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.)