The new BankAmerica Corp., battered by the global economic crisis, reported third-quarter earnings far below analysts' expectations.
The company posted operating profits of $893 million, or 50 cents a share, 44% below Wall Street's expectation of 90 cents a share.
The big surprises: a $372 million chargeoff for a loan to New York hedge fund D.E. Shaw & Co. and a $500 million reserve against trading losses.
The company, formed by the Sept. 30 merger of BankAmerica Corp. and NationsBank Corp., became the second new megabank to report sharply falling profits. Citigroup, created by the merger of Citicorp and Travelers Group, last week said it expected to report a 53% decline in third-quarter profits.
Analysts said the results could cause tension between executives of the former NationsBank Corp. and the old BankAmerica as they begin integrating the two companies. The unexpected problems arose largely from BankAmerica units.
All the same, BankAmerica chairman Hugh L. McColl and some analysts said the nation's first coast-to-coast bank still had bright prospects.
"This quarter did not reflect the earnings power we have with the new Bank of America," Mr. McColl said. "We are encouraged that loan growth and consumer banking performance remain positive."
(Separately, company officials downplayed integration problems in Florida as it completed the conversion of Barnett Banks Inc. See story on page 21.)
BankAmerica reported net income of $374 million, down a full 78% from the pro forma results of a year earlier. The decline, which reflected a charge of $519 million for merger-related expenses, prompted a sharp decline in the company's shares. (See story on back page.)
The $595 billion-asset company generally turned in solid results in traditional domestic businesses. Credit card fee income was up 18%, to $379 million; brokerage income nearly tripled, to $198 million; and loan growth jumped 9%. One of the few exceptions was a $250 million writedown of a mortgage servicing portfolio.
But difficulties in the old BankAmerica's overseas operations easily overshadowed any positive domestic gains made by the combined bank. A $529 million loss in third quarter trading income translated to a 288% decline from the year-earlier quarter.
Investment banking income was up 20%, to $376 million from the same period a year ago, but down 43% from a record $664 million in the second quarter.
To further protect against foreign turmoil, BankAmerica will begin paring overseas operations, according to analysts who listened to a conference call with bank officials Wednesday morning. The move represents a marked reversal. Following the merger announcement in April, BankAmerica president David A. Coulter had said he planned to expand the bank's operations abroad.
"NationsBank's tolerance for international risk has gone way, way down because of the third quarter results," Mr. Bradshaw said.
The report may also make what is likely to be an arduous integration process even tougher, analysts said.
"NationsBank got a lot more than they bargained for, given weaker than expected results from the old BankAmerica," said Michael L. Mayo, of Credit Suisse First Boston in New York.
"The long-term concern is how the corporate businesses of both companies will meld together given the friction caused by these problems," he said.
Others were more upbeat about the new BankAmerica, which boasts 4,870 branches in 22 states.
"Investors are going to trade around these foreign problems in the near- term, but this business is 90% domestic," Mr. Bradshaw said. "It's a locomotive that is not going to be stopped on the domestic side."
During the conference call, BankAmerica chief financial officer James H. Hance Jr. and president of financial services Michael E. O'Neill attempted to focus on the bank's strengths, analysts said. But instead they were peppered with pointed questions about the exposure to D.E. Shaw.
"As much as they wanted to talk about their domestic power, the only thing anyone wanted to talk about was D.E. Shaw," said Joseph K. Morford, an analyst with Van Kasper & Co. in San Francisco.
To ameliorate its D.E. Shaw problems, the bank said that it would purchase $20 billion of fixed-income securities along with the related hedge positions from the firm. This should minimize further losses by allowing BankAmerica to liquidate the securities in an orderly fashion that should minimize losses, analysts said.
"If BofA hadn't bought the portfolio, D.E. Shaw would have been forced to dump it at fire sale prices," Mr. Bradshaw said. After the $372 million chargeoff, BankAmerica will still have a $1 billion invested in the hedge fund. +++
BankAmerica Corp. Charlotte, N.C. Dollar amounts in millions (except per share) Third Quarter 3Q98 3Q97 Net income $374.0 $1,730.0 Per share 0.21 0.96 ROA 0.26% 1.26% ROE 3.23% 16.13% Net interest margin 3.60% 4.01% Net interest income 4,484.0 4,676.0 Noninterest income 2,405.0 3,078.0 Noninterest expense 4,576.0 4,406.0 Loss provision 1,405.0 489.0 Net chargeoffs 902.0 497.0 Year to Date 1998 1997 Net income $4,003.0 $5,083.0 Per share 2.30 2.87 ROA 0.93% 1.26% ROE 12.01% 15.92% Net interest margin 3.74% 4.06% Net interest income 13,811.0 13,991.0 Noninterest income 9,534.0 8,531.0 Noninterest expense 14,012.0 12,865.0 Loss provision 2,410.0 1,406.0 Net chargeoffs 1,923.0 1,360.0 Balance Sheet 9/30/98 9/30/97 Assets $594,673.0 $543,414.0 Deposits 345,756.0 335,574.0 Loans 344,767.0 329,523.0 Reserve/nonp. loans 315% 305% Nonperf. loans/loans 0.65% 0.66% Nonperf. assets/assets 0.43% 0.48% Nonperf. assets/loans + OREO 0.73% 0.77% Leverage cap. ratio 6.64% 6.16% Tier 1 cap. ratio 7.39% 7.00% Tier 1+2 cap. ratio 11.38% 11.56% ===