Bank of America stocks slump on warning

Thursday, Dec. 7, 2000 | 11:09 a.m.

SUN STAFF AND WIRE REPORTS

NEW YORK -- Stock prices slumped Wednesday after an explosive rally on Tuesday that propelled the Nasdaq composite index to its biggest one-day gain ever.

Traders said a modest early pullback turned into a substantial decline after Bank of America warned that its profits would miss Wall Street's expectations, its second downward revision in a month.

The Dow Jones industrial average fell 234.34 points, or 2.2 percent, to 10,664.38.

The earnings warning from Bank of America squelched an early rally in financial stocks. Banks and brokerage firms had been buoyed by Tuesday's signal from Alan Greenspan, the Federal Reserve chairman, that the central bank may cut short-term interest rates early next year. But investors were unnerved after Bank of America projected fourth-quarter profits of 85 to 90 cents a share because of bad loans, instead of the $1.17 a share that Wall Street had been expecting.

Shares of Charlotte, N.C.-based Bank of America Corp., the No. 2 bank in Nevada, fell nearly 8 percent Wednesday after its profit warning.

Besides the fourth-quarter warning, B of A also said it expects earnings per share in 2001 to range from $5.10 to $5.20. Before Wednesday's announcement, analysts were expecting $5.46.

Officials with the financial giant blamed high credit costs and nonperforming domestic corporate loans for the disappointing earnings forecast.

"These realistic projections are based on the deterioration of credit quality and slowdown in the capital markets activity," said spokeswoman Ann McNeish. "We do indicate that nonperforming assets will be about 20 percent above the third-quarter level."

Investors were not pleased by the news, sending shares down $3.19 to $38 on the New York Stock Exchange.

Last month, the company disclosed that one large loan had been placed on nonperforming status and that a significant portion of it will appear as a one-time charge.

Meeting with investors in New York Wednesday, B of A Vice Chairman and Chief Financial Officer James H. Hance Jr. said the company estimates fourth quarter net charge-offs and provision expense at about $1.1 billion.

Hance said Bank of America is budgeting for significantly higher loan losses and credit costs in 2001 but that net charge-offs are not expected to exceed the company's target.

The bank's warning came as banking regulators voiced growing concern about credit quality at U.S. banks.

"The next several quarters are going to be rocky from a credit point of view," said Michael Plodwick, a bank analyst at UBS Warburg LLC.

The Federal Deposit Insurance Corp. said third-quarter loan loss reserves at commercial banks were up 26 percent, or $1.4 billion, from a year earlier. Earmarking funds for potential losses ate up 7.3 percent of the banking industry's net operating revenue in the first nine months, compared to 6.3 percent in the year-earlier period.

"We're not at crisis levels, but we're going from too-good-to-be-true levels to normal levels" of problem loans, said James Ellman, a portfolio manager at Merrill Lynch Investment Managers, who oversees more than $700 million. "It's happening more quickly than anyone expected."

First Union also warned of higher loan losses last month. Bank One also anticipates higher losses if economic growth stalls, Chief Executive James Dimon told investors Wednesday at a Goldman Sachs conference in New York. Bank of America made its announcement at the same conference.

Separately, B of A said it won't renew $20 billion of loans that come due in the next two years.

The move escalates the bank's effort to muscle in on the more profitable securities businesses dominated by investment banks such as Morgan Stanley Dean Witter & Co. and Goldman Sachs Group Inc.

"We are not interested in renting out our balance sheet to clients who are not delivering us additional fee-based business," Hance told investors at the Goldman Sachs-sponsored conference. "The returns on holding a lot of these assets is not sufficient."

Among borrowers that may be squeezed is Dominion Resources Inc. The owner of Virginia's largest utility has a $1.75 billion one-year back-up line due Jan. 21. Bank of America is one of the arrangers on the line.

Qwest Communications International Inc., the No. 4 U.S. long-distance telephone company, has a $1 billion one-year line arranged by Bank of America that comes due on March 8 next year.

Raytheon Aircraft Credit Co. has a $1.25 billion one-year line arranged by Bank of America that expires March 9.

Bank of America is reducing its dependence on lending as securities firms are resisting pressure from clients to extend low-margin credit lines in exchange for investment banking business. The traditional lenders have sought to exploit the conflict to win more investment-banking work, which generates bigger profits than their usual loans and is growing faster.

While the amount of stock sales B of A has arranged in the United States increased this year to about $2.5 billion from $1.8 billion in 1999, it still ranks only No. 13. It has advised on $80 billion of global mergers this year, up more than fourfold from last year, yet it ranks No. 19.

The bank also said it plans to bundle home loans made through its mortgage subsidiary and sell them as securities, another move it says will help profits.

The company will keep mortgages made through its branches, as well as home equity loans, on its books.