Tuesday, October 18, 2011

How BofA Made Mega-Profits Again this Year

...besides just the illegal forecloses that were written off to the taxpayers and the banks over-draft scams.

Bank of America reported Third-Quarter 2011 Net Income of $6.2 Billion, helped in part by Net Charge-Offs, which is bad debt or poor credit quality loans which are regularly charged off as bad debt and purged from the books, often on a monthly or quarterly basis.

A charge-off is the declaration by a creditor (usually a credit card account) that an amount of debt is unlikely to be collected. This occurs when a consumer becomes severely delinquent on a debt. Traditionally, creditors will make this declaration at the point of six months without payment. The purpose of making such a declaration is to give the bank a tax exemption on the debt.

B of A also had a $1.7 billion pretax gain in trading Debit Valuation Adjustments (see the full WSJ article below). Debit valuation adjustments (DVA), is an accounting trick rule that permits banks to post paper profits when the value of their own credit quality declines. It also helped Citigroup post a $3.77 billion profit Monday even as its revenue fell. And J.P. Morgan Chase & Co. included a $1.9 billion pre-tax benefit from debt valuation adjustments in its investment bank when it posted third-quarter earnings last Thursday. This morning, Bank of America Corp. reported booking their $1.7 billion gain due to the accounting rule.

B of A revenues were also helped by total average deposit balances of $1.05 trillion, which were up $77 billion. Average deposit balances increased $11.2 billion from a year-ago this quarter, driven by growth in liquid products in a low rate environment. "Liquid investment" is an investment that one has immediate access to, either the ability to buy or sell the investment (such as a stock or mutual fund) or the ability to access and withdraw funds (such as a savings account). A "low rate environment" means cheap money borrowed from the FED before they re-loan it to you.

The number of net new consumer and small business checking accounts was positive for the third consecutive quarter as the company continued to focus on the retention of "profitable customer relationships" (the wealthier depositors) - so many customers are willing to increase their balances to achieve account benefits (i.g. free checking and ATM use).

Evidently those people never heard of Bank Transfer Day.

The company continued to strengthen their balance sheet by reducing risk-weighted assets by $33 billion from the second quarter of 2011 and $117 billion from the third quarter of 2010. For example, loans that are secured by a letter of credit would be weighted riskier than a mortgage loan that is secured with collateral.

Earlier this year B of A launched an initiative with the implementation of Phase 1 beginning this month with a goal of reducing expenses by approximately $5 billion per year by 2014, on a baseline of approximately $27 billion. The company expects to incur technology and severance costs during the implementation of Phase 1. (New computers and the layoff of employees).

The allowance for loan and lease losses with "net charge-offs" (write-offs) remained strong in the third quarter of 2011. B of A's Chief Financial Officer Bruce Thompson says, "We reduced the size of our balance sheet by $42 billion from the second quarter of 2011." (Bad debts written off their taxes after they were already bailed out by taxpayers.)

The number of new U.S. credit card accounts for B of A grew by 17 percent in the third quarter of 2011 compared to the second quarter of 2011. Credit quality continued to improve with the 30-day delinquency rate declining for the 10th consecutive quarter. Card Services reported net income of $1.3 billion. (after already writing off most of their bad debts, and only retaining customers with the better credit scores).

Average loans for B of A declined $17.5 billion from a year-ago due to charge-offs (write-offs), portfolio runoff, and divestitures. "Divestiture" is the removal of assets from the books. Businesses divest by the selling of ownership stakes, the closure of subsidiaries and the bankruptcy of divisions. "Portfolio runoff" is a decrease in the assets of a mortgage-backed securities portfolio due to the prepayment of the securities held in that portfolio.

B of A's net income rose 29 percent from the year-ago. Revenue for B of A rose 6 percent to $28.7 billion - the CEO got a $9 million bonus, but you got $5 ATM fee. They got bail outs while you got foreclosures, jacked up interest rates, user fees, and over-draft charges. The banksters should have been occupying jail, while we should be nationalizing all the banks.

How Weakening Credit Strengthens Banks' Results—and Vice Versa

From the Wall Street Journal By Katy Burne - katy.burne@dowjones.com  

Investors in bank stocks should take the latest round of quarterly earnings with a pinch of salt, given the effects some contentious accounting metrics have had on their income statements, according to market observers.

