GOIH Capital Markets: Investment Banking News

NEW YORK -- Bank of America Corp. posted a 32% drop in third-quarter net income amid a dismal performance by its investment bank and higher reserves to cover potential bad loans.
The combination of more than $1.4 billion in trading losses in its investment bank and about $2 billion in provisions for credit losses pushed the Charlotte-based bank's third-quarter profits down to $3.7 billion, or 82 cents a share, from $5.42 billion, or $1.18 a share, a year earlier. Revenue fell 12% to $16.3 billion. It was the first time since late 2005 that Bank of America has failed to boost its year-over-year profits.

Bank of America's investment bank was at the center of the quarter's weakness. The trading losses, in addition to about $247 million in write-downs on the bank's portfolio of leveraged loans, essentially wiped out the division's profits, which fell 93% to $100 million. The losses were concentrated in credit and structured products. The investment bank also suffered from a slowdown in underwriting fees.
Bank of America was hardly alone in suffering from poor investment-banking results in the third quarter. Across Wall Street, banks took multibillion-dollar hits due to the diminished values of leveraged loans and mortgage assets that they couldn't get off their balance sheets, and in some cases their traders struggled to navigate choppy credit and equity markets.

Joe Price, Bank of America's chief financial officer, said that the trading losses were largely a result of hedges that didn't work as intended. Most of the losses stemmed from trades the bank was executing on behalf of clients, although the bank's traders also placed a "couple" of their own bad directional bets, Mr. Price said.
In Bank of America's giant consumer unit, which includes the nation's biggest credit-card business and bank-branch network, revenue was up 6.2% to $11.99 billion and earnings dropped 16% to $2.45 billion. Earnings were hurt by higher managed credit costs.
But weakening credit quality took a toll, as the bank was forced to set aside more funds to cover bad loans. Net charge-offs held basically steady, but non-performing assets -- troubled loans that could turn into charge-offs -- jumped to $3.37 billion, or 0.43% of loans, from $2.39 billion, or 0.32%, in the second quarter.