Summary: After settling a multibillion-dollar lawsuit with state and federal agencies, Bank of America’s profits declined due to lingering effects of the weakened economy.
According to the New York Times, Bank of America reported that its profits dropped significantly during the third quarter. The decrease was largely due to a legal charge related to its tremendous settlement with federal and state agencies.
In August, Bank of America settled civil claims related to its sale of low-quality mortgage securities for $16.65 billion.
Last year, during the same period, the bank reported profits of $2.5 billion. This year, the numbers were $168 million. Despite being a tremendous drop, the decline was not as devastating as what Wall Street analysts had predicted.
Wall Street had expected a loss of 9 cents a share, according to a Thomson Reuters survey of analysts. However, the reported loss was only 1 cent a share. Bank revenue dropped 1 percent, to $21.4 billion, from the third quarter of 2013. Analysts had predicted closer to $21.36 billion.
The cost of the massive settlement, which grew as the deal was finalized with prosecutors, accounted for most of the $5.3 billion charge. Otherwise, the bank reported decent quarterly results in its credit card and investment banking businesses.
Although the settlement with the Justice Department and other state and federal agencies is the largest the bank faced, Bank of America is still dealing with other litigation expenses from the housing bubble burst. Third-quarter results demonstrate the bank is having a difficult time recovering in an economy that is still fighting to bounce back from the 2008 financial crisis. Revenue hardly moved from one year ago and only increased 1 percent to $21.2 billion.
Much of Bank of America’s profit gains were due to cutting expenses. Aside from legal costs, overall expenses decreased, with noninterest expenses dropping 7 percent from a year earlier.
Brian T. Moynihan, chief executive of Bank of America, stated, “We remain focused on streamlining and simplifying our company and connecting customers and clients with the real economy, an approach that is paying dividends for them and for our shareholders.”
Bank of America’s numbers are often viewed as an index for consumer banking. Bank of America wound down low-quality loans and experienced lower charge offs. New loans have been made with higher-quality credit.
However, all big banks face a challenge as they attempt to grow in the consumer business, especially with the worldwide slowdown of the economy, and amidst recent concerns of the spread of the Ebola virus.
Bruce R. Thompson, chief financial officer of Bank of America, explained, “We’ve seen growth grinding forward in a 2 to 4 percent area. We are cognizant of a variety of external factors, whether they be health concerns or conflicts that are out there.”
However, growth was reported in the credit card area. 1.2 million new credit cards were issued in the third quarter by Bank of America, which was a 15 percent increase from 2013’s third quarter.
Both JPMorgan Chase, which also had to pay $1.1 billion in legal costs as part of a settlement involving foreign exchange market manipulation, and Citigroup reported increased profits on Tuesday, assisted by a recovering trade environment and lower credit losses. Wells Fargo also stated its profits increased, even as its mortgage business remained stagnant.
Photo credit: sleekmoney.com