BAC is applying a strategy of not selling core assets. they are trying to
reduce expeness
reducing potentially large liabilities
selling slowly non core assets
rather than sell good core assets which will make money later. As a result of this they have lower capital ratios then Citi which has been more aggressive in selling assets.
If the environment becomes much worse they may regret this strategy. They may be forced to sell good assets at a price lower than what they could have achieved 6 months ago. Or they may be forced to raise capital from their shareholders.
If interest rates increase and expenses reduce from managing legacy assets profits (less headcount to do this job) will increase, which will increase their capital ratios.
Low rates and weak GDP are terrible for banks. They focus on cost cutting as a result. Unless focus on fees, underwriting and trading. Hopefully the latter will be drilled out of banks.
A long recession will affect earnings and hence their ability to have sufficient earning power to achieve the capital ratios demanded by Basle III.
A significant component of rep-and-warrant is what happens to home prices. So because home prices obviously reflect or impact the collateral losses that investors incur, and that's the basis upon which people look for rep and warrant.
We've assumed that 3% decline in home prices over the course of 2011. And in 2012, we assumed they're up very modestly 1% for 2012.
Friday, 19 August 2011
Fairholme BAC conference call
Number one, our core franchise continues to perform in the market, is growing market share in its core businesses. When we look at our array of businesses, they are the strongest positions that anybody has across businesses or consumers, companies and institutional investors
The second point is we continue to execute on a broad scale transformation of this company. We do that through focusing on the core strategic customer basis, selling noncore assets, and that helps our focus and also generates capital, and moving from product sales to customer-focused execution in each of our businesses
The third point is our capital levels are among the highest they've ever been in this institution's history. They're sufficient to run the company even after we took $20 billion in the second quarter, to help with the mortgages issues behind us. We have a clear path on implementing the new rules under Basel III, the new banking regulatory capital rules
The fourth point is the focus on the key issues: continuing to clean up the mortgage issues related to the Countrywide acquisition, get our operating cost down across the board, and that has to be especially true on the tough revenue and extended low interest rate environment, which isn't that favorable to some of the core banking activities, and to continue to lower the risk in our company across the board
As we look at our consumers in 1 or 2 households, we have millions of debit and credit card holders. In the month of July 2011, those consumers spent about $37 billion on their cards, 5% more than they spent in July 2010. the core customer base continues to push along, consumers are continuing to spend money, maybe not as fast as people have projected, but this is about the 15th to 16th month of continued increases. Gas prices contributed about 1.5% to 2% of that growth. The rest is core spending growth. Credit demand across our portfolios continues to be slow, but credit risk continues to improve. And we've seen the trends of improved charge-offs and delinquencies that we saw in the second quarter of 2011 continue in July
However, if you think about it, the fundamentals are so much better in our country and in our company and in our industry than they were 4 years ago when last the financial crisis hit. There's a lot less leverage, whether it's for consumers' leverage, companies' leverage, leverage in the financial system and leverage across the world.
in the acquisition phase between 2006 and 2008, the company bought MBNA, U.S. Trust, La Salle, Countrywide and Merrill Lynch.
Post-Merrill Lynch, the combined Bank of America Merrill Lynch on 1/1/09 had $70 billion of tangible common equity, $1.7 trillion of risk-weighted assets and total assets of about $2.5 trillion. Today, we have $128 billion in tangible common equity, $1.4 trillion in risk-weighted assets and $2.2 trillion in total assets.
We simply cannot continue on the course of diluting our shareholders to build capital. So as I said, our #1 priority is to transform the company and its balance sheet, to rebuild that balance sheet to be able to support growth, navigate through a cycle that would come someday without a dilution and, frankly, align the franchise to the core strategic customer-focused businesses. We had to bring down risk across the board in our consumer portfolios, our commercial estate portfolios and our trading risk. So we started on an asset transformation.
The continued focus on long-term shareholder growth remains in this company, and we believe a key to that is to focus on tangible book value per share growth. That's the measure which translates over time to strong shareholder returns
we sold 23 units in 6 quarters. We've built reserves for the mortgage issues from a negative amount at the beginning of that time period to over $18 billion. And on top of that, we have litigation reserves. We've driven down credit risk, so that charge-off coverage ratio increased from 1x trailing charge-offs to 1.6x.
We have moved our profit trading off the company's. This completely could have all the positions are sold [ph]. We're not doing any acquisitions. We completed the last third or fourth in the process of finally completing the last transitions of Merrill Lynch. We sold $20 billion of equity investments. We significantly tightened the underwriting standards on the consumer side, reducing unsecured consumer book from $225 billion to $150 billion
Our commercial real estate book is down from $80 billion, as peak, to $40 billion. Our legacy asset market assets left over financial crisis are down materially. This work is and will continue to be the massive transformation to continue to build capital and focus the company. So where that left us was more capital, more reserves, both credit- and mortgage-related, less risk and, most importantly, more tangible book value per share
debate about selling core assets and why would we not prioritize that.
First, the customers want us to provide all the services we provide: the corporation to be able to provide corporate investment banking advice to them, an individual to be able to provide both banking and brokerage and investing advice to them. That's what the customers need and want, a corporation that can serve them in the United States and outside the United States. That's the customer-driven franchise we built. The second reason is sale of core assets would hurt that franchise. But more importantly, it's also where we earn the bulk of our money right now. And third, when you have encore assets to sell, why would you sell the core assets.
As I spoke about before, we're also focused on the reality of managing in a protracted economic recovery that's going slower than people predicted even earlier this year. And that means cost management. It's not surprising that post-Merrill Lynch and post-financial crisis, there's a lot of inefficiencies we've built for the company, even setting aside the legacy asset servicing business, which solely deals with the delinquent mortgage loans and has 40,000 people working on that on a given day
All that's in an effort to build the expenses to continue to support the areas of growth for the company, whether it's in international area, growing our financial advisors, growing small business relationship managers or other internal growth. Core expenses have been running about flat. we started on a company-wide campaign called New BAC to begin to take out significant expenses from the company
The other thing we continue to focus on is the mortgage cleanup. Obviously, there aren't many days that I get up and think positively about the Countrywide transaction in 2008. In each quarter, we continue to put risk behind us. In the past quarter, we made a significant step forward in doing that. The mortgage area will continue to make noises and get through the current legal cases, but the risk has been lowered each quarter for the last 3 and the quarters before that
So as we think about what we have done in transformation, increased the focus, lowered the risk, managed expenses, the key is to focus on what we have that no one else has, and that's the best franchise in the business
So as you think about our franchise in the second quarter, let's talk about what happened. The core franchise continues to perform. In the second quarter, all of our businesses made money. They made a total of $5.7 billion [ph] . But when you added the mortgage charge, we produced a loss
We also shed in the quarter 63 less productive branches as we continue to fine-tune the retail deposit franchise on our way to our goal of eliminating 750 branches over the next few years. Our broad coverage banking centers in the markets around the U.S. enables us to continue to right-size the network while there's a continuing to build the cash density of distribution we have.
We made over $2 billion in the Credit Card business, and that was aided by reserve releases. Importantly, we added over 750,000 accounts for the quarter, another solid quarter of new accounts. Credit quality of this underwriting remains very, very strong. We've seen credit improvement in both delinquencies and charge-offs in the second quarter
Our Global Wealth and Investment Management businesses, Merrill Lynch Wealth Management and U.S. Trust continue to produce solid results with more than $500 million of after-tax profit. In those businesses, we added advisors. The client balances continue to grow on the second quarter, and we'll continue to drive the connectivity of these businesses throughout our franchise
Our Global Banking and Markets businesses, our large corporate investment banking and trading businesses earned $1.6 billion after tax in the quarter. Our investment outside the U.S. continues to bear fruit as our loans in our investment banking fees outside the U.S. were at record levels for us. And in fact, our loans to large corporations outside United States, our funded loans are bigger than our loans inside the United States. Our Investment Banking team finished second in the world of fees received with about $1.6 billion
INTL LOANS ARE GOOD FOR DIVERSIFIATION AS LONG AS LENDING IS NOT LAX AND NOT SIMPLY LENDING TO DILUTE THEIR US PORTFOLIO!
