BL/Bank of America May Miss 20% Profit-Gain Forecast, Analysts Say
By David Mildenberg
April 20 (Bloomberg) -- Bank of America Corp. Chief Executive Officer Kenneth Lewis will fail to fulfill his pledge to increase profit by 20 percent this year because of rising losses on home-equity loans and credit cards, analysts say.
Nine of 14 analysts predict unchanged or lower profit this year at the second-largest U.S. bank, according to Bloomberg data. The average estimate has declined 28 percent to $3.16 a share since Jan. 22, when Lewis said he expected earnings ``to be well above $4'' this year.
``Chief executives sometimes boldly predict because they are trying to go against the market,'' Gary Townsend, a partner at Hill-Townsend Capital in Chevy Chase, Maryland, said in an interview. ``In retrospect it doesn't look very smart.''
Bank of America may report its third straight quarterly profit decline tomorrow, according to analyst estimates compiled by Bloomberg. The Charlotte, North Carolina-based bank faces rising losses on consumer loans plus writedowns of $3.5 billion related to subprime mortgages, KBW Inc. analyst Jefferson Harralson said in an April 7 report.
An increased gap between what the bank pays on deposits and receives from borrowers would propel gains this year, Lewis said. ``That's going to be a pretty big number,'' he told analysts in January.
While the bank's net interest margin probably increased in the quarter from the Dec. 31 level of 2.61 percent, that may be more than offset by higher credit costs, Harralson said in the report. He predicts Bank of America will earn $2.80 a share in 2008, the second-lowest estimate of 21 analysts surveyed by Bloomberg.
`Out on a Limb'
JPMorgan Chase & Co. CEO James Dimon and many other bank CEOs have refrained from issuing projections, said Nancy Bush, an independent bank analyst in Aiken, South Carolina, who expects Bank of America to earn $3.11.
``I don't know why any CEO would step out on a limb this year,'' Bush said. ``Even in January, it was obvious that this was going to be a difficult year.''
Bank of America has tightened its lending standards this year to limit losses to credit card, home-equity and small- business borrowers, Lewis said. Scott Silvestri, a spokesman for Bank of America, declined to comment.
The bank's losses on its $112 billion in home equity loans are likely to more than double in the first quarter to 1.3 percent because of declining home prices in California and Florida, Harralson predicted. About 40 percent of the bank's home equity loans are in those two states.
Home Equity, Credit Cards
Wells Fargo & Co., on April 16 reported home equity losses that Goldman Sachs Group Inc. analyst Brian Foran called greater than expected. Wells Fargo is the second-largest home equity lender behind Bank of America.
Bank of America will probably charge off 6 percent of its $76 billion in credit card loans this year, more than the 5 percent to 5.5 percent range previously cited by management, Merrill Lynch & Co. analyst Edward Najarian said in a March 28 report. He said he based his opinion on a visit with senior management. The bank is the largest U.S. credit card issuer.
The bank's earnings may be affected by January's sale of $13 billion in preferred stock. The bank boosted capital after spending $21 billion last year to buy LaSalle Bank from ABN Amro NV. The preferred dividend payments of more than $900 million annually will trim earnings by about 24 cents a share, Townsend said.
``Bank of America's capital structure isn't nearly so happy to common shareholders as it was before,'' he said.
Lewis in January said the bank didn't expect a repeat of the $2.76 billion fourth-quarter loss from its corporate and investment bank unit, largely due to writedowns related to debt securities backed by subprime mortgages.
With demand for leveraged loans and packages of mortgage- backed securities remaining depressed, the bank faces another $3 billion in writedowns, analyst Joseph Morford of RBC Capital Markets in San Francisco said in an April 1 report. He expects the bank to earn $3.35 a share this year.
To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net
Last Updated: April 20, 2008 12:35 EDT
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