Related article: Banks Hoard Cash as Credit Card Defaults Rise
“We have to be prepared that it gets a lot worse,” J.P. Morgan chief executive Jamie Dimon said about the overall economic outlook.
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Oct. 21 (Bloomberg) — Bank of America Corp., the largest U.S. consumer bank, lost money in its credit-card unit for the first time since its January 2006 purchase of MBNA Corp. as more borrowers missed payments amid the slowing economy.
Card services, which includes unsecured loans, lost $373 million in the third quarter, compared with a profit of $1.04 billion in the same period last year, the Charlotte, North Carolina-based company said today in a regulatory filing. Defaults on cards, consumer loans and home mortgages contributed to a 47 percent decline in operating profit at the consumer and small-business division.
Bank of America provided more details on its third-quarter results today, two weeks after reporting a 68 percent decline in profit. Those earnings, released early as the bank announced plans to raise $10 billion by selling common shares, were worse than analysts expected. The world’s biggest financial companies have disclosed $661 billion in losses and raised $634 billion in fresh capital.
“Credit cards have typically been among the most profitable parts of Bank of America’s business,” said Jim Campen, executive director of Americans for Fairness in Lending, a Boston-based nonprofit that studies the credit card industry. “As we enter the biggest financial crisis since the Great Depression, more people aren’t going to be able to pay their credit cards.”
Consumer Unit
The consumer division, which contributed 55 percent of the bank’s profit in the first nine months of this year, earned $1.2 billion in the quarter ended Sept. 30, compared with $2.3 billion a year earlier.
Losses on credit cards rose to $3 billion, reflecting a loss rate of 6.4 percent. That compared with 5.96 percent in the quarter ended June 30 and 4.67 percent in the third quarter of 2007.
The $35 billion purchase of MBNA made Bank of America the largest U.S. credit-card issuer at the time. For the first nine months of this year, Bank of America earned $720 million in card services, compared with profit of $3.7 billion for all of last year and $5.7 billion in 2006.
Credit-card lenders are facing “an exceptionally challenging period” as the U.S. unemployment rate climbs, limiting borrowers’ ability to repay loans, Moody’s Investors Service said in an Oct. 16 report. “The uncertainty and tempo of the turmoil will test even the stalwarts’ ability to adapt.”
Jobless Rate
The credit-card industry’s default rates are “all but certain” to surpass post-recession peaks reached in 2003, Moody’s said. Unemployment may rise until the fourth quarter of 2009, pushing the default rate to a peak of about 8.5 percent from 6.82 percent in August, Moody’s said.
American Express Co., the biggest U.S. credit-card company by purchases, said yesterday profit in the company’s U.S. card business dropped 59 percent to $244 million in the third quarter.
U.S. employers cut staff by the most in five years last month, pushing the jobless rate to 6.1 percent, according to the Labor Department. Borrowing by U.S. consumers fell $7.9 billion in August, the biggest drop since the Federal Reserve began tracking the figures in 1943.
Bank of America’s mortgage, home equity and insurance services unit lost $162 million in the quarter compared with profit of $30 million a year earlier. The latest results included Countrywide Financial Corp., the largest U.S. mortgage lender, which was acquired on July 1. The bank is expected to complete its purchase of Merrill Lynch & Co., the world’s largest securities brokerage, at the end of this year.
Future Losses
The bank raised its allowance for expected loan losses by almost $2 billion during the quarter, including $700 million for unsecured loans to consumers, $600 million in credit cards and $100 million in automobile dealership financing.
The company said its corporate and investment bank earned $533 million, compared with $90 million a year earlier. Profit from business lending and treasury services overcame a $693 million loss from the bank’s capital markets and advisory services unit, which suffered from writedowns of securities backed by mortgages and leveraged loans.
The bank’s wealth and investment management unit earned $67 million, down 88 percent. Bank of America took a $313 million charge related to buying back auction-rate securities from 5,500 individual clients, businesses and charities. Assets under management declined 21 percent in the past year to $564 billion, partly reflecting declining stock market valuations.
Bank of America dropped 43 cents to $23.97 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have declined 42 percent this year.
To contact the reporters on this story: David Mildenberg in Charlotte at [email protected]; Andrew Frye in New York at [email protected].
Last Updated: October 21, 2008 16:45 EDT
By David Mildenberg
Source: Bloomberg