updated 4/21/2008 4:41:02 PM ET 2008-04-21T20:41:02

If the 77 percent drop in Bank of America’s first-quarter earnings is any indication, the economy may have a long way to go before it works out the problems that began with the subprime mortgage crisis.

The nation’s largest retail bank on Monday quintupled the money it set aside for loans that go sour, and hinted that consumer weakness and the housing slump means that things will not get better for it, or for the economy, for some time.

“I think first it would be too early to strike up the band and sing happy days are here again,” Chief Executive Ken Lewis said on a conference call with analysts during which he said the situation in the capital markets was particularly tough in March.

Like many other banks, Charlotte-based Bank of America is besieged on two sides. Its bread-and-butter banking business is ailing because with home prices flagging, more people and real estate developers are failing to repay their loans.

The credit crisis is also hobbling the value of many bank investments.

Last week, crosstown rival Wachovia Corp. said it lost $393 million in the first quarter because of bad credit and tumultuous financial markets. Washington Mutual Inc. lost $1.1 billion.

Wells Fargo & Co.’s profit fell 11 percent, JPMorgan Chase & Co.’s profit slid 50 percent, and Citigroup Inc. posted a loss of $5.1 billion.

“It still remains unclear what ramifications the housing downturn, higher energy costs and subprime crisis will ultimately have and how long the downturn will persist,” Chief Financial Officer Joe Price said on a conference call with analysts.

If the economy doesn’t turn around — and few expect it will — more troubles could loom for Bank of America. It’s set to acquire distressed subprime mortgage lender Countrywide Financial Corp. later this year, and it holds the nation’s biggest credit card business and retail branch network.

“Earnings for the first half remain questionable and, at this stage, the focus must be on positioning the bank for the eventual recovery of the economy,” said Walter O’Haire, senior analyst with Celent, a Boston-based financial research and consulting firm.

In January, Bank of America agreed to acquire Calabasas, Calif.-based Countrywide Financial in a deal valued at about $4 billion in stock when it was announced. Countrywide is among the dozens of mortgage lenders that have battled a spike in mortgage defaults and foreclosures.

Standard & Poor’s analyst Stuart Plesser wrote in a research note this month that the proposed acquisition of Countrywide Financial and Bank of America’s large exposure to consumer credit “increases (Bank of America’s) risk profile in a weakened consumer credit market environment.”

Financial stocks declined Monday after the bank’s poor quarterly report, while equity markets broadly were mixed as some of the earnings optimism that carried stocks to strong gains last week dissipated.

Bank of America’s shares dropped 95 cents, or about 2.5 percent, to $37.61.

Its write-downs, largely in part due to more and more people missing payments on their credit cards and home loans, led Bank of America to report a 77 percent decline in first-quarter profit of $1.21 billion, or 23 cents a share, on $17 billion in revenue. That compared with net income of $5.26 billion, or $1.16 a share, a year earlier on $18.16 billion in revenue.

Analysts on average expected a profit of 41 cents per share on revenue of $16.5 billion, according to Thomson Financial.

Lewis said he remained “concerned about the health of the consumer,” given the state of our nation’s economy.

“Consumer credit quality deteriorated substantially from the fourth quarter, particularly in home equity,” Lewis said on the conference call. “Credit quality will continue to be an issue with charge-offs at least at first quarter levels but probably higher for the rest of the year.”

Bank of America’s results included $1.47 billion in write-downs of collateralized debt obligations, a security often backed by subprime mortgage loans, and $439 million for loans to fund leveraged buyouts.

But the real damage: Bank of America’s provision for credit losses soared to $6.01 billion from $1.24 billion amid rising credit costs in the home-equity, small-business and homebuilder portfolios.

Net charge-offs, loans it doesn’t think are collectable, jumped to $2.72 billion, up from $1.43 billion a year ago, reflecting housing market deterioration and slowing economic conditions, the company said.

In the bank’s consumer unit, which includes the nation’s biggest credit card business and retail branch network, revenue rose 17 percent, while earnings dropped 59 percent due to increased credit costs.

Investment-banking profit plunged 92 percent on the write-downs as revenue fell 41 percent.

Monday’s news led Moody’s Investors Service to cut its rating on Bank of America by one notch, saying the company’s capital position has been hurt by the credit market crisis and its high dividend.

Moody’s outlook on the rating is negative, reflecting integration challenges of the bank’s pending acquisition of Countrywide, the bank’s still-big home equity and mortgage exposure, and the prospect of further capital market write-downs.

Bank of America’s key Tier 1 capital ratio, essentially a measure of a company’s cash versus its debt, fell to 7.51 percent from 8.57 percent a year ago, even as the bank raised $13 billion in fresh capital by selling preferred stock in January. However, capital generation has slowed because of the credit crisis and management’s commitment to maintain high dividends, Moody’s said.

Despite the difficult business climate for his company, Lewis said Bank of America plans to maintain its dividend — which is currently paid at a quarterly rate of 64 cents a share— unless the nation’s economy drastically worsens.

“If things got noticeably worse and our view of things was they’d continue to be worse, for a period of time, then of course we’d look at the dividend,” Lewis said, adding that the bank’s board might consider approving an offering of preferred stock before cutting its payout to stakeholders.

Lewis told analysts that for now, the bank’s dividend is staying put and that he wasn’t interested in seeking additional capital.

In recent weeks, other national banks, including National City Corp., Washington Mutual Inc., and Wachovia, have slashed dividends, raised billions in capital through share sales or from investment groups as a means of trying to survive the home mortgage crisis.

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