How Bank of America Got Credit Crunched

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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.

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