Bank of America, Wachovia Profits Slump on Mortgage Writedowns

Bank of America Corp. and Wachovia Corp., the second- and fourth-largest U.S. banks, said earnings plummeted after more than a combined $6.9 billion of market writedowns.

Bank of America's fourth-quarter profit dropped 95 percent to $268 million, while net income at Wachovia was almost wiped out, plunging 98 percent to $51 million. Bank of America declined 5.5 percent in early New York trading to $34 and Wachovia fell 4.4 percent to $29.46.

Kenneth Lewis, Bank of America's chief executive officer, and Kennedy Thompson, his counterpart at Wachovia, said in separate statements today that the companies were battered by the fixed-income markets. Lewis said he expects economic growth to be anemic at best in the first half.

Bank of America and Wachovia, both based in Charlotte, North Carolina, reported the lowest quarterly profits in at least six years during the country's worst housing slump in more than two decades. The world's biggest banks and brokerages have disclosed more than $120 billion of writedowns and credit losses since June, mostly caused by the collapse of the subprime mortgage market.

Bank of America earned 5 cents a share in the fourth quarter, excluding merger and restructuring costs and a gain from the sale of Marsico Capital Management LLC, falling short of the 21-cent average estimate from 21 analysts surveyed by Bloomberg. Wachovia's profit of 8 cents a share, excluding takeover-related costs, also missed analysts' estimates.

`Slowing Economy'

Our fourth-quarter results were severely impacted by ongoing dislocations in capital markets and the slowing economy, Lewis said in today's statement. He added that the company is cautiously optimistic about 2008.

Bank of America increased its bet on the faltering U.S. economy earlier this month by agreeing to acquire Countrywide Financial Corp., the largest U.S. mortgage lender, for about $4 billion in stock. Countrywide has dropped 36 percent in New York trading since the takeover was announced as investors speculate that Bank of America may seek better terms or abandon the deal.

Countrywide would give Bank of America a 25 percent share of U.S. mortgage originations, Lehman Brothers Holdings Inc. analyst Jason Goldberg wrote in a Jan. 11 report to clients. Almost two-thirds of Countrywide's loan originations in 2007 came from mortgage brokers and other third parties, a practice that Lewis has said Bank of America expects to curtail.

The corporate and investment bank lost $2.76 billion, compared with a profit of $1.4 billion a year earlier, and earnings at the consumer and small-business banking unit declined 28 percent to $1.87 billion. Lewis has scaled back investment banking by cutting 1,150 jobs since October and putting the hedge-fund brokerage unit up for sale.

First Drop Since 2001

Investment banking isn't Ken Lewis's core competency and he doesn't need it, says Bruce Foerster, a former Lehman Brothers managing director who's now president of the South Beach Capital Markets advisory firm in Miami.

Bank of America's total fourth-quarter revenue fell 31 percent to $12.7 billion, while non-interest costs rose 15 percent to $10.1 billion. Return on equity, a gauge of how effectively the company reinvests profit, declined to 11.1 percent for the year from 16.3 percent in 2006.

Full-year earnings dropped for the first time in Lewis's tenure since the 60-year-old CEO succeeded Hugh McColl Jr. in 2001, with net income sliding 29 percent to $15 billion.

Wachovia's fourth-quarter earnings were the lowest since 2001 after $1.7 billion of writedowns, including $1 billion for subprime mortgage-related holdings. The company's corporate and investment bank had a loss of $596 million after the costs.

Golden West

The continued turmoil in the capital markets and the dramatic change in the credit environment diminished our fourth- quarter results substantially, Thompson said in the statement.

Fourth-quarter revenue fell 17 percent to $7.2 billion. Return on equity was 0.28 percent, down from 13.1 percent a year earlier. The net interest margin, the difference between what Wachovia pays for deposits and what it charges on loans, narrowed to 2.88 percent from 2.92 percent on Sept. 30.

Wachovia has dropped almost 45 percent in New York trading since the company acquired Golden West Financial Corp. for $24.6 billion in October 2006 just before the housing market peaked. Since then, U.S. home sales slumped 21 percent to the lowest in 26 years.

They've got a tiger by the tail in Golden West and I don't think they know what to do, said Nancy Bush, an independent bank analyst in Aiken, South Carolina, who has a hold rating on Wachovia.