Lewis Calls Merrill, Countrywide Stars, Expects Gains
Feb. 26 (Bloomberg) -- Bank of America Corp.’s purchases of Merrill Lynch & Co. and Countrywide Financial Corp. are paying off as other parts of the company struggle, Chief Executive Officer Kenneth Lewis said.
Lewis, speaking yesterday in a Bloomberg Television interview from his Charlotte, North Carolina, headquarters, said Merrill will be “a thing of beauty” over the long term. Merrill, the New York-based securities firm, posted losses of almost $35 billion during the past two years, including $15.8 billion in the fourth quarter.
“The two stars, the ones that are doing the best are Merrill Lynch and Countrywide,” Lewis said. “This powerful corporate bank, coming together with our investment bank -- and then Merrill Lynch on top of it -- everything we thought is playing out.”
The 61-year-old banker’s views on the acquisitions counter criticism from bank analysts such as Stuart Plesser of Standard & Poor’s Corp., who contend the bank overpaid when it agreed in July to buy Countrywide and in September to acquire Merrill. Bank of America’s $4 billion profit last year contrasts with Citigroup Inc. and other major financial institutions that posted multibillion dollar losses, Lewis said.
“We’ve had one loss in one quarter in 17 years,” Lewis said. “We should not be painted with that same brush and for some reason, we have and it’s been really unfortunate.”
Revenue Expectations
Lewis said Bank of America expects revenue to top $100 billion this year, with Merrill and Countrywide poised to become key profit contributors. Merrill had annual operating profit of $3.7 billion to $7.8 billion between 2001 and 2006, while Countrywide had profit of $3.6 billion to $4.3 billion between 2003 and 2006 as the housing market soared. Bank of America is cutting more than $7 billion in annual expenses from the mergers, further boosting profit, Lewis said.
“I don’t think Countrywide will ever return to those kinds of profits,” said Plesser, an equity analyst at Standard & Poor’s in New York who has a “hold” rating on the bank. “There was a lot of securitization going on and both Countrywide and Merrill were leveraging up.”
Five months after he agreed to buy Merrill and cap a four- decade career at the nation’s largest bank, Lewis is under pressure from investors and Congress to bolster his share price and increase lending. Lewis, the CEO since 2001, said in internal memos and a letter to clients in recent days that Bank of America, the recipient of $45 billion in government aid, doesn’t need further help.
‘Off My Chair’
“I almost fell off my chair” after hearing Lewis’s comments, Michael Holland, who oversees $4 billion as chairman and founder of Holland & Co. in New York, told Bloomberg TV. Holland doesn’t hold Bank of America shares.
Bank of America gained 9.1 percent to $5.16 in New York Stock Exchange composite trading yesterday. The shares have declined 63 percent this year.
Industry statistics show the company is gaining market share against Wall Street rivals, Lewis said.
“Countrywide is ripping right now because we’ve got a refinance boom going on,” said Anton Schutz, president of Mendon Capital Advisors Corp., a Rochester, New York investment firm that owns Bank of America shares. “And for Merrill there’s a pretty good fixed-income market right now.”
The U.S. government’s plan to use “stress tests” to review balance sheets of the 19 biggest banks won’t pose a problem, Lewis said. It is “a stress test on top of a stress test,” he said in the interview.
Reducing Assets
The bank expects to boost its ratio of tangible common equity to assets to 3 percent by the end of 2009 by reducing assets or selling some business units that don’t fit its strategy, Lewis said. The ratio was 2.68 percent at the end of last year.
“We may over time sell more of CCB, but the point with China Construction Bank is that it is a strategic partner and we always want to have a relatively substantial stake,” Lewis said.
Bank of America may sell Merrill’s First Republic private banking unit, the Wall Street Journal reported today, citing unidentified people familiar with the situation. Merrill acquired First Republic Bank in 2007 for about $1.8 billion.
Bank of America had a loss of $1.79 billion in the fourth quarter, excluding the Merrill losses. The company cut its quarterly dividend to 1 cent from 32 cents on Jan. 16 to preserve capital. Its stock traded at $33.74 before the Merrill deal was announced on Sept. 15.
Merrill Deal
Two former CEOs of Bank of America praised Lewis’s decision to buy Countrywide last year and said the government forced the bank to purchase Merrill. Countrywide positions the bank “to take advantage of one of the few bright spots in the entire industry right now: the surging market for mortgage financing,” Hugh McColl Jr. and Thomas Storrs said yesterday in the Charlotte Observer.
Lewis said the bank was “strongly advised, with an emphasis on strongly,” not to walk away from the Merrill deal. He said the government told Bank of America, “‘We will work with you. We know this is a Merrill issue.’ I was told, ‘We view you as a strong company that has done the right thing in a difficult situation,’ and that, ‘the money will be there for you.’”
Lewis said he looks forward to talks with New York Attorney General Andrew Cuomo, who is investigating Merrill’s $3.6 billion bonus payments to employees in December, just before the merger was completed. “When we get the facts out and we show what we’ve done and how we did it, we’ll be fine,” Lewis said.
To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net
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