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Bank of America results back up CEO's relative optimism

July 21, 2008 | 11:11 am

Bank of America Corp. CEO Ken Lewis has been saying for months that Wall Street was too negative on the bank's prospects. He backed that up with some hard data today.

BofA beat analysts' second-quarter earnings estimates despite setting aside $5.83 billion for bad loans, 222% more than it put aside a year earlier.

The second-biggest U.S. bank earned $3.41 billion, or 72 cents a share, in the quarter, down from $5.76 billion, or $1.28 a share a year earlier. But analysts had been expecting just 53 cents a share.

The results helped give financial stocks another big lift this morning, although the rally has since faded. BofA rose as high as $30.90 early in the session, but at about 10:45 a.m. PDT was trading at $29.40, up $1.91.

Still, the stock has rocketed nearly 60% since it closed at a multi-year low of $18.52 last Tuesday. Some gutsy investors have made several years’ worth of profit on BofA in four trading sessions.

BofasignLewis stayed on point today in the bank’s conference call with analysts: He thinks the gloom is overdone about the economy generally and BofA’s prospects specifically.

"Although we, too, are sensitive about the health of the economy and monitor it closely, we do not yet see the economy slipping into a prolonged negative growth," he said. "While we could be wrong, our analysis indicates continued economic sluggishness" in 2008, but "eventual stabilization later this year and the start of a recovery in the first half of 2009, albeit at a slow pace."

As for BofA’s loan losses, Lewis said: "Credit losses are still going up, but given what we see today they are manageable. Second, the fact that we can absorb $3.6 billion in credit losses, take $1.2 billion in additional write-downs, add $2.2 billion to our allowance for credit losses and still earn $3.4 billion should tell investors something about the extent and consistency of our earnings power."

Some other highlights from the conference call:

-- Lewis reiterated his intention to maintain the quarterly dividend at 64 cents a share, which gives the stock a current annualized yield of about 8.7%.

-- Losses on home-equity loans continue to vex the bank as home prices slide. Home equity loan charge-offs came to 3.1% (annualized) in the quarter, up from 1.7% in the first quarter and just 0.1% a year earlier. California and Florida combined account for 41% of BofA’s home-equity loan portfolio but 63% of the losses.

-- The bank wrote off $645 million of its collateralized debt obligation (CDO) portfolio in the quarter, but that was down from a write-off of $1.47 billion in the first quarter.

-- Investors who own debt securities issued by Countrywide Financial, which BofA bought on July 1, won’t get a guarantee of repayment from BofA. "We don’t intend to guarantee the public debt but we do understand the ramifications of not paying that maturity," said Joe Price, BofA’s chief financial officer.

From Bloomberg News: "Bond investors are concerned that BofA may absorb the best assets of Countrywide while the debt remains with a new company created by the merger, Red Oak Merger Corp. The investors speculated that Red Oak could then file for bankruptcy, shielding Bank of America from liability. Previous filings said debt may be about $38.1 billion."

Price wouldn’t elaborate on the bank’s plans.

Photo credit: Chuck Burton / Associated Press