So as you think about it from the top of the house, credit in the second quarter continued to improve, and our reserve shows strong coverage at 1.6x our annualized charge-offs. Delinquencies and charge-offs continued to improve trends, which you see across the board continue in July
Loan growth remains muted except internationally, as I spoke about before. We continue to run off the noncore portfolio, which has dragged our earnings out the charge-offs. But that reduction of portfolio releases capital
Our margins will continue to -- as we stated last year in the second quarter, will continue to be under pressure as the interest rate environment goes forward. And we've been clear about that we think we've hit a plateau there, and we'll continue to work to improve that. Expenses for the quarter were flat on a core basis, subtracting out the mortgage charges. But that's clearly not good enough. We continued to absorb large expenses to clean up our legacy assets. We've seen the headcount generally take over on the company, and our New BAC program is well underway to provide significant expense leverage beginning later this year and in 2012 and beyond
The 2 issues are mortgage risk and capital. On Mortgage, we've continued to work to encapsulate risk, take risk off the table and put it behind us. On rep-and-warranty putback risk, each of the last 3 quarters, we've made major steps. Over the past several quarters, we built the reserves over $18 billion plus in rep-and-warranty liability reserves and also -- and more in litigation reserves.
On the operations side of the Mortgage, one of the more encouraging things is that we saw during the quarter, we're able to reduce the number of delinquent customers by about 150,000 mortgage holders. That's on a base of about 1.5 million
If you look at our overall loan reserves for credit losses at the end of June, they totaled $37.3 billion, which, to put in context, represents 1.64x our annualized charge-offs, as well as 4% of our total loan and lease balances.
Let me move to mortgage within the credit loss area because we tend to receive a lot of questions on that. If you look at our loan loss reserves within the mortgage business at the end of June, they totaled $21 billion. To put that in context, that's 2.5% of our total residential mortgage loans, and the piece that we allocate for Home Equity is nearly 7% of a reserve relative to our total Home Equity balances, excluding purchase credit impaired.
Once a mortgage loan goes more than 180 days past delinquent, it is charged down to the net realizable value. And as we go forward, we update that net realizable value on a quarterly basis.
In addition to our credit reserves, we have approximately $18 billion in reserves in our mortgage business for rep-and-warrants, and we have additional reserves for litigation matters. The rep-and-warrant liability of approximately $18 billion at the end of June compares to only $4 billion that was on our books at the beginning of 2010.
We have a mortgage servicing right on the balance sheet, $12.4 billion at June 30 of 2011. Under Basel III, a portion of this is deducted from Tier 1 common capital. As we have said previously, we're working aggressively to reduce this and recently signed an agreement to sell approximately $500 million of certain mortgage servicing rights. We continue to work on additional sales as we move forward, as well as focusing on reducing the level of MSR that we originate on the front end within our mortgage business.
regulatory requirements that will be implemented under Basel III starting on January 1, 2013. I think it's important to take a step back and realize that effective January 1, '13, the minimum Tier 1 common standard under Basel III will be 3.5%
we'll have roughly $70 billion of risk-weighted assets under Basel III in a loan runoff portfolio that we would expect to run off largely by the end of 2015. We also have the credit correlation trading portfolio that we'd expect to be about $30 billion of Basel III risk-weighted assets at the end of 2012 that will run off largely by 2018. From a private equity perspective, our private equity investments, we believe, will be approximately $50 billion of risk-weighted assets under Basel at the end of 2012, and we'll continue to work through those in '13 and beyond. Those 3 items obviously total about $150 billion of risk-weighted assets that we will look to work through in 2013 and beyond. Over and above that, we'll continue to sell assets that are not core to the customer franchise that Brian alluded on earlier. We will continue to be very focused on reducing MSRs, as I indicated before. Those are 100% risk-weighted deductions. And obviously, going forward, as we make money and use the deferred tax assets that we have on the balance sheet, capital will accrete at a rate greater than the amount of net income that goes through the income statement
The second point is we continue to execute on a broad scale transformation of this company. We do that through focusing on the core strategic customer basis, selling noncore assets, and that helps our focus and also generates capital, and moving from product sales to customer-focused execution in each of our businesses
The third point is our capital levels are among the highest they've ever been in this institution's history. They're sufficient to run the company even after we took $20 billion in the second quarter, to help with the mortgages issues behind us. We have a clear path on implementing the new rules under Basel III, the new banking regulatory capital rules
The fourth point is the focus on the key issues: continuing to clean up the mortgage issues related to the Countrywide acquisition, get our operating cost down across the board, and that has to be especially true on the tough revenue and extended low interest rate environment, which isn't that favorable to some of the core banking activities, and to continue to lower the risk in our company across the board
As we look at our consumers in 1 or 2 households, we have millions of debit and credit card holders. In the month of July 2011, those consumers spent about $37 billion on their cards, 5% more than they spent in July 2010. the core customer base continues to push along, consumers are continuing to spend money, maybe not as fast as people have projected, but this is about the 15th to 16th month of continued increases. Gas prices contributed about 1.5% to 2% of that growth. The rest is core spending growth. Credit demand across our portfolios continues to be slow, but credit risk continues to improve. And we've seen the trends of improved charge-offs and delinquencies that we saw in the second quarter of 2011 continue in July
However, if you think about it, the fundamentals are so much better in our country and in our company and in our industry than they were 4 years ago when last the financial crisis hit. There's a lot less leverage, whether it's for consumers' leverage, companies' leverage, leverage in the financial system and leverage across the world.
in the acquisition phase between 2006 and 2008, the company bought MBNA, U.S. Trust, La Salle, Countrywide and Merrill Lynch.
Post-Merrill Lynch, the combined Bank of America Merrill Lynch on 1/1/09 had $70 billion of tangible common equity, $1.7 trillion of risk-weighted assets and total assets of about $2.5 trillion. Today, we have $128 billion in tangible common equity, $1.4 trillion in risk-weighted assets and $2.2 trillion in total assets.
We simply cannot continue on the course of diluting our shareholders to build capital. So as I said, our #1 priority is to transform the company and its balance sheet, to rebuild that balance sheet to be able to support growth, navigate through a cycle that would come someday without a dilution and, frankly, align the franchise to the core strategic customer-focused businesses. We had to bring down risk across the board in our consumer portfolios, our commercial estate portfolios and our trading risk. So we started on an asset transformation.
The continued focus on long-term shareholder growth remains in this company, and we believe a key to that is to focus on tangible book value per share growth. That's the measure which translates over time to strong shareholder returns
we sold 23 units in 6 quarters. We've built reserves for the mortgage issues from a negative amount at the beginning of that time period to over $18 billion. And on top of that, we have litigation reserves. We've driven down credit risk, so that charge-off coverage ratio increased from 1x trailing charge-offs to 1.6x.
We have moved our profit trading off the company's. This completely could have all the positions are sold [ph]. We're not doing any acquisitions. We completed the last third or fourth in the process of finally completing the last transitions of Merrill Lynch. We sold $20 billion of equity investments. We significantly tightened the underwriting standards on the consumer side, reducing unsecured consumer book from $225 billion to $150 billion
Our commercial real estate book is down from $80 billion, as peak, to $40 billion. Our legacy asset market assets left over financial crisis are down materially. This work is and will continue to be the massive transformation to continue to build capital and focus the company. So where that left us was more capital, more reserves, both credit- and mortgage-related, less risk and, most importantly, more tangible book value per share
debate about selling core assets and why would we not prioritize that.
First, the customers want us to provide all the services we provide: the corporation to be able to provide corporate investment banking advice to them, an individual to be able to provide both banking and brokerage and investing advice to them. That's what the customers need and want, a corporation that can serve them in the United States and outside the United States. That's the customer-driven franchise we built. The second reason is sale of core assets would hurt that franchise. But more importantly, it's also where we earn the bulk of our money right now. And third, when you have encore assets to sell, why would you sell the core assets.
