’t end up taking several of the people back at the end of the year.
If anyone has any more stories about (or more info on) paid employment deferrals, or how you spent deferral money to go on an incredible trip to Southeast Asia while we were toiling away at our desks, please share, post racy photos, or send to: tips at dealbreaker dot com.

Bank of America just confirmed that last week its Global Equities division experienced a “realignment,” in which it fired 30 associates (pictured). Granted this represents a small fraction of BoA’s Global Markets division and most banks are quick to tell you about growing overall headcounts in the face of layoffs but the move represents a displacement of many high value (and high costing) employees and continues the trader layoff bonanza across the Street.
The BoA 30 will stand united in the face of the 17,000 strong from Citi. While it is said that the forces from Citi can send recruiter email spam that can blot out an email account, the BoA 30 will recruit in the shade (of Monstertrak). Tonight they dine in Hell (‘s Kitchen)!
Will reinforcements arrive (i.e. – Is a larger BoA exodus forthcoming)?