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Earnings At Bank Of America Tumble, Surprising Investors

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By ERIC DASH, The New York Times

Published: October 19, 2007

Bank of America's third-quarter earnings dropped 32 percent, badly hurt by a spike in consumer credit costs and the poor performance of an investment banking unit that has clamored for respect on Wall Street.

The bank's big consumer division absorbed heavy losses as it bolstered its reserves by $865 million, or 52 percent, in anticipation of higher losses across all businesses.

Meanwhile, the investment bank was hurt badly by the credit market turmoil, as the dismal performance in its fixed-income activities caused profit to drop 93 percent.

Net income in the third quarter was $3.7 billion, or 82 cents a share, compared with $5.42 billion, or $1.18 a share, a year ago. Revenue declined 12 percent to $16.3 billion.

Without a profit warning, the results caught Wall Street off-guard on Thursday and suggested the extent to which the bank is under stress from the downturn in the housing market and a slowdown in the consumer economy. The heavy trading losses raise questions about its risk management practices.

Shares in the company closed Thursday at $48.85, down $1.18.

As the third consecutive quarter that Bank of America, based in Charlotte, N.C., has failed to significantly increase revenue, the results call into question its ability to transform itself from a deal machine to an internal growth powerhouse under pressure from a federal deposit cap.

The bank's chairman and chief executive officer, Kenneth D. Lewis, said the performance was not acceptable. He vowed to cut bank expenses as the economy's growth prospects slow and promised changes in its investment bank.

'While the significant dislocations in the capital markets have hurt most participants, we are still very disappointed in our third-quarter performance,' Lewis said.

He suggested that Bank of America would be able to muddle through in the fourth quarter, when it will recognize a large mark-to-market gain on its investment in a Chinese bank. But Lewis said the company now expected gross domestic product to be 2 percent going forward, not 3 percent as it had forecast in July.

The earnings drop comes as Bank of America had been showcasing its swagger. In July, it took a $2 billion stake in Countrywide Financial, giving it an immediate paper profit and an option to buy the mortgage giant if it was ever put up for sale. More recently, it took over La Salle Bank to expand its presence in Chicago.

Still, it has struggled to find ways to grow.

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