Bank of America Corp, the second-largest U.S. bank, said on Tuesday it expects to write down $3 billion of debt in the fourth quarter as fallout from the nation's housing slump deepens.
Shares nevertheless rose, as investors gained confidence the bank and its rivals can withstand further turmoil even if credit market liquidity fails to improve and more homeowners, as expected, slide into foreclosure.
The pretax loss stems from collateralized debt obligations, including those tied to subprime mortgages, and may grow if market conditions worsen, Chief Financial Officer Joe Price said at a Merrill Lynch & Co banking conference.
Bank of America also expects to set aside $600 million to help money market mutual funds exposed to risky debt maintain the $1 per share net asset value that all such funds try to keep. It is also reserving $300 million for a troubled investment, and setting aside more money for other housing-related losses, including to homebuilders.
Price nevertheless called the losses manageable, while cautioning that capital markets should remain turbulent into 2008.
The losses are not only manageable for the bank, but were long ago discounted by investors, said Marshall Front, who oversees $800 million at Front Barnet Associates LLC in Chicago, including Bank of America shares. Unless something enormous and unforeseen happens, major, diversified well-capitalized banks can handle these losses.
Shares of Bank of America rose $1.93, or 4.4 percent, to $45.90 in afternoon trading. They began the year at $53.39.
INDUSTRYWIDE, $40 BILLION
Bank of America joined Citigroup Inc, Morgan Stanley Wachovia Corp and other banks in projecting large fourth-quarter write-downs for exposure to mortgages and other debt that investors are no longer willing to buy.
With the significant deterioration that we've seen ... it does make these things difficult to value, Price said.
Citigroup said it might write off $8 billion to $11 billion, while Morgan Stanley projected $3.7 billion and Wachovia $1.1 billion. Merrill Lynch suffered an $8.4 billion write-down in the third quarter. Industrywide write-downs so far total well over $40 billion.
Analysts, on average, had expected Bank of America to post a fourth-quarter profit of $1.10 per share on revenue of $18.82 billion, according to Reuters Estimates. The $3 billion pretax loss equals roughly one month of profit. Citigroup analyst Keith Horowitz had projected a $3.3 billion write-down.
Among other executives at the Merrill Lynch conference, Goldman Sachs Group Inc Chief Executive Lloyd Blankfein said his Wall Street investment bank didn't expect significant asset write-downs.
Meanwhile, JPMorgan Chase & Co Chief Executive Jamie Dimon said we think we're fine, as he discussed the third-largest U.S. bank's subprime and CDO exposures.
Shares of Goldman and JPMorgan rose more than 8 percent and 6 percent, respectively, in afternoon trading.
Price said some CDOs that Bank of America is writing down are exposed to subprime mortgages, which go to people with poor credit. The bank has not offered such home loans since 2001.
The bank also expects to set aside $500 million to help money funds exposed to so-called structured investment vehicles preserve a $1 share price, and avoid breaking the buck. Some SIVs have struggled as market liquidity deteriorated.
In addition, Bank of America expects to set aside $300 million for a troubled mezzanine investment, Price said.
Mezzanine financing is often used in buyouts. A bank spokesman declined to elaborate.
The bank plans to resume stock buybacks no sooner than July 2008 as it rebuilds capital levels, he said.
Bank of America's losses come after a third quarter when profit from corporate and investment banking fell 93 percent, depressing overall earnings by 32 percent.
Chief Executive Kenneth Lewis announced 3,000 job cuts, and ordered a strategic review of the corporate and investment banking unit that should be completed by early 2008.