As I spoke about before, we're also focused on the reality of managing in a protracted economic recovery that's going slower than people predicted even earlier this year. And that means cost management. It's not surprising that post-Merrill Lynch and post-financial crisis, there's a lot of inefficiencies we've built for the company, even setting aside the legacy asset servicing business, which solely deals with the delinquent mortgage loans and has 40,000 people working on that on a given day
All that's in an effort to build the expenses to continue to support the areas of growth for the company, whether it's in international area, growing our financial advisors, growing small business relationship managers or other internal growth. Core expenses have been running about flat. we started on a company-wide campaign called New BAC to begin to take out significant expenses from the company
The other thing we continue to focus on is the mortgage cleanup. Obviously, there aren't many days that I get up and think positively about the Countrywide transaction in 2008. In each quarter, we continue to put risk behind us. In the past quarter, we made a significant step forward in doing that. The mortgage area will continue to make noises and get through the current legal cases, but the risk has been lowered each quarter for the last 3 and the quarters before that
So as we think about what we have done in transformation, increased the focus, lowered the risk, managed expenses, the key is to focus on what we have that no one else has, and that's the best franchise in the business
So as you think about our franchise in the second quarter, let's talk about what happened. The core franchise continues to perform. In the second quarter, all of our businesses made money. They made a total of $5.7 billion [ph] . But when you added the mortgage charge, we produced a loss
We also shed in the quarter 63 less productive branches as we continue to fine-tune the retail deposit franchise on our way to our goal of eliminating 750 branches over the next few years. Our broad coverage banking centers in the markets around the U.S. enables us to continue to right-size the network while there's a continuing to build the cash density of distribution we have.
We made over $2 billion in the Credit Card business, and that was aided by reserve releases. Importantly, we added over 750,000 accounts for the quarter, another solid quarter of new accounts. Credit quality of this underwriting remains very, very strong. We've seen credit improvement in both delinquencies and charge-offs in the second quarter
Our Global Wealth and Investment Management businesses, Merrill Lynch Wealth Management and U.S. Trust continue to produce solid results with more than $500 million of after-tax profit. In those businesses, we added advisors. The client balances continue to grow on the second quarter, and we'll continue to drive the connectivity of these businesses throughout our franchise
Our Global Banking and Markets businesses, our large corporate investment banking and trading businesses earned $1.6 billion after tax in the quarter. Our investment outside the U.S. continues to bear fruit as our loans in our investment banking fees outside the U.S. were at record levels for us. And in fact, our loans to large corporations outside United States, our funded loans are bigger than our loans inside the United States. Our Investment Banking team finished second in the world of fees received with about $1.6 billion
INTL LOANS ARE GOOD FOR DIVERSIFIATION AS LONG AS LENDING IS NOT LAX AND NOT SIMPLY LENDING TO DILUTE THEIR US PORTFOLIO!
So as you think about it from the top of the house, credit in the second quarter continued to improve, and our reserve shows strong coverage at 1.6x our annualized charge-offs. Delinquencies and charge-offs continued to improve trends, which you see across the board continue in July
Loan growth remains muted except internationally, as I spoke about before. We continue to run off the noncore portfolio, which has dragged our earnings out the charge-offs. But that reduction of portfolio releases capital
Our margins will continue to -- as we stated last year in the second quarter, will continue to be under pressure as the interest rate environment goes forward. And we've been clear about that we think we've hit a plateau there, and we'll continue to work to improve that. Expenses for the quarter were flat on a core basis, subtracting out the mortgage charges. But that's clearly not good enough. We continued to absorb large expenses to clean up our legacy assets. We've seen the headcount generally take over on the company, and our New BAC program is well underway to provide significant expense leverage beginning later this year and in 2012 and beyond
The 2 issues are mortgage risk and capital. On Mortgage, we've continued to work to encapsulate risk, take risk off the table and put it behind us. On rep-and-warranty putback risk, each of the last 3 quarters, we've made major steps. Over the past several quarters, we built the reserves over $18 billion plus in rep-and-warranty liability reserves and also -- and more in litigation reserves.
On the operations side of the Mortgage, one of the more encouraging things is that we saw during the quarter, we're able to reduce the number of delinquent customers by about 150,000 mortgage holders. That's on a base of about 1.5 million
If you look at our overall loan reserves for credit losses at the end of June, they totaled $37.3 billion, which, to put in context, represents 1.64x our annualized charge-offs, as well as 4% of our total loan and lease balances.
Let me move to mortgage within the credit loss area because we tend to receive a lot of questions on that. If you look at our loan loss reserves within the mortgage business at the end of June, they totaled $21 billion. To put that in context, that's 2.5% of our total residential mortgage loans, and the piece that we allocate for Home Equity is nearly 7% of a reserve relative to our total Home Equity balances, excluding purchase credit impaired.
Once a mortgage loan goes more than 180 days past delinquent, it is charged down to the net realizable value. And as we go forward, we update that net realizable value on a quarterly basis.
In addition to our credit reserves, we have approximately $18 billion in reserves in our mortgage business for rep-and-warrants, and we have additional reserves for litigation matters. The rep-and-warrant liability of approximately $18 billion at the end of June compares to only $4 billion that was on our books at the beginning of 2010.
We have a mortgage servicing right on the balance sheet, $12.4 billion at June 30 of 2011. Under Basel III, a portion of this is deducted from Tier 1 common capital. As we have said previously, we're working aggressively to reduce this and recently signed an agreement to sell approximately $500 million of certain mortgage servicing rights. We continue to work on additional sales as we move forward, as well as focusing on reducing the level of MSR that we originate on the front end within our mortgage business.
regulatory requirements that will be implemented under Basel III starting on January 1, 2013. I think it's important to take a step back and realize that effective January 1, '13, the minimum Tier 1 common standard under Basel III will be 3.5%
we'll have roughly $70 billion of risk-weighted assets under Basel III in a loan runoff portfolio that we would expect to run off largely by the end of 2015. We also have the credit correlation trading portfolio that we'd expect to be about $30 billion of Basel III risk-weighted assets at the end of 2012 that will run off largely by 2018. From a private equity perspective, our private equity investments, we believe, will be approximately $50 billion of risk-weighted assets under Basel at the end of 2012, and we'll continue to work through those in '13 and beyond. Those 3 items obviously total about $150 billion of risk-weighted assets that we will look to work through in 2013 and beyond. Over and above that, we'll continue to sell assets that are not core to the customer franchise that Brian alluded on earlier. We will continue to be very focused on reducing MSRs, as I indicated before. Those are 100% risk-weighted deductions. And obviously, going forward, as we make money and use the deferred tax assets that we have on the balance sheet, capital will accrete at a rate greater than the amount of net income that goes through the income statement
Citigroup Q2 2011
We announced earnings of $3.3 billion for the second quarter, which brings our total net income for the first half to $6.3 billion
Loans grew throughout our core businesses in the second quarter at a level that more than offset the reduction in Citi Holdings. The revenues from our International Consumer Banking operations increased from the previous quarter and year, as did the net income from the North American Consumer Bank
"The bank reported a first quarter net income of $3 billion, or 10 cents per share. Citi Holdings revenues declined 50 percent from last year to $3.3 billion. Net interest revenues fell by over 40 percent due to lower consumer lending. Net losses for Citi Holdings was $608 million compared to $886 million in the first quarter of 2010.
"Citi Holdings will be a drain on our revenue for a while. Eventually, growth in Citi Corp will overtake the growth in Citi Holdings," said CEO Vikram Pandit on the first quarter earning conference call.
Citigroup was able to divest $22 billion in assets in the first quarter, leaving total assets in the entity at $337 billion.
"Citi Holdings assets are now at 17% of our total balance sheet," said Pandit. "Citi Holdings' loss was $608 million, down 31% from the prior year."
Last quarter, Citigroup divested $106 billion in asset sales, and $49 billion in net run-off and amortization. Of those asset sales, $10 billion came from Citi's mortgage books with $6 billion being delinquent loans.
"The assets in Citi Holdings will continue to decline," said John Gerspach, CFO, on the first quarter earnings conference call. "However as you can see those will be moderated over the next year."
In our Institutional Businesses, Investment, Corporate and Private Banking revenues improved. Global Transaction Services performed very well, as net income increased from the previous quarter, despite continued low interest rates. However, our Markets business was clearly impacted by the trading environment.
In Citi Holdings, we continued the reduction of assets in an economically rational manner. Our Holdings assets were reduced by $29 billion during the quarter, from $337 billion to $308 billion, and now make up less than 16% of Citigroup's balance sheet.