Debit valuation adjustments, an accounting rule that permits banks to post paper profits when the value of their own credit quality declines, helped Citigroup Inc. post a $3.77 billion profit Monday even as its revenue fell. And J.P. Morgan Chase & Co. included a $1.9 billion pre-tax benefit from debt valuation adjustments in its investment bank when it posted third-quarter earnings last Thursday. And this morning, Bank of America Corp. reported booking a $1.7 billion gain due to the accounting rule.

Risk specialists say the banks have been up front about the accounting rules inflating their incomes and contributing to earnings volatility. The specialists also note that while the rules worked in the banks' favor in the previous quarter, they have worked against the banks in the past.

"This is just fair-value accounting—it's not something banks decided to use to boost their earnings," said Joyce Frost, partner at Riverside Risk Advisors LLC. "It just so happens that we were in an environment because of the European debt crisis, that bank credit spreads widened dramatically and applying these accounting principles resulted in a non-cash gain. If credit spreads tighten dramatically this quarter, you will see an equal and opposite effect."

Keith Horowitz, a banking analyst at Citigroup, said most investors have seen these sorts of accounting benefits before, and know to look straight through them.

"Most investors are completely ignoring the DVA gains since it's accounting fiction and it's been an item before," he said. "The investors I talk to, they are accustomed to it and it's not an issue for the stock."

Citi's third-quarter results included a $1.9 billion gain from a widening in its credit-default swap spreads over the third quarter. The adjustments let banks record gains when the cost of protecting their own debt with credit-default spreads rises, reflecting a higher probability of default on derivatives contracts and other obligations.

As a firm's liabilities move in its favor, its counter-parties record a loss and the firm records a gain, said David Kelly, director in credit product development at derivatives solutions specialist Quantifi Inc.

However, the firms could realize these gains only if they were to default on their obligations, Mr. Kelly said, and if a firm's credit spreads improve in the fourth quarter, the gains would be reversed.

Jon Gregory, partner at counterparty risk consultancy Solum Financial, said the effect of a debit valuation adjustment is like having a very large life-insurance policy, but not being rich because you can't monetize it until death. "We went through this before in 2008," he said. "Every time bank spreads widen, inevitably there are DVA gains. One argument is that if you don't do that, then balance sheets wouldn't add up. But it's not real money."

In the first quarter of 2009, J.P. Morgan had a DVA gain of $638 million due to its deteriorating credit quality, while Morgan Stanley recorded a DVA loss of $1.5 billion as its credit spreads rallied.

Nearly three years later, the pattern seems to be repeating.

In J.P. Morgan's case, the DVA benefits this quarter were nearly a quarter of its $4.3 billion net income for the period. Citi had net income of $3.77 billion for the quarter, and said its revenue was $18.9 billion excluding the $1.9 billion credit adjustment.

In both of these cases—and in earnings coming from other big banks—counterparties "had to record a loss due to the bank's wider credit spreads and on the other side of the ledger, [banks] recorded a corresponding gain," Mr. Kelly explained.

"As counterintuitive as this accounting treatment may seem, shareholders can't push for more of a mark-to-market world, but then cherry-pick when they want to include the mark-to-market. In either case, bank analysts have figured out what the DVA means to the results and are discounting the effect in their analysis," said Jiro Okochi, chief executive of the risk management company Reval.

Citi Mr. Horowitz last week forecast that Morgan Stanley would record a $1.5 billion net DVA gain when it reports earnings Wednesday.

Other articles I've written:

Phil Gramm: From US Senator to UBS Banker 
Elizabeth Warren - Consumer Financial Protection
I Want to be a Banker
George Clooney - New Spin Doctor for Goldman Sachs?
GOP Won't Reform Banks or Cut Oil Subsidies
Republicans Support Crooked Bankers
A Company of One Verses Big Banks
Some Bankers Must #Occupy Jail
B of A CEO Gets $9M Bonus-You Get $5 ATM Fee


  1. The Alliance for a Greater New York and Occupy Wall Street teamed up to launch occupytheboardroom.org, a website that lists the names of 200 top executives and board members from Bank of America Corp., Citigroup, Goldman Sachs Group, JP Morgan Chase, Morgan Stanley and Wells Fargo. “Just got evicted while your banker gets bonuses?” the site asks. “Share your special story with someone who ought to know.”


  2. Did Bad Loans Continue at Bank of America After 2008?