Bank of America Corp's (BAC.N) quarterly profit fell 63 percent as it took $5 billion of mortgage-related charges, but the bank showed signs that it is moving past its problems as it shrank the group that deals with its troubled home loans.
BofA, the second-largest U.S. bank by assets, cut 3,000 jobs in its mortgage servicing unit in the fourth quarter and said it could reduce expenses in the division by $1 billion by year-end. It also made more home loans in the quarter, with mortgage volume rising 42 percent from a year earlier as borrowers refinanced at low rates.
However, the Charlotte, North Carolina-based bank faces major questions about how it will boost revenue. Its shares were down 3.7 percent in midday trading, likely on the comparison to stronger earnings at healthier rivals, said Shannon Stemm, an analyst with Edward Jones.
"Relative to other banks, it comes back to, 'What is the earnings potential of Bank of America and where will that growth come from?'" she said, noting the bank has lost market share in recent years in areas such as mortgages and credit cards.
While BofA Chief Executive Brian Moynihan has impressed investors with his ability to generate capital faster than expected, it is unclear if he will be able to boost revenue, Stemm said. "Is he the long-term strategic guy? Probably not," she said.
The bank earned $732 million, or 3 cents a share, in the quarter, down from $2 billion, or 15 cents per share, a year earlier. Analysts' average forecast was 2 cents a share, according to Thomson Reuters I/B/E/S.
Revenue fell 25 percent to $18.7 billion, with an accounting charge related to the value of the bank's debt contributing to the decline.
But BofA executives touted efforts to gain new business, including hiring mortgage loan officers, small-business bankers and investment advisers in branches. Loans were up 2 percent from the third quarter at $907.8 billion but down 2 percent from the 2011 fourth quarter.
"We stepped up our focus on growth in the business," Chief Financial Officer Bruce Thompson said in a conference call with analysts, highlighting an increase in commercial loans, deposits and investment assets.
MORE WORK AHEAD
BofA warned on January 7 that fourth-quarter results would include a litany of one-time items, including mortgage-related charges, a $1.3 billion tax benefit, and a $700 million charge related to the value of its debt.
Charges included $2.5 billion for its share of an $8.5 billion settlement between the federal government and large banks over foreclosures and other mortgage-related expenses, and $2.7 billion for agreements with Fannie Mae (FNMA.OB) over soured loans the bank sold the finance company and for delays in processing foreclosures.
Most of BofA's mortgage troubles stem from its 2008 purchase of subprime lender Countrywide Financial. So far it has taken more than $40 billion in losses on legal settlements and requests to buy back soured loans sold to investors during the housing boom.
While it made progress cleaning up its mortgage mess, the bank still needs to finalize an $8.5 billion settlement with private mortgage investors. It also faces litigation with mortgage insurers and has been sued by the U.S. Justice Department over loans it sold to Fannie Mae and Freddie Mac (FMCC.OB). Thompson said the settlement with private mortgage investors could be wrapped up in the second quarter or early in the third quarter.
"We put a lot of risk behind us in 2012," the CFO said on a call with reporters.
In 2011, Bank of America launched a broad cost-cutting program to eliminate $8 billion in annual expenses by mid-2015. Expenses in the fourth quarter declined to $18.4 billion from $18.9 billion a year earlier.
The bank has been speeding up the downsizing of its mortgage servicing unit by selling the rights to handle loans to other mortgage companies, including a recent deal to offload servicing rights to Nationstar Mortgage Holdings (NSM.N) and Walter Investment Management Corp (WAC.A). This will allow BofA to lower expenses in the unit by more than $1 billion by year-end, Thompson said.
The mortgage servicing unit's work force fell by 3,000, or 7 percent, from the third quarter, and the bank also shed 6,000, or 35 percent, of its contractors.
The bank's reserve for bad loans fell to $2.2 billion in the fourth quarter from $2.9 billion a year earlier. Investment banking fees climbed 58 percent.
The bank's results showed it still has a ways to go to match its healthiest rivals. Wells Fargo & Co (WFC.N) made $5.1 billion in the fourth quarter, JPMorgan Chase & Co (JPM.N) $5.7 billion, and Citigroup Inc (C.N) $1.2 billion.