We remain on track to meet the Basel III capital requirements through both the optimization of our assets and the generation of capital. We continue to expect that Citi will be in a position to return capital to shareholders in 2012 and still have an 8% to 9% Basel III Tier 1 common capital ratio at the end of that year (more than BAC, hence why BAC is trading a larger discount to book, more liklihood of a capital raising).
our earnings and utilization of deferred tax assets create a multiplier effect on regulatory capital formation. In the first half of this year, this generated $9 billion of Basel III regulatory capital on $6.3 billion of earnings and $1.5 billion of DTA utilization
Revenues of $20.6 billion were down 7% versus the prior year, as strong growth in International Consumer Banking and Transaction Services was more than offset by lower revenues in Citi Holdings, Securities and Banking and North America Consumer Banking.
Expenses were up 9% year-over-year to $12.9 billion. But excluding the U.K. bonus tax of roughly $400 million in the second quarter of 2010, expenses were up nearly 13%. Approximately 1/3 of this 13% increase resulted from the impact of foreign exchange, and another 1/3 was related to higher legal and related costs. The remaining 1/3 was driven by the net impact of investment spending, partially offset by ongoing productivity savings. All other expense increases, such as higher volume-related costs in Citicorp, were largely offset by a reduction in Citi Holdings expenses
Net credit losses declined again in the second quarter to $5.1 billion, 35% lower than the second quarter of 2010. We also released $2 billion of net loan loss reserves compared to a $1.5 billion net release last year and a $3.3 billion in the first quarter. On a sequential basis, end-of-period loans grew 2% for Citigroup, as strong loan growth in Citicorp more than offset the decline in Citi Holdings
Citicorp reported revenues of $16.3 billion and net income of $3.7 billion in the second quarter is down slightly versus last year. Sequentially, we grew end-of-period loans in every business in every region in Citicorp, and the same holds true year-over-year with the exception of North America branded cards. Versus last year, Citicorp loans grew 16%, including 11% growth in consumer and 22% growth in corporate loans.
Citi Holdings reported revenues of $4 billion and a net loss of $218 million, which included over $0.5 billion of pretax realized gains on the sale of assets transferred out of held-to-maturity in the Special Asset Pool in the first quarter. Citi Holdings ended the quarter with $308 billion of assets, down $29 billion during the quarter and $157 billion year-over-year.
Citicorp's net credit losses were $2.2 billion, down 27% from the prior year, driven by Citi-branded cards in North America. We released $914 million in net loan loss reserves, up from $665 million last year, due to higher net releases in Citi-branded cards, partially offset by lower releases in International Consumer Banking and the corporate portfolio
emerging markets contributed nearly half of Citicorp's revenues and over 60% of earnings before taxes in the second quarter. Emerging markets revenues have grown year-over-year for 5 consecutive quarters, driven by both our consumer and institutional businesses. This growth reflects consistent strength in underlying business drivers, with average deposits up 13% year-over-year and loans up 27%.
North America Consumer Banking business. Revenues of $3.4 billion were down 9% versus last year, mainly due to a decline in average card loans, lower mortgage revenues and the impact of CARD Act. Sequentially, revenues were up 1%. Expenses of $1.8 billion were up 17% year-over-year and 5% sequentially as we continued to increase investments largely through higher marketing and technology spending. Credit costs declined 74% from last year to $552 million. Net credit losses were down 39% to $1.3 billion, driven by Citi-branded cards. And the reserve release was $757 million this quarter. Net credit margin grew by 32% year-over-year to $2.1 billion. Sequentially, we grew both end-of-period retail and card loans, although average card loans declined modestly
International consumer banking. Sequentially, we have grown average loans and deposits every quarter for over 2 years, and card purchase sales have increased year-over-year for 7 quarters. We have also increased our net credit margin and our earnings before taxes, excluding the impact of loan loss reserves, year-over-year for 7 consecutive quarters.
In investment banking, revenues of $1.1 billion were up 27% sequentially with strength in both advisory and underwriting activities. x CVA, equity market revenues of $776 million were down 30% sequentially, mainly due to lower market volumes and a challenging trading environment, particularly in derivatives. Fixed income market revenues x CVA were down 27% sequentially to $2.9 billion, driven by credit-related and securitized products.
The $29 billion reduction in the second quarter was comprised of nearly $21 billion of asset sales and business dispositions, over $7 billion of net runoff and paydowns and roughly $1 billion of net cost of credit and net asset marks.
net credit losses and loan loss reserves. NCLs continued to improve in the second quarter, down 18% sequentially to $5.1 billion. And the net LLR release was $2 billion versus $3.3 billion in the prior quarter. We ended the quarter with $34.4 billion of total loan loss reserves and our LLR ratio was 5.4%. Consumer NCLs declined 11% sequentially to $4.8 billion, and we released $1.5 billion in net loan loss reserves.
nternational consumer credit trends. In Citicorp, as our loan portfolios grew, dollar NCLs were up modestly from the first quarter in Asia and Latin America, but remain stable to improving on a rate basis. 90-plus-day delinquencies also increased sequentially in dollar terms in Asia and Latin America, but remain fairly stable as a percentage of loans. We also saw a continued improvement in international consumer credit in Citi Holdings.
the North America mortgage portfolio in Citi Holdings, split between residential first mortgages and home equity loans. NCLs and 90-plus-day delinquencies improved in both portfolios in the second quarter. In residential first mortgages, we ended the second quarter with $73 billion of loans, down 19% from a year ago. Sequentially, 90-plus-day delinquencies declined by 13% to $3.9 billion and were down more than 50% from last year. Net credit losses were down 17% sequentially to $461 million. The sequential decline in first mortgage delinquencies again was primarily due to continued asset sales, as we sold nearly $800 million in delinquent mortgages in the quarter.
We ended the quarter with a Tier 1 capital ratio of 13.6% and a Tier 1 common ratio of 11.6%. Our total risk-weighted assets were $992 million -- $992 billion, with roughly 28% attributable to Citi Holdings.
Over the past few quarters, Citigroup's risk-weighted assets, as reported under Basel I, have been fairly constant, as growth in Citicorp has been offset by a significant reduction in Citi Holdings. We currently expect risk-weighted assets under Basel I to grow slightly by low single digits as of the end of 2012. Based on our initial analysis, last year we estimated that Basel III would result in an increase in risk-weighted assets in Citicorp of approximately 30% to 35%. Today, we believe the increase in risk-weighted assets for total Citigroup will be in the range of 35%, with Citicorp's risk-weighted assets increasing in the range of 20%. The refinement in our estimate of the risk-weighted asset impact is based on several factors, including greater experience with Basel III risk models and key drivers and more clarity on the impact of mitigating actions. We believe our businesses in Citicorp are inherently Basel III-friendly.
Regarding operating expenses. The impact of the weakening U.S. dollar, as well as higher legal and related costs, total roughly $1.6 billion out of the $1.9 billion increase in our expense base in the first half of 2011 as compared to the first half of last year. These factors will likely continue to affect our expenses in the second half of this year and will remain difficult to predict. Therefore, we expect operating expenses to remain elevated for the remainder of the year. As a result, our full year operating expenses will likely exceed the $48 billion to $50 billion guidance that we had communicated previously.
Can you maybe give some help on how to think about the risk-weighted asset? What is heavier, I guess, in Citi Holdings in terms of the risk-weighted assets under Basel III versus what are lighter? So is it mortgages that are the biggest hit, or is it the Special Asset Pool? And we can kind of do our own conclusions on the pace of runoff on the individual assets.
John Gerspach
Well, Basel III certainly puts a premium on any type of asset that's resulting from a securitization. And so that would sort of draw your attention to more of assets that are in Special Asset Pool.
James Mitchell - Buckingham Research Group, Inc.
Right. So to the extent that you can move those down more quickly, that could be helpful?
John Gerspach
That would be the logical conclusion, yes.
continue to drive down the Citi Holdings expenses as we drive down assets. And I think we do have a pretty good track record. And you should assume that as we continue to drive down the assets in Citi Holdings, we will get expense saves coming out of the business. That is clearly the way that we are operating Citi Holdings. And to your point, we had a little bit of a bump on the road this year -- this quarter due to some legal and related costs.
