BofA’s Merrill Lynch Unit Drives Return to Profit (Update2)
By David Mildenberg
April 16 (Bloomberg) -- Bank of America Corp., whose takeover of Merrill Lynch & Co. last year drew fire from investors, regulators and lawmakers, leaned on the new subsidiary to post its first profit in three quarters.
Sales and trading revenue hit a record $7 billion in the first quarter, according to a statement today from the Charlotte, North Carolina-based bank. That exceeded the totals reported by JPMorgan Chase & Co. from comparable operations and helped Bank of America report net income of $3.18 billion.
Merrill Lynch’s results more than erased losses tied to home lending. Chief Executive Officer Brian T. Moynihan told analysts on a conference call that Bank of American has “broken the back” on defaults in the credit-card unit, which turned its first profit in more than a year.
“The worst of the credit cycle is clearly behind us,” Moynihan said, adding at a Charlotte speech later in the day that while credit losses remain high, “the recovery is real.” Write-offs tied to home-equity loans still lay ahead, and the bank plans to keep liquidity elevated until the economy shows more signs of strength, he said during the conference call.
Net income amounted to 28 cents a share, compared with $4.25 billion, or 44 cents, in the same period a year earlier. The stock was little changed during early New York Stock Exchange trading, then fell as much as 7.3 percent when the Securities and Exchange Commission said it was suing Goldman Sachs Group Inc. for fraud tied to mortgage securities. Goldman Sachs called the action unfounded.
Bank of America dropped $1.07 to $18.41, or 5.5 percent, at 4:01 p.m. Goldman Sachs, based in New York, slid 13 percent.
Benefits from Bank of America’s Merrill Lynch purchase are occurring at least three quarters earlier than expected, said Nancy Bush, an independent bank analyst.
Disruption Ends
“Bank of America and JPMorgan, at least in the capital markets, have overcome the disruption,” Bush said. “The financial crisis is over for these companies.”
While first-quarter trading profits typically exceed other periods, Moynihan said signs of continued strength are apparent. “The fixed-income activities are all driven by customers,” he said, noting the bank does little proprietary trading. “There is very active issuance and a very active secondary market.”
Revenue from fixed-income, currency and commodity trading climbed 16 percent to $5.52 billion, the most since the bank acquired Merrill Lynch last year. The segment’s revenue exceeded JPMorgan’s $5.46 billion in fixed-income revenue for the quarter, which was a record for that bank.
Equities sales and trading revenue, at $1.53 billion, was also the highest since the takeover of Merrill Lynch and also beat JPMorgan.
‘Blowout’
“They paid about $20 billion for Merrill Lynch and they probably already have booked $17 billion in trading gains” since January 2009, said Anthony Polini, an analyst at Raymond James & Co., who has a “strong buy” rating on Bank of America. “It was a blowout quarter from a trading standpoint.”
Moynihan, 50, has said he’s focused on curtailing bad loans and simplifying consumer accounts and fees. The provision for credit losses dropped by $3.6 billion, according to the bank. He’s also trying to repair relations with Congress and regulators, which frayed during the months before the December retirement of his predecessor, Kenneth D. Lewis.
Lewis’s bid for Merrill Lynch during the depths of the financial crisis was criticized by investors for being too expensive, and by lawmakers for triggering a second round of bailout funds, which Bank of America has since been repaid. The SEC also launched a probe of alleged misstatements tied to the takeover, which the bank settled for $150 million. Lewis retired in December.
Card Regulations
Bank of America ranks first in the U.S. by deposits and assets, and second among credit-card lenders. Overdue card loans fell in March to the lowest in more than a year, signaling that write-offs may decline from 2009’s record. The bank’s card services business swung to a $952 million profit from a $1.75 billion loss. The provision for credit costs on unpaid card debts dropped by more than half to $3.54 billion. Home loans and insurance reported a $2.07 billion loss as fewer borrowers refinanced their homes and defaults increased. It was the only one of Bank of America’s six operating units to report a loss during the quarter. “The industry is getting better and credit is getting better across the board,” Tom Brown, chief executive officer of Second Curve Capital LLC, said today in an interview with Tom Keene on Bloomberg Radio. “It’s been a heck of a start to the year, but I still say we have another doubling left to go in the group over the next two to three years.”
