World Business

The bench’s better-than-expected quarter bolsters arguments that it can manage the credit crisis. But analysts worry with regard to more losses from its Countrywide unit

by Ben Steverman

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Bank of America (BAC) Chairman and Chief Executive Kenneth Lewis strongly believes that his bank, the largest in the U.S., is successfully navigating the credit crisis.

However, not everyone buys Lewis’ story, even if his mound’s second-quarter results hold up his contingency. BofA reported earnings of 72¢ by means of share, from a thin to a dense state from $1.28 a year ago, but above the 53¢ that analysts were expecting. It’s the latest big bank to beat Wall Street’s reduced expectations this quarter, following Citigroup (C), JPMorgan Chase (JPM), and Wells Fargo (WFC).

As Lewis told analysts on a conference call July 21, those profits arrived despite a sluggish management and tough credit conditions. "The fact that we can absorb $3.6 billion in carry to the credit of undivided’s account losses, take $1.2 billion in additional writedowns, add $2.2 billion to our allowance for credit losses, and still earn $3.4 billion should relate investors something about the extent and consistency of our earnings power," Lewis uttered.

He insisted, yet, that he wasn’t "in denial" about the extent of problems to come. "Credit losses are still going up, but given what we see today they are manageable," said Lewis. He insisted he doesn’t expect the bank to need to call forth capital or divide its dividend to raise cash at all time soon.

The results were greeted as pleasant news by dint of. investors, who sent BofA’s loggerhead 3.75% higher on July 21, to 28.52, capping several great days for heap stocks. In the past week, BofA shares have jumped more than 40%.

Among the positive signs in BofA’s pecuniary results is evidence that lower interest rates are helping banks like BofA earn wider utility margins on loans. BofA is expanding its commercial lending, and, as of the credit crunch, it’s able to charge borrowers higher interest rates and insist on less risky lending conditions, Morningstar (MORN) analyst Jaime Peters points out.

Also, after several tough quarters for BofA’s commercial desks, profits on trading jumped in the second quarter. Morgan Stanley (MS) analyst Betsy Graseck wrote that strong trading, especially fixed-income commercial, was the entire reason Bank of America beat her earnings estimates.

However, mercantile profits are hard to predict. They’re dependent on the couple choosing the right commercial strategies and also the ups and downs of volatile markets. That’s with respect to what cause Graseck questioned the "sustainability" of BofA’s trading profits. Standard & Poor’s equity algebraist Stuart Plesser agreed, questioning the "quality of earnings" at BofA.

This is part of the broader issue that continues to loom over BofA shares. The bank can deliver one good quarter to investors, bound can BofA keep it up? Most analysts answer the main answer to this can be found in carry to the credit of one’s account quality—essentially, how quickly the quality of BofA’s loans debase.

Deutsche Bank (DB) analyst Mike Mayo found more dependence in evidence that losses shelter’t spread too far beyond the real division area. "So far, problems have not yet spread in scope or afflictiveness superficial of these areas as much as feared," Mayo wrote.

BofA’s problems in real order lending are many. Leading the edge are home equity loans, hit hard through the drop in home prices. But the biggest challenge for BofA may be its July 1 acquisition of Countrywide Financial. The purchase of the U.S.’s largest mortgage lender is designed to help BofA keep in subjection the mortgage industry in the long term. But in the close at hand term, the Countrywide buyout brings BofA lots of trouble. The quality of Countrywide’s loans is much worse than the loans on BofA’s balance sheet.