Bank of America expects loss after settlement
NEW YORK/CHARLOTTE, North Carolina (Reuters) - Bank of America Corp said it expects to take more than $20 billion of charges after settling with mortgage bond investors, resulting in a second-quarter loss.
The sum, which includes an $8.5 billion settlement, removes a question mark that had been hovering over the bank since October, and Bank of America's shares rallied.
"Investors can now start attaching a number to these unknowns and what they will cost the bank. With the swipe of a pen, they've dealt with a large chunk of these issues," said Paul Miller, a banking analyst with FBR Capital Markets.
Chief Executive Brian Moynihan is working hard to move past the mortgage crisis, and this settlement is the latest step in that process.
The bank was hit hard in part because prior CEO Ken Lewis bought mortgage lender Countrywide Financial in 2008, just as the housing market bubble was bursting.
The settlement, more than what BofA has earned since the financial crisis began in 2008, could eat into capital levels and prevent the bank from boosting its dividend or buying back meaningful numbers of shares for years, analysts said.
Other banks, including JPMorgan Chase & Co and Wells Fargo & Co , could now face pressure to resolve similar allegations, and new lawsuits may arise, analysts said.
Bank of America said that excluding items such as the settlement, second-quarter earnings could top the average Wall Street estimate.
The bank can likely absorb the hit to its capital from the charges, analysts said. Marty Mosby of Guggenheim Securities said the bank has $67 billion in excess capital under current rules -- and $26 billion under new proposed industry rules.
During a conference call announcing the settlement, BofA Chief Financial Officer Bruce Thompson said the bank projects it can replace the capital with earnings through the next two quarters.
Bank of America settled with a group of investors, including BlackRock Financial Management , who alleged that bonds they bought from Countrywide Financial were packed with mortgages that should never have been sold. Countrywide was once the largest U.S. mortgage lender.
The investors also said Bank of America, which is collecting payments on the mortgages, was not doing enough to maximize the collections. Part of the settlement includes improvements in gathering payments, known as servicing.
"This settlement is likely to embolden the other plaintiff's lawyers to go after other banks and look for similarities in their securitizations," said Nancy Bush, a veteran bank analyst.
CHEVY VEGA
The settlement is the third in six months for BofA, following similar deals with government-backed mortgage investors Fannie Mae and Freddie Mac, and insurer Assured Guaranty Ltd .
In January, the bank announced plans to settle with Fannie and Freddie for $2.8 billion. In April, BofA disclosed a $1.6 billion settlement with Assured Guaranty.
Last fall, CEO Moynihan declared the bank would fight any such repurchase requests. He described talks with investors over claims as "hand-to-hand combat" and said some investors were looking for a better deal through repurchases.
Their attitude, Moynihan said, was "I bought a Chevy Vega but I want it to be a Mercedes."
"We're going to protect shareholders against that," he said during the company's third-quarter earnings conference call on October 19, 2010.
But Moynihan struck a different tone on Wednesday, saying the company was looking to put repurchase woes behind it in terms that would be favorable to BofA shareholders.
"Our job is to eliminate risks to allow this company to go forward," he said, dismissing suggestions from analysts that the bank did not put up a fight in the settlement process.
Bank of America said it expected to post a loss of 88 cents to 93 cents per share for the second quarter.
Excluding special items, it expects earnings of 28 cents to 33 cents a share. Analysts' average forecast was 28 cents, according to Thomson Reuters I/B/E/S.
The bank said charges would include the $8.5 billion settlement with bond investors, $5.5 billion to cover expected payments to other mortgage bond investors, and $6.4 billion in other charges linked to mortgages.
The $8.5 billion settlement covers a lawsuit filed by 22 institutional investors, including BlackRock, Pacific Investment Management Co and Western Asset Management.
All investors in the securities will share in the settlement, and the 22 institutional investors will not receive any special benefits, according to a statement from law firm Gibbs & Bruns, which represented the institutional investors.
Shares of Bank of America were up 3 percent to $11.14 in midday trading.
(Reporting by David Henry, additional reporting by Brenton Cordeiro in Bangalore and Lauren Tara LaCapra and Dan Wilchins in New York; Editing by Lisa Von Ahn and John Wallace)