Monday, October 6, 2008

BAC Earnings Miss Expectations

After the closing bell, Bank of America announced much worse than anticipated third-quarter earnings results.  BAC reported net income of 15 cents a share, compared to the average analyst estimate of 62 cents a share.  Net income dropped 68% on $952 million in write-downs from subprime mortgage-related investments.  Despite repeated denials that the bank would ever cut its dividend, Bank of America halved its quarterly dividend and announced plans to sell $10 billion in common stock.  This "surprise" earnings announcement has several important lessons for investors: 
  • Even top tier banks that are supposed to be weathering the storm are getting crushed
  • Earnings estimates are still WAY TOO HIGH
  • Banks that issue equity during the short-sale ban are indicating that their stocks are overvalued
A few details on the performance on BAC's loan portfolio offer insight into how poorly the US consumer is faring.  Net charge-offs jumped to 1.84% from .80% a year ago and 1.67% in the second quarter.  Nonperforming assets increased to 1.42% from .43% a year ago and 1.13% in the second quarter.  The company stated that increased loss and delinquency trends first noted in the home equity and homebuilder portfolios have spread to first mortgage, unsecured consumer lending and credit-card portfolios.  A lack of refinancing options to consumers due to a tight lending environment should lead to a surge of delinquencies and defaults.  I suspect that increased charge-offs and delinquencies are not unique to Bank of America's loan portfolio and that investors should prepare themselves for more disappointment this earnings season.         

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