Pressure on Bank Profits to Build in '07
>>>No fee mortgages on the way!!!!!<<<
By VALERIE BAUERLEIN
January 24, 2007; Page A3
Bank of America Corp. and Wachovia Corp. capped a mixed earnings season for U.S. banks with surges in quarterly profit that were fueled by investment banking, tight expense controls and recent takeovers. But both showed signs of the slipping credit quality and unrelenting interest-rate pressures that are likely to hurt banks throughout 2007.
The 47% jump in net income at Bank of America and 35% profit rise by Wachovia, both based in Charlotte, N.C., also underscored how much the two banks are leaning on major acquisitions and lines of business tied to Wall Street as the outlook grows murkier for loans. Wachovia's latest results were its first to include Golden West Financial Corp., an Oakland, Calif., savings and loan purchased in October for $23.91 billion, while Bank of America got a major boost from the former MBNA Corp., a credit-card issuer acquired for $34.2 billion in January 2006. Neither bank disclosed exactly how much the acquisitions added to profit.
Pressure to squeeze even higher returns from those deals is likely to intensify in coming months, because of the inverted yield curve, representing the difference between long- and short-term interest rates. Banks typically make money by borrowing at lower-cost short-term rates and lending at higher long-term rates. When the yield curve inverts, they earn less. Wachovia's net interest margin fell to 3.09% from 3.25% in last year's fourth quarter, while Bank of America saw its margin slip to 2.75% from 2.82%.
Over all, net interest margin narrowed in the fourth quarter at six of the 10 largest U.S. banks in stock-market value, and there is little optimism that a substantial rebound is around the corner. Bank of America is the second-biggest U.S. bank by market capitalization after Citigroup Inc., while Wachovia ranks fifth.
Like many other banks, Bank of America and Wachovia increased their loan-loss provision, which serves as a financial shock absorber for loans likely to go bad in the future. The increases partly reflect larger loan portfolios as a result of takeovers, but executives at both banks said they also are expecting more trouble. Bank of America's credit-card operation, the country's largest in terms of loans outstanding, has seen delinquencies climb for four straight quarters. The bank said it plans to boost its total loan-loss provision by about 20% this year.
Kenneth D. Lewis, Bank of America chairman and chief executive, said that his prediction two years ago that credit quality would return to normal levels is "finally...beginning to happen." But consumers aren't likely to face widespread problems "if you've got employment and wage growth," he added.
As part of its push to overcome the stiffest headwinds facing banks, Bank of America said it is considering expanding a pilot program offering no-fee mortgages nationwide. In the fourth quarter, a free stock-trading offer led to a 54% jump in the number of brokerage-account openings, compared with the third quarter. Tom Wurtz, Wachovia's chief financial officer, said the bank will be helped by its limited exposure to borrowers with poor credit histories and heavy concentration in growing markets on the East Coast, California and Texas.
Bank of America shares fell 33 cents to $53.32 in 4 p.m. New York Stock Exchange composite trading. Wachovia rose 38 cents to $56.65. |