That's a great question. I mean obviously, as we continue to drive down yielding assets in Citi Holdings, and in this quarter as you said, we got rid of that $13 billion of securities that we had in the hold-to-maturity. That is certainly going to impact the net interest income coming out of both the Special Asset Pool as well as Citi Holdings in total.
Now we began investing last year. We called out the fact that we were beginning to invest in our consumer businesses in Asia and Latin America. When you start investing in your consumer businesses, you've got roughly a 12- to 18-month lead time before you really begin to see something positive in operating leverage coming out of those investments. And in both of those geographies, as we said in the call, our expectation is that, beginning in the fourth quarter of this year, you will see positive operating leverage in both the Regional Consumer Banking businesses in Asia and in Latin America.
Again, we're very conscious of -- you guys are very focused on expenses. I got to tell you, so are we. But we're also trying to make sure that we're putting the right expense dollars into the businesses to grow operating margin
Citi Holdings
Citi Holdings will be a group of non-core businesses that include attractive long-term businesses with strong market positions. However, they do not sufficiently enhance the capabilities of Citi's core business, and in many ways compete for its resources.
The Citi Holdings management team will seek to maximize the value of these businesses by running them well, restructuring and managing them through this tough economic cycle, and taking advantage of value-enhancing disposition and combination opportunities as they emerge. These businesses and assets will initially include:
Brokerage and asset management: including the 49 percent stake in Morgan Stanley Smith Barney, as well as Nikko Cordial Securities, Nikko Asset Management and Primerica Financial Services. Brokerage and Asset Management is mostly related to the Morgan Stanley Smith Barney JV. Morgan Stanley has calls to purchase our stake in the JV in 3 tranches beginning in 2012, and either party has the right to cause an IPO after 2015. We have also roughly $12 billion of margin loans and other assets, the majority of which should transfer to the JV by the end of 2012.
Local consumer finance: including CitiFinancial and CitiMortgage in the U.S., and consumer finance operations in Western Europe, Japan, India, Mexico, Brazil, Thailand and Hong Kong. Local Consumer Lending is a mix of operating businesses and runoff portfolios. Two sizable operating businesses remain. First is retail partner cards with $45 billion of assets. Second is Citi Financial with $32 billion of assets, including both the one main business and Citi Financial servicing. On Slide 15, these assets are included in both mortgages and personal loans. The majority of assets in Local Consumer Lending will either run off or be reduced by smaller sales. Over half of the assets are mortgages with a roughly 6-year expected average life.
Special asset pool: will manage the assets covered by the loss-sharing agreement with the U.S. government parties in the ring-fenced portfolio; and other non-strategic assets. Roughly $19 billion are trading assets or available-for-sale. $13 billion are held-to-maturity securities with an expected average life of 7 years. $7 billion are loans and leases which we currently expect to reduce significantly by the end of next year. And the remainder is other assets, including private equity positions, targeted for sale.
Loans grew throughout our core businesses in the second quarter at a level that more than offset the reduction in Citi Holdings. The revenues from our International Consumer Banking operations increased from the previous quarter and year, as did the net income from the North American Consumer Bank
"The bank reported a first quarter net income of $3 billion, or 10 cents per share. Citi Holdings revenues declined 50 percent from last year to $3.3 billion. Net interest revenues fell by over 40 percent due to lower consumer lending. Net losses for Citi Holdings was $608 million compared to $886 million in the first quarter of 2010.
"Citi Holdings will be a drain on our revenue for a while. Eventually, growth in Citi Corp will overtake the growth in Citi Holdings," said CEO Vikram Pandit on the first quarter earning conference call.
Citigroup was able to divest $22 billion in assets in the first quarter, leaving total assets in the entity at $337 billion.
"Citi Holdings assets are now at 17% of our total balance sheet," said Pandit. "Citi Holdings' loss was $608 million, down 31% from the prior year."
Last quarter, Citigroup divested $106 billion in asset sales, and $49 billion in net run-off and amortization. Of those asset sales, $10 billion came from Citi's mortgage books with $6 billion being delinquent loans.
"The assets in Citi Holdings will continue to decline," said John Gerspach, CFO, on the first quarter earnings conference call. "However as you can see those will be moderated over the next year."
In our Institutional Businesses, Investment, Corporate and Private Banking revenues improved. Global Transaction Services performed very well, as net income increased from the previous quarter, despite continued low interest rates. However, our Markets business was clearly impacted by the trading environment.
In Citi Holdings, we continued the reduction of assets in an economically rational manner. Our Holdings assets were reduced by $29 billion during the quarter, from $337 billion to $308 billion, and now make up less than 16% of Citigroup's balance sheet.
We remain on track to meet the Basel III capital requirements through both the optimization of our assets and the generation of capital. We continue to expect that Citi will be in a position to return capital to shareholders in 2012 and still have an 8% to 9% Basel III Tier 1 common capital ratio at the end of that year (more than BAC, hence why BAC is trading a larger discount to book, more liklihood of a capital raising).
our earnings and utilization of deferred tax assets create a multiplier effect on regulatory capital formation. In the first half of this year, this generated $9 billion of Basel III regulatory capital on $6.3 billion of earnings and $1.5 billion of DTA utilization
Revenues of $20.6 billion were down 7% versus the prior year, as strong growth in International Consumer Banking and Transaction Services was more than offset by lower revenues in Citi Holdings, Securities and Banking and North America Consumer Banking.
Expenses were up 9% year-over-year to $12.9 billion. But excluding the U.K. bonus tax of roughly $400 million in the second quarter of 2010, expenses were up nearly 13%. Approximately 1/3 of this 13% increase resulted from the impact of foreign exchange, and another 1/3 was related to higher legal and related costs. The remaining 1/3 was driven by the net impact of investment spending, partially offset by ongoing productivity savings. All other expense increases, such as higher volume-related costs in Citicorp, were largely offset by a reduction in Citi Holdings expenses
Net credit losses declined again in the second quarter to $5.1 billion, 35% lower than the second quarter of 2010. We also released $2 billion of net loan loss reserves compared to a $1.5 billion net release last year and a $3.3 billion in the first quarter. On a sequential basis, end-of-period loans grew 2% for Citigroup, as strong loan growth in Citicorp more than offset the decline in Citi Holdings
Citicorp reported revenues of $16.3 billion and net income of $3.7 billion in the second quarter is down slightly versus last year. Sequentially, we grew end-of-period loans in every business in every region in Citicorp, and the same holds true year-over-year with the exception of North America branded cards. Versus last year, Citicorp loans grew 16%, including 11% growth in consumer and 22% growth in corporate loans.
Citi Holdings reported revenues of $4 billion and a net loss of $218 million, which included over $0.5 billion of pretax realized gains on the sale of assets transferred out of held-to-maturity in the Special Asset Pool in the first quarter. Citi Holdings ended the quarter with $308 billion of assets, down $29 billion during the quarter and $157 billion year-over-year.
Citicorp's net credit losses were $2.2 billion, down 27% from the prior year, driven by Citi-branded cards in North America. We released $914 million in net loan loss reserves, up from $665 million last year, due to higher net releases in Citi-branded cards, partially offset by lower releases in International Consumer Banking and the corporate portfolio
emerging markets contributed nearly half of Citicorp's revenues and over 60% of earnings before taxes in the second quarter. Emerging markets revenues have grown year-over-year for 5 consecutive quarters, driven by both our consumer and institutional businesses. This growth reflects consistent strength in underlying business drivers, with average deposits up 13% year-over-year and loans up 27%.
North America Consumer Banking business. Revenues of $3.4 billion were down 9% versus last year, mainly due to a decline in average card loans, lower mortgage revenues and the impact of CARD Act. Sequentially, revenues were up 1%. Expenses of $1.8 billion were up 17% year-over-year and 5% sequentially as we continued to increase investments largely through higher marketing and technology spending. Credit costs declined 74% from last year to $552 million. Net credit losses were down 39% to $1.3 billion, driven by Citi-branded cards. And the reserve release was $757 million this quarter. Net credit margin grew by 32% year-over-year to $2.1 billion. Sequentially, we grew both end-of-period retail and card loans, although average card loans declined modestly
International consumer banking. Sequentially, we have grown average loans and deposits every quarter for over 2 years, and card purchase sales have increased year-over-year for 7 quarters. We have also increased our net credit margin and our earnings before taxes, excluding the impact of loan loss reserves, year-over-year for 7 consecutive quarters.
