Ken Lewis has produced plenty of sound bites this year, but Friday, he was speechless by comparison.
Though willing to provide limited guidance on underlying earnings strength and credit trends, B of A executives were quick to hedge and caution during a conference call to discuss second-quarter results. They were equally reluctant to sound as positive a tone on the future as some of their peers.
Lewis, the company's president and chief executive, said early in the call that he is "wrestling with the definition of normalized earnings" due to an unpredictable economy and government intervention. When pressed by analysts, Lewis said he remains comfortable with projections that the company can produce $50 billion in pretax, pre-provision earnings this year, "but to talk about it on a quarter-to-quarter basis is pretty hard."
He added later: "You'd have to be a psychic to be able to predict the economy."
Guidance on credit losses was also hard to pin down during the call. Lewis said it would take "several quarters" before the overall credit picture stabilizes. Joe Price, B of A's chief financial officer, warned analysts minutes later that it is "hard to get comfortable" with credit-related projections using traditional models.
During a call with reporters, Price was hesitant to concur with comments from executives at other big competitors who had hinted that the worst may soon be over. While insisting that "the pace of deterioration seems to be dissipating," he said he had learned over the past two years to "deal with a lot of unexpected" issues at B of A, the nation's largest banking company.
The circumspection underscores B of A's tenuous position in the face of a sluggish economy and rising unemployment. It also makes it increasingly difficult for Wall Street to forecast future performance or determine when the company will be strong enough to repay the $45 billion it has received from the government.
Betsy Graseck, an analyst at Morgan Stanley, said management is trying to be as "straightforward" as it can, though it is still leaving Wall Street to make its own assessments. "They're being incredibly conservative, which is understandable given their position," she said.
Difficulties forecasting performance at B of A are understandable, considering the messiness of the $2.32 trillion-asset Charlotte company's second quarter. Earnings fell 26% from the first quarter and fell 6% from a year earlier, to $3.2 billion, thanks to a bevy of unique items.
Several gains were part of capital-raising efforts after the stress tests, including $5.3 billion from selling China Construction Bank stock and $3.8 billion from selling its merchant processing business to a joint venture. Absent those, the company could have fallen back into the red after a profitable first quarter.
B of A gave back accounting gains related to the purchase of Merrill Lynch & Co. that boosted first-quarter profits. In the second quarter it took $3.6 billion in losses in mark-to-market adjustments on debt and $1.6 billion of losses tied to derivative liabilities. A quarter earlier those items produced $3.9 billion in gains.
"Profitability in the second half of the year will be much tougher than the first half," Lewis said, as B of A will have fewer ways to offset losses.
"I would rather see the operating improvements and take the accounting lumps," he added.
Price said there may be fewer special items to hit earnings, too, and that Bank of America remains in talks with multiple parties about selling its Columbia Asset Management unit, which could provide a lift if completed.
Credit-quality data also was mixed, though B of A focused on positives. Price cautiously noted that early-stage delinquencies have been stable this year and may have peaked, particularly in areas such as home equity and home builder exposure. Pressure from worsening commercial credit is likely to offset the improvements seen from home builders, he said.
Bank of America kept its loan-loss provision steady from a quarter earlier, at $13.38 billion, despite worsening measures elsewhere. Net chargeoffs rose 25% from the first quarter and 140% from a year earlier, to $8.7 billion. Nonperforming assets rose 21% from the first quarter and more than doubled from a year earlier, to $30.98 billion.
Some analysts remained skeptical despite a decline in 30-day delinquencies and a 27% decrease in net additions to reserves compared with a quarter earlier.
Isabel Schauerte, an analyst at the Celent unit of Oliver Wyman Group, said exposure to the U.S. consumer — enhanced by past purchases of card issuer MBNA Corp. and mortgage giant Countrywide Financial Corp. — still "leaves the bank rather vulnerable" compared to other big banks and that "a moderation of default rates is not in sight."
B of A's approach to credit differed greatly from that of JPMorgan Chase & Co., where the provision more than doubled from the first quarter, to $9.7 billion. Not only that, B of A continued to talk about holding on to liquidity while JPMorgan Chase brought up the prospect of buying back common stock.
Investment banking was a bright spot, mirroring results at other big financial companies. Excluding special items, sales and trading revenue hit a record $6.7 billion in the second quarter, helping the company reach $16.1 billion in pretax, pre-provision profit in the quarter.
Lewis reminded analysts about the volatility of capital markets and said the business will be "a big factor" over the next few quarters. Predicting sustainability there, he added, "is hard to say."
"As much as these companies make statements, they really can't see out any further than three months," said Thomas Kersting, an analyst at Edward Jones. "A lot will depend on the overall economy, and my sense is that Ken Lewis and everyone else doesn't have a sense of where it is going. The question for me is, what is the real earnings power at Bank of America in a year or two?"