Monday, April 20, 2009

Credit markets worsening, says BoA chief; investors flee for safety as Dow falls 200 points

Even though Bank of America reported a nearly $3 billion profit for the first quarter, its CEO scared the hell out of the financial markets today by saying credit markets will worsen with many more bad loans mounting.

Troubled loans, or nonperforming assets for BoA, increased to $25.7 billion from $7.8 billion a year ago.

The Dow was down more than 200 points by midday, and a new group of analysts are starting to speak out that the current Bear market rally does not have the economic data to sustain it. One analyst said the coming fall in the value of equities will be more severe due to the current run up.

Easy come. Easy go.

Investors are starting to believe that the banks cannot sustain their first quarter profitability as the other shoe is going to drop in their home lending portfolios with ARMs coming due in giant housing markets such as California.

Credit markets are not going to thaw or will simply refreeze. Nashville Mayor Karl Dean has picked a hell of a time to try to sell a $600 million convention center project in the credit markets.

AP reports:

Bank of America warned of worsening loan default problems Monday even as it posted a first-quarter profit of $2.81 billion.

Investors concerned about the banking industry's health sent financial stocks and the overall market sharply lower.

Although Bank of America said higher revenue from the purchase of Merrill Lynch helped offset a surge in credit costs, it took a hefty $13.4 billion provision for credit losses during the first three months of the year.

The bank's stock [BAC 8.78 -1.82 (-17.17%) ] fell sharply as the overall stock market slid.

Although last week Wall Street was happy with better-than-expected results from JPMorgan Chase [JPM 31.37 -1.89 (-5.68%) ], Goldman Sachs Group [GS 118.64 -1.96 (-1.63%) ] and Citigroup [C 3.06 -0.59 (-16.16%) ], banking companies generally benefited during the quarter from unusually strong bond trading, a trend not expected to continue while loan problems persist.

Charlotte, N.C.-based Bank of America reported a similar performance during the first quarter.

"Like it or not, capital markets is now a core business for Bank of America, and that has more volatile returns than other businesses," said Celent banking analyst Bart Narter. "Bank of America is no longer exclusively a retail bank and there can be more fluctuations."

Bank of America earned $2.81 billion after paying preferred dividends, or 44 cents per share, compared with a profit of $1.02 billion, 23 cents per share, in the year ago period. Analysts surveyed by Thomson Reuters expected profit of 4 cents per share.

Troubled loans, or nonperforming assets, increased to $25.7 billion from $7.8 billion a year ago. The bank also lost $1.8 billion on card services, after posting a profit a year ago.

"Credit is bad and we believe credit is going to get worse before it will eventually stabilize and improve." Lewis said during a conference call with analysts, noting that the bank continues to face challenges. "Whether that turn is later this year or in the first half of 2010, I'm not going to hazard a guess."

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