In investment banking, revenues of $1.1 billion were up 27% sequentially with strength in both advisory and underwriting activities. x CVA, equity market revenues of $776 million were down 30% sequentially, mainly due to lower market volumes and a challenging trading environment, particularly in derivatives. Fixed income market revenues x CVA were down 27% sequentially to $2.9 billion, driven by credit-related and securitized products.
The $29 billion reduction in the second quarter was comprised of nearly $21 billion of asset sales and business dispositions, over $7 billion of net runoff and paydowns and roughly $1 billion of net cost of credit and net asset marks.
net credit losses and loan loss reserves. NCLs continued to improve in the second quarter, down 18% sequentially to $5.1 billion. And the net LLR release was $2 billion versus $3.3 billion in the prior quarter. We ended the quarter with $34.4 billion of total loan loss reserves and our LLR ratio was 5.4%. Consumer NCLs declined 11% sequentially to $4.8 billion, and we released $1.5 billion in net loan loss reserves.
nternational consumer credit trends. In Citicorp, as our loan portfolios grew, dollar NCLs were up modestly from the first quarter in Asia and Latin America, but remain stable to improving on a rate basis. 90-plus-day delinquencies also increased sequentially in dollar terms in Asia and Latin America, but remain fairly stable as a percentage of loans. We also saw a continued improvement in international consumer credit in Citi Holdings.
the North America mortgage portfolio in Citi Holdings, split between residential first mortgages and home equity loans. NCLs and 90-plus-day delinquencies improved in both portfolios in the second quarter. In residential first mortgages, we ended the second quarter with $73 billion of loans, down 19% from a year ago. Sequentially, 90-plus-day delinquencies declined by 13% to $3.9 billion and were down more than 50% from last year. Net credit losses were down 17% sequentially to $461 million. The sequential decline in first mortgage delinquencies again was primarily due to continued asset sales, as we sold nearly $800 million in delinquent mortgages in the quarter.
We ended the quarter with a Tier 1 capital ratio of 13.6% and a Tier 1 common ratio of 11.6%. Our total risk-weighted assets were $992 million -- $992 billion, with roughly 28% attributable to Citi Holdings.
Over the past few quarters, Citigroup's risk-weighted assets, as reported under Basel I, have been fairly constant, as growth in Citicorp has been offset by a significant reduction in Citi Holdings. We currently expect risk-weighted assets under Basel I to grow slightly by low single digits as of the end of 2012. Based on our initial analysis, last year we estimated that Basel III would result in an increase in risk-weighted assets in Citicorp of approximately 30% to 35%. Today, we believe the increase in risk-weighted assets for total Citigroup will be in the range of 35%, with Citicorp's risk-weighted assets increasing in the range of 20%. The refinement in our estimate of the risk-weighted asset impact is based on several factors, including greater experience with Basel III risk models and key drivers and more clarity on the impact of mitigating actions. We believe our businesses in Citicorp are inherently Basel III-friendly.
Regarding operating expenses. The impact of the weakening U.S. dollar, as well as higher legal and related costs, total roughly $1.6 billion out of the $1.9 billion increase in our expense base in the first half of 2011 as compared to the first half of last year. These factors will likely continue to affect our expenses in the second half of this year and will remain difficult to predict. Therefore, we expect operating expenses to remain elevated for the remainder of the year. As a result, our full year operating expenses will likely exceed the $48 billion to $50 billion guidance that we had communicated previously.
Can you maybe give some help on how to think about the risk-weighted asset? What is heavier, I guess, in Citi Holdings in terms of the risk-weighted assets under Basel III versus what are lighter? So is it mortgages that are the biggest hit, or is it the Special Asset Pool? And we can kind of do our own conclusions on the pace of runoff on the individual assets.
John Gerspach
Well, Basel III certainly puts a premium on any type of asset that's resulting from a securitization. And so that would sort of draw your attention to more of assets that are in Special Asset Pool.
James Mitchell - Buckingham Research Group, Inc.
Right. So to the extent that you can move those down more quickly, that could be helpful?
John Gerspach
That would be the logical conclusion, yes.
continue to drive down the Citi Holdings expenses as we drive down assets. And I think we do have a pretty good track record. And you should assume that as we continue to drive down the assets in Citi Holdings, we will get expense saves coming out of the business. That is clearly the way that we are operating Citi Holdings. And to your point, we had a little bit of a bump on the road this year -- this quarter due to some legal and related costs.
That's a great question. I mean obviously, as we continue to drive down yielding assets in Citi Holdings, and in this quarter as you said, we got rid of that $13 billion of securities that we had in the hold-to-maturity. That is certainly going to impact the net interest income coming out of both the Special Asset Pool as well as Citi Holdings in total.
Now we began investing last year. We called out the fact that we were beginning to invest in our consumer businesses in Asia and Latin America. When you start investing in your consumer businesses, you've got roughly a 12- to 18-month lead time before you really begin to see something positive in operating leverage coming out of those investments. And in both of those geographies, as we said in the call, our expectation is that, beginning in the fourth quarter of this year, you will see positive operating leverage in both the Regional Consumer Banking businesses in Asia and in Latin America.
Again, we're very conscious of -- you guys are very focused on expenses. I got to tell you, so are we. But we're also trying to make sure that we're putting the right expense dollars into the businesses to grow operating margin
Citi Holdings
Citi Holdings will be a group of non-core businesses that include attractive long-term businesses with strong market positions. However, they do not sufficiently enhance the capabilities of Citi's core business, and in many ways compete for its resources.
The Citi Holdings management team will seek to maximize the value of these businesses by running them well, restructuring and managing them through this tough economic cycle, and taking advantage of value-enhancing disposition and combination opportunities as they emerge. These businesses and assets will initially include:
Brokerage and asset management: including the 49 percent stake in Morgan Stanley Smith Barney, as well as Nikko Cordial Securities, Nikko Asset Management and Primerica Financial Services. Brokerage and Asset Management is mostly related to the Morgan Stanley Smith Barney JV. Morgan Stanley has calls to purchase our stake in the JV in 3 tranches beginning in 2012, and either party has the right to cause an IPO after 2015. We have also roughly $12 billion of margin loans and other assets, the majority of which should transfer to the JV by the end of 2012.
Local consumer finance: including CitiFinancial and CitiMortgage in the U.S., and consumer finance operations in Western Europe, Japan, India, Mexico, Brazil, Thailand and Hong Kong. Local Consumer Lending is a mix of operating businesses and runoff portfolios. Two sizable operating businesses remain. First is retail partner cards with $45 billion of assets. Second is Citi Financial with $32 billion of assets, including both the one main business and Citi Financial servicing. On Slide 15, these assets are included in both mortgages and personal loans. The majority of assets in Local Consumer Lending will either run off or be reduced by smaller sales. Over half of the assets are mortgages with a roughly 6-year expected average life.
Special asset pool: will manage the assets covered by the loss-sharing agreement with the U.S. government parties in the ring-fenced portfolio; and other non-strategic assets. Roughly $19 billion are trading assets or available-for-sale. $13 billion are held-to-maturity securities with an expected average life of 7 years. $7 billion are loans and leases which we currently expect to reduce significantly by the end of next year. And the remainder is other assets, including private equity positions, targeted for sale.
Bank of America Q2 2011
Media summary
Negative profits. mainly from writedowns of uncertain risk to defined risk where compensate investors. This is taken from PL. Loan loss provisions falling throughout the US banking environment.
Notes
settlement on private-label securities litigation
put large pieces of uncertain risks behind us as a company
actions we took on last year's fourth quarter on the GSEs...
"Bank of America Corp's $3 billion settlement with Fannie Mae and Freddie Mac may have brought New Year cheer to the bank's stockholders, but now comes the hard part: settling far larger and thornier claims made by private mortgage investors. Money manager BlackRock Inc and bond fund Pimco are in talks with Bank of America over $16.5 billion of mortgage bonds they purchased. The government-sponsored enterprises often had higher standards and well-understood eligibility guidelines for the mortgages they purchased. As a result, the lower quality loans were shipped off to other investors."
