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Bank of America net falls on credit losses

NEW YORK (Reuters) - Bank of America Corp BAC.N, the largest U.S. retail bank, posted a 77 percent decline in quarterly profit on Monday, as a growing number of consumers and real estate developers failed to repay loans.

A taxi speeds past a Bank of America branch in New York's Times Square January 11, 2008. REUTERS/Brendan McDermid

Profit dropped for a third straight quarter and slid more than analysts expected, dragged down by what Chief Executive Kenneth Lewis called a “litany of negative issues,” including more than $5 billion of write-downs and credit-related costs.

Bank of America said the housing market will remain weak all year, as credit problems once concentrated there spread into other areas such as credit cards.

The bank also quintupled the amount it set aside for bad loans to $6.01 billion and said the economy might grow little or shrink this quarter.

“It would be too early to strike up the band and sing ‘Happy Days Are Here Again,’” Chief Executive Kenneth Lewis said on a conference call.

First-quarter net income fell to $1.21 billion, or 23 cents per share, from $5.26 billion, or $1.16, a year earlier. Results included a $776 million pre-tax gain from credit card network Visa Inc's V.N initial public offering last month.

Excluding merger costs, profit was 26 cents per share, below the average analyst forecast of 45 cents, according to Reuters Estimates. Net revenue dropped 6 percent to $17 billion, but topped the average $16.33 billion projection.

The Charlotte, North Carolina-based bank, the nation's second-largest by assets, still expects to complete its roughly $4.1 billion purchase of Countrywide Financial Corp CFC.N, the largest U.S. mortgage lender, in the third quarter.

In midday trading, Bank of America shares were down 95 cents, or 2.5 percent, at $37.61.

Results followed weak earnings reported last week by rivals such as Citigroup Inc C.N, JPMorgan Chase & Co JPM.N and Wachovia Corp WB.N and Washington Mutual Inc WM.N.

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The $6.01 billion set aside for bad loans stemmed in significant part from credit costs in home equity, small business and home builder portfolios.

Bank of America added $3.29 billion to its reserves for credit losses. Net charge-offs nearly doubled to $2.72 billion and nonperforming assets nearly quadrupled to $7.83 billion.

“Credit was a lot worse than expected,” wrote Jeff Harte, an analyst at Sandler O’Neill & Partners LP. “Management added meaningfully to reserves, but this may be a necessary evil.”

The bank said credit card losses in particular were rising in areas hit hard by housing troubles, including Arizona, California, Florida and Nevada.

“Credit card borrowers are feeling some of that strain,” Chief Financial Officer Joe Price said in an interview. “It’s most acute in states with the greatest home price depreciation, although you see some stress across the nation where you have impact from the economic slowdown.”

Results also included write-downs of $1.47 billion for collateralized debt obligations and $439 million for loans to fund leveraged buyouts. Trading losses declined to $1.31 billion from $5.15 billion from the fourth quarter.

Bank of America’s Tier-1 capital ratio, a measure of its ability to cover losses, rose to 7.51 percent from the fourth quarter’s 6.87 percent after the bank sold $12.9 billion of preferred stock last quarter. Regulators say 6 percent signals a “well-capitalized” bank.

Moody’s Investors Service downgraded Bank of America debt to “Aa2” from “Aa1” and assigned a “negative” outlook. It cited the bank’s “relatively weak capital position” and risks tied to Countrywide, mortgage and home equity exposure, and CDOs.


“We have not changed our philosophy” about the bank’s $2.56 per-share annual dividend, but could review it if the environment got “noticeably worse,” Lewis said.

The bank has raised its dividend for 30 straight years. Among rivals to lower their dividends in 2008 are Citigroup, Wachovia, Washington Mutual and National City Corp NCC.N.

Price said earnings this year should take an “upward trajectory” from the first quarter. He said results were weaker than the bank expected in January, when Lewis had said 2008 profit should top $4.00 per share.

Profit in consumer and small business banking fell 59 percent to $1.09 billion. The corporate and investment bank saw profit fall 92 percent to $115 million.

In wealth and investment management, profit fell 54 percent to $228 million, hurt by a $220 million loss to prop up some money market funds in its Columbia Management unit.

Results reflected the bank's $21 billion purchase of ABN AMRO Holding NV's AAH.AS LaSalle Bank on October 1.

The U.S. Federal Reserve on Tuesday is holding the first of three public hearings concerning Bank of America’s planned purchase of Countrywide. Tuesday’s hearing is in Chicago and the Fed scheduled hearings for April 28 and 29 in Los Angeles.

Bank of America ended the quarter with 6,148 branches in the United States and $1.74 trillion of assets. Through Friday, its shares had fallen 7 percent this year compared with an 8 percent drop in the Philadelphia KBW Bank Index .BKX.

Editing by Maureen Bavdek/Andre Grenon