By Hugh Son
NEW YORK - Bank of America Corp., the second-largest U.S. lender, swung to a fourth-quarter profit as the company sold assets and built capital faster than expected.
Net income of $1.99 billion, or 15 cents a diluted share, compared with a loss of $1.24 billion, or 16 cents, a year earlier, according to a statement Thursday from the Charlotte, N.C.-based firm. While results were boosted by one- time gains on asset sales and reserve releases, the stock advanced 5.6 percent in early trading as investors focused on the stronger balance sheet.
CEO Brian T. Moynihan, 52, is cutting holdings, expenses and staff while raising capital to meet demands from regulators for a larger cushion against losses. So far, $50 billion in assets are gone, and Moynihan’s Project New BAC will eliminate at least 30,000 jobs as the firm seeks to save $5 billion annually. He’s also aiming to quell disputes over faulty mortgages that have cost the bank about $40 billion.
“The biggest shock in the quarter was, nobody improves their Tier 1 common ratio by 121 points in 90 days,” said Thomas Brown, CEO of Second Curve Capital LLC and a Bloomberg contributing editor, in an interview with Betty Liu on Bloomberg Television’s “In the Loop.” “It’s going to survive and its capital ratios are a lot stronger today than we all thought yesterday.” Brown has owned Bank of America warrants and shares.
Tier 1 capital, a measure of ability to absorb losses, surged to 9.86 percent from 8.65 percent in the third quarter. In December, the lender indicated capital would improve to about 9.2 percent. Revenue gained 11 percent to 25.1 billion. For the year, Bank of America said it earned $1.4 billion, compared with a $2.2 billion loss in 2010, as revenue dropped 15 percent.
Bank of America’s stock rose 38 cents to $7.18 as of 8:48 a.m. in New York.
Moynihan cited a “gradually improving economy” for a 13 percent rise in commercial and industrial loan balances from a year earlier. The consumer real estate unit posted a $1.46 billion loss, narrower than a year earlier. Global banking and markets reported a net loss of $433 million, compared with net income of $669 million in the year-ago quarter. Revenue in the unit declined 31 percent, primarily driven by lower sales and trading revenue and investment banking fees.
The quarter’s results were skewed by one-time pretax gains including $2.9 billion from selling most of its remaining stake in China Construction Bank Corp., $1.2 billion on an exchange of preferred securities, and $1.2 billion on sales of debt securities. The provision for credit losses fell 43 percent to $2.9 billion, or about $2.2 billion less than a year earlier.
Expenses tied to bad mortgages included $1.5 billion for litigation and $263 million for buying back soured home loans from investors. A year earlier, the bank booked a $2 billion impairment at the home-loan unit.
“There’s a lot of one-time charges and gains in there,” Paul Miller, an analyst at FBR Capital Markets in Arlington, Va., said in an interview on Bloomberg Television. “On a core basis, it looks like they came in below our numbers. On one side people like the capital position, but the earnings side to us, it was kind of weak.”
Bank of America is selling assets deemed risky by regulators and stockpiling earnings to comply with new international rules on capital meant to protect against a future financial crisis. The company may have to retain more than $40 billion in earnings by 2019. That figure could drop if the bank unloads more of its riskiest assets, said Jerry Dubrowski, a spokesman for the firm.
JPMorgan Chase & Co. supplanted the bank as the biggest U.S. lender by assets last year. Bank of America’s divestments during the year included 23.5 billion shares of China Construction, a Canadian credit-card business and private-equity stakes in the biggest U.S. Pizza Hut franchisee and hospital operator HCA Holdings Inc.
The bank doesn’t need to be the biggest, according to Moynihan, who said in September he wants his company to be more focused. Moynihan also decided to scale back the firm’s mortgage operations, shuttering a correspondent unit that accounted for half of loan volume in the first six months of 2011.
By doing so, the lender will accumulate fewer mortgage servicing contracts -- one of the assets it’s been selling because the new regulations compel banks to hold more capital if they own riskier assets.
Rivals may already be taking up the slack in mortgage lending. Wells Fargo & Co., the No. 4 U.S. bank by assets, posted a 20 percent rise in fourth-quarter income to $4.11 billion as new home loans rose 35 percent from the prior three months. U.S. Bancorp, ranked fifth by deposits, said profit advanced 39 percent to $1.35 billion.
Earnings dropped at the biggest New York-based banks as trading slumped in the last three months of 2011. Earnings fell 23 percent to $3.73 billion at JPMorgan, while Citigroup Inc., the No. 3 bank, said income slid 11 percent to $1.17 billion.
Moynihan’s success may hinge on how well he deflects future costs of refunds, writedowns and lawsuits stemming from faulty mortgages and foreclosures -- most of them inherited in the 2008 takeover of Countrywide Financial Corp. They total about $40 billion since 2007, and another $12 billion to $32 billion may lie ahead, according to a Citigroup estimate.
Those expenses helped send the lender’s stock plunging 58 percent in 2011, the worst showing in the Dow Jones Industrial Average. Bank of America’s 22 percent gain this year through yesterday to $6.80 has led the 30-company Dow as investors bet that an improving U.S. economy will buoy earnings.