, in the first quarter on the monolines
"MBIA (NYSE: MBI) are up more than 7 percent Tuesday following news the company reached an agreement with Bank of America (NYSE: BAC) to dismiss a suit related to insurance for mortgage-debt defaults. Allegations were in regards to the unwinding of some $5.7 billion in credit-default swaps and the related insurance issued against these debt obligations. MBIA claimed Merrill Lynch's marketing efforts for the swap contracts were part of a scheme to sell nearly-toxic loans during 2006 and 2007. Tuesday's settlement has money managers and analysts speculating that MBIA and BofA now may be closer to agreeing to terms on wider allegations related to underwater subprime loans"
, we put another significant part of the rep and warrant exposure behind us and other mortgage-related matters. In all, as you can see, from the materials, we took almost $20 billion in charges related to the Mortgage business
"On June 29, Bank of America Corp. (BAC : 6.96, -0.07) announced that it will pay $8.5 billion in a game-changing settlement that should put some of its mortgage troubles in the past. The deal calls for BAC to pay $8.5 billion to settle claims brought by 22 private mortgage investors that bought 530 mortgage securities worth $424 billion from the Calabasas-based Countrywide Financial, now part of BAC.
we reported capital ratios, which are stronger than this quarter in 2010. Pimco, BlackRock, the Federal Reserve Bank of New York and other institutional investors are expected to receive cash payments as a result of the settlement. The settlement will be a binding agreement after court approval. However, a group of 11 mortgage-bond investors who call themselves the ‘Walnut Place' claim that the huge settlement is abundant with conflicts of interest, leading to questions about the fairness of the settlement. The group of bond investors challenging the settlement, whose identities have not been revealed, have a bleak chance of succeeding in the courts. But, their potential challenge clearly indicates that BAC's way out of mortgage mayhem may not be smooth. Investors could make a case for rejecting the deal by exposing poor loan underwriting on bonds, and emphasizing the investors backing the settlement hold small positions in some bonds. "
Our Tier 1 common ratio came in at 8.23%, higher than we expected, a drop of 20 basis points since the first quarter 2011 but improving since last year. Our tangible common equity ratio, came in at 5.87%, again, an improvement of what we said.
In all, during the second quarter 2011, our RWA came down over $30 billion
we don't need to raise capital as we continue on our plans to comply with Basel III
As we look at the business lines and you can see how they perform, this quarter shows the power of the rest of our franchise, which has been covered up by losses in Mortgag
In our Deposits business, we grew deposits. We paid less for our deposits this quarter on our deposits franchise, and we lowered our cost to operate the franchise in this quarter. we are growing our fees again, offsetting the overdraft regulations that came through last year.
In our Card business, we had strong performance aided by the credit provision released. But we also increased our units in the United States this quarter to over 730,000 new cards
In our Global Wealth Investment Management business, we had another solid quarter. We grew long-term assets, grew our advisory team and continue to see strong performance across the franchise
As we move to the corporate commercial side of our house, we had strong earnings in our Global Commercial Bank. That's our Middle Market business
global corporate Investment Banking business. That serves our larger corporate customers around the world. The deposit and treasury management revenues in these businesses were solid.
The loan growth outside the U.S. is strong, and our investment Banking fees of $1.6 billion plus were one of the best quarters we had in this business
Let me switch to 2 other areas of focus, our credit and expenses. On credit, we continue to see improvements in all portfolios, and we still have upside as charge-offs will continue to fall. Delinquencies in all portfolios continue to come down
on expenses, we continue to manage to a flat core expense level, if you eliminate the large mortgage onetime charges in the expense base. We've seen our headcount go down slightly this quarter. We continue to invest where we need and have to, in this franchise. Examples are the LAS buildout, the Legacy Asset Services buildout, where we've had to invest to collect the delinquent mortgage loans, but more importantly, on the revenue side, investing in more wealth managers in our Global Wealth and Investment Management business, more FSAs or brokers in our branch and small business lenders in our Deposits business, our international franchise and importantly, a technology investor throughout the franchise
At the same time, we continue to take out expenses in other areas to help fund these investments. For example, this quarter, our branch count is down 63 from last quarter. Our New BAC projects, which is a company-wide initiative on expenses, will be done this quarter, in the third quarter 2011, for one -- about 1/2 of the company, and we'll give you the results of that in October and show you what we plan to do with the second half of the company during the latter part of this year.
Risk-weighted assets were down $40.7 billion for the quarter or 2.8%, which is consistent with our strategy of driving down risk-weighted assets as we look out to the new Basel capital rules. To give you a sense of the magnitude of this reduction, it led to a 23-basis-point benefit to Tier 1 common during the quarter.
As we look at average loans, average loans declined $3.1 billion. On the negative, we saw commercial real estate decline by roughly $2.2 billion, which masked the improvement and the increase in average loans that we saw in commercial industrial loans in our Middle Market business. Once again, very strong improvement in asset quality within the Commercial Bank. Charge-offs declined $193 million or 38% from the first quarter. Nonperformers declined 11%, and we continued to see very solid performance in credit.
mortgage and home equity delinquencies. What I would highlight here, as you can see, delinquencies peaked in the second quarter of 2009, and we've seen 5 quarters of continued reductions in those delinquencies through the second quarter of 2011.
You can see that during the second quarter of 2011, both less than 180 day, as well as greater than 180-day delinquencies, improved in both residential mortgage and home equity.
With that being said, I'd make 2 additional points. The first charge-offs do remain elevated due to refreshed valuation losses, even though the frequency of loss continues to improve. The second thing I would note is that we've started to see the greater than 180-day backlog decline as foreclosure activity has started, particularly in most nonjudicial states
As you think about the individual portfolios that are affected by home prices, we have roughly $40 billion of portfolios that are directly affected, $13 billion of nonperforming loans that are more than 180 days past due that have been written down to net realizable value. Given they're at net realizable value, every 1% decline in home prices will have a correspondingly immediate effect on this portfolio.
Your 6.75% to 7% at the end '12 (core equity ratio), where do you go beyond that? As you look to get to the fully phased-in number of 9.5% by the end of '19, even with all of the actions that we've talked about, we have significant additional actions we can take in '13 and beyond. We've laid out 3 portfolios of assets here that we would expect to reduce aggressively. We have a loan run-off portfolio of $70 billion, that we would expect at the end of '12, that runs off by roughly 20% a year. We have a structured credit trading book, that's roughly $30 billion at the end of '12, that will run off over a 5-year period as well. And we have a private equity portfolio that's roughly $50 billion under Basel III, that will be out there at the end of '12, that we'd expect to run off over the several years beyond 2012. In addition to that, you can expect to see us continue to reduce assets in the way that we've done over the course of the last 6 quarters.
at the end of June, we'll have roughly $30 billion of a net deferred tax asset, roughly 2/3 of that is associated with NOLs and 1/3 is associated with timing. The net effect of that is that we would expect our Tier 1 common to grow at a rate that's above that, which is improved just by the generation of net income
We would clearly expect net interest income, if not at the trough, to clearly be pretty close to that. On the NIM, there are 2 comments that I'd make. The first is the rates that we're seeing with respect to the corporate loans that we've made have not shown any material deterioration, so the yields that we're seeing on the asset side continue to hold up. What I do want to caution you to a little bit is, to the extent that we continue to generate the types of liquidity on the deposit side that we are, NIM will be affected to the extent that, that happens because we're not going to chase long-duration assets that have OCI risk, and we're not going to chase assets that we don't feel comfortable with the credit. the NIM percentage could bounce around either way, give or take, depending on what happens in liquidity (ie deposits fall would need to borrow in markets which may be at a higher rate and would affect margin. Liquidity crunch and that borrowing rate may increase, decreasing margin as asset side income may not vary as wildly.)
Negative profits. mainly from writedowns of uncertain risk to defined risk where compensate investors. This is taken from PL. Loan loss provisions falling throughout the US banking environment.
Notes
settlement on private-label securities litigation
put large pieces of uncertain risks behind us as a company
actions we took on last year's fourth quarter on the GSEs...
"Bank of America Corp's $3 billion settlement with Fannie Mae and Freddie Mac may have brought New Year cheer to the bank's stockholders, but now comes the hard part: settling far larger and thornier claims made by private mortgage investors. Money manager BlackRock Inc and bond fund Pimco are in talks with Bank of America over $16.5 billion of mortgage bonds they purchased. The government-sponsored enterprises often had higher standards and well-understood eligibility guidelines for the mortgages they purchased. As a result, the lower quality loans were shipped off to other investors."
, in the first quarter on the monolines
"MBIA (NYSE: MBI) are up more than 7 percent Tuesday following news the company reached an agreement with Bank of America (NYSE: BAC) to dismiss a suit related to insurance for mortgage-debt defaults. Allegations were in regards to the unwinding of some $5.7 billion in credit-default swaps and the related insurance issued against these debt obligations. MBIA claimed Merrill Lynch's marketing efforts for the swap contracts were part of a scheme to sell nearly-toxic loans during 2006 and 2007. Tuesday's settlement has money managers and analysts speculating that MBIA and BofA now may be closer to agreeing to terms on wider allegations related to underwater subprime loans"
, we put another significant part of the rep and warrant exposure behind us and other mortgage-related matters. In all, as you can see, from the materials, we took almost $20 billion in charges related to the Mortgage business
"On June 29, Bank of America Corp. (BAC : 6.96, -0.07) announced that it will pay $8.5 billion in a game-changing settlement that should put some of its mortgage troubles in the past. The deal calls for BAC to pay $8.5 billion to settle claims brought by 22 private mortgage investors that bought 530 mortgage securities worth $424 billion from the Calabasas-based Countrywide Financial, now part of BAC.
we reported capital ratios, which are stronger than this quarter in 2010. Pimco, BlackRock, the Federal Reserve Bank of New York and other institutional investors are expected to receive cash payments as a result of the settlement. The settlement will be a binding agreement after court approval. However, a group of 11 mortgage-bond investors who call themselves the ‘Walnut Place' claim that the huge settlement is abundant with conflicts of interest, leading to questions about the fairness of the settlement. The group of bond investors challenging the settlement, whose identities have not been revealed, have a bleak chance of succeeding in the courts. But, their potential challenge clearly indicates that BAC's way out of mortgage mayhem may not be smooth. Investors could make a case for rejecting the deal by exposing poor loan underwriting on bonds, and emphasizing the investors backing the settlement hold small positions in some bonds. "
Our Tier 1 common ratio came in at 8.23%, higher than we expected, a drop of 20 basis points since the first quarter 2011 but improving since last year. Our tangible common equity ratio, came in at 5.87%, again, an improvement of what we said.
In all, during the second quarter 2011, our RWA came down over $30 billion
we don't need to raise capital as we continue on our plans to comply with Basel III
As we look at the business lines and you can see how they perform, this quarter shows the power of the rest of our franchise, which has been covered up by losses in Mortgag
In our Deposits business, we grew deposits. We paid less for our deposits this quarter on our deposits franchise, and we lowered our cost to operate the franchise in this quarter. we are growing our fees again, offsetting the overdraft regulations that came through last year.
In our Card business, we had strong performance aided by the credit provision released. But we also increased our units in the United States this quarter to over 730,000 new cards
In our Global Wealth Investment Management business, we had another solid quarter. We grew long-term assets, grew our advisory team and continue to see strong performance across the franchise
As we move to the corporate commercial side of our house, we had strong earnings in our Global Commercial Bank. That's our Middle Market business
global corporate Investment Banking business. That serves our larger corporate customers around the world. The deposit and treasury management revenues in these businesses were solid.
The loan growth outside the U.S. is strong, and our investment Banking fees of $1.6 billion plus were one of the best quarters we had in this business
Let me switch to 2 other areas of focus, our credit and expenses. On credit, we continue to see improvements in all portfolios, and we still have upside as charge-offs will continue to fall. Delinquencies in all portfolios continue to come down
on expenses, we continue to manage to a flat core expense level, if you eliminate the large mortgage onetime charges in the expense base. We've seen our headcount go down slightly this quarter. We continue to invest where we need and have to, in this franchise. Examples are the LAS buildout, the Legacy Asset Services buildout, where we've had to invest to collect the delinquent mortgage loans, but more importantly, on the revenue side, investing in more wealth managers in our Global Wealth and Investment Management business, more FSAs or brokers in our branch and small business lenders in our Deposits business, our international franchise and importantly, a technology investor throughout the franchise
At the same time, we continue to take out expenses in other areas to help fund these investments. For example, this quarter, our branch count is down 63 from last quarter. Our New BAC projects, which is a company-wide initiative on expenses, will be done this quarter, in the third quarter 2011, for one -- about 1/2 of the company, and we'll give you the results of that in October and show you what we plan to do with the second half of the company during the latter part of this year.
Risk-weighted assets were down $40.7 billion for the quarter or 2.8%, which is consistent with our strategy of driving down risk-weighted assets as we look out to the new Basel capital rules. To give you a sense of the magnitude of this reduction, it led to a 23-basis-point benefit to Tier 1 common during the quarter.
As we look at average loans, average loans declined $3.1 billion. On the negative, we saw commercial real estate decline by roughly $2.2 billion, which masked the improvement and the increase in average loans that we saw in commercial industrial loans in our Middle Market business. Once again, very strong improvement in asset quality within the Commercial Bank. Charge-offs declined $193 million or 38% from the first quarter. Nonperformers declined 11%, and we continued to see very solid performance in credit.
mortgage and home equity delinquencies. What I would highlight here, as you can see, delinquencies peaked in the second quarter of 2009, and we've seen 5 quarters of continued reductions in those delinquencies through the second quarter of 2011.
You can see that during the second quarter of 2011, both less than 180 day, as well as greater than 180-day delinquencies, improved in both residential mortgage and home equity.
With that being said, I'd make 2 additional points. The first charge-offs do remain elevated due to refreshed valuation losses, even though the frequency of loss continues to improve. The second thing I would note is that we've started to see the greater than 180-day backlog decline as foreclosure activity has started, particularly in most nonjudicial states
As you think about the individual portfolios that are affected by home prices, we have roughly $40 billion of portfolios that are directly affected, $13 billion of nonperforming loans that are more than 180 days past due that have been written down to net realizable value. Given they're at net realizable value, every 1% decline in home prices will have a correspondingly immediate effect on this portfolio.
Your 6.75% to 7% at the end '12 (core equity ratio), where do you go beyond that? As you look to get to the fully phased-in number of 9.5% by the end of '19, even with all of the actions that we've talked about, we have significant additional actions we can take in '13 and beyond. We've laid out 3 portfolios of assets here that we would expect to reduce aggressively. We have a loan run-off portfolio of $70 billion, that we would expect at the end of '12, that runs off by roughly 20% a year. We have a structured credit trading book, that's roughly $30 billion at the end of '12, that will run off over a 5-year period as well. And we have a private equity portfolio that's roughly $50 billion under Basel III, that will be out there at the end of '12, that we'd expect to run off over the several years beyond 2012. In addition to that, you can expect to see us continue to reduce assets in the way that we've done over the course of the last 6 quarters.
at the end of June, we'll have roughly $30 billion of a net deferred tax asset, roughly 2/3 of that is associated with NOLs and 1/3 is associated with timing. The net effect of that is that we would expect our Tier 1 common to grow at a rate that's above that, which is improved just by the generation of net income
We would clearly expect net interest income, if not at the trough, to clearly be pretty close to that. On the NIM, there are 2 comments that I'd make. The first is the rates that we're seeing with respect to the corporate loans that we've made have not shown any material deterioration, so the yields that we're seeing on the asset side continue to hold up. What I do want to caution you to a little bit is, to the extent that we continue to generate the types of liquidity on the deposit side that we are, NIM will be affected to the extent that, that happens because we're not going to chase long-duration assets that have OCI risk, and we're not going to chase assets that we don't feel comfortable with the credit. the NIM percentage could bounce around either way, give or take, depending on what happens in liquidity (ie deposits fall would need to borrow in markets which may be at a higher rate and would affect margin. Liquidity crunch and that borrowing rate may increase, decreasing margin as asset side income may not vary as wildly.)
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