Bank Beats Forecasts, Reassuring Investors

After so much bad news from the nation’s financial industry, Bank of America heartened Wall Street on Monday with quarterly profits that easily surpassed analysts’ gloomy forecasts.

While results from a slew of other banks this week could yet disappoint investors, the report from Bank of America, the nation’s largest retail bank, added to the sense of cautious optimism that some big banks are starting to find their footing.

Bank of America, with its $3.4 billion second-quarter profit, was the fourth major bank to report stronger-than-expected results in recent days. While that result represented a 44 percent decline from the same period a year earlier, it nonetheless exceeded most forecasts and left investors impressed by the company’s ability to offset hefty credit losses with higher lending margins and fees. Bank of America’s share price rose almost 4 percent in heavy trading.

“We see things improving sequentially,” Kenneth D. Lewis, Bank of America’s chairman and chief executive, said during a conference call with investors. “We have a ray of optimism now that we haven’t had for a few quarters.”

Mr. Lewis said that while consumer loan losses were rising, he expected them to peak in the next two or three quarters. He forecast that the economy would remain sluggish for the rest of 2008 and slowly recover during the first half of next year. And he suggested that for Bank of America, at least, the days of enormous dollar write-offs on loans for corporate buyouts and for complex mortgage investments would end soon.

Few analysts say the banking industry as a whole has turned the corner. Nearly every major institution is wrestling with surging losses tied to real estate, credit card and construction loans. But investors are starting to recognize that the losses may not be as severe as they had initially feared. They are also realizing that banks may have the earnings power to offset bad loans and absorb further write-downs.

“It is too early to say things are getting better, but this is coming off extreme fears,” said Mark Fitzgibbon, the director of research at Sandler O’Neill & Partners in New York.

Financial shares have swung erratically during the last week and a half as the Bush administration moved to bolster the nation’s two largest mortgage finance companies, Fannie Mae and Freddie Mac, and federal regulators seized a large California lender, IndyMac Bancorp. But the sector roared back late last week after Wells Fargo, JPMorgan Chase and Citigroup reported strong results.

Bank of America has another reason for optimism: The Countrywide Financial Corporation, the troubled mortgage lender it recently acquired, is now expected to turn profit this year, Bank of America said Monday. When the acquisition was announced in January, Bank of America said the deal would have no impact on earnings this year.

Still, investors fear that losses from Countrywide’s $111 billion loan portfolio could spiral higher, and that Bank of America could be saddled with billions of dollars in litigation costs stemming from Countrywide’s business practices.

But Mr. Lewis said on Monday that given Bank of America’s current analysis of the environment, he was confident that Countrywide’s losses would total about $18.9 billion. Some analysts have previously estimated they could reach $30 billion or more.

Mr. Lewis also told investors that Bank of America’s dividend was safe for now. And with about $26 billion in unrecognized gains related to its ownership stake in China Construction Bank, Bank of America executives said they felt good about their company’s financial position.

While Mr. Lewis has struck a more optimistic note than several other bank chiefs, he said in an interview that he was trying to be “realistic.”

“Even what we think would be reasonable comments are thought to be Pollyanna-ish” in today’s bearish environment, he said. “The psychology in the market is worse than things really are.”

Even so, Bank of America’s credit losses are rising sharply. On Monday, the bank said that it would set aside $2.2 billion more to cover future losses tied to real estate, credit card and construction loans. The bank is also experiencing heavy losses from loans made to small-business customers. And though losses might peak in the coming quarters, many investors expect them to remain high for some time.

Bank of America still has several billion dollars’ worth of buyout loans to sell, and some Wall Street analysts worry the bank has been slow to mark down the values of those loans on its books. The bank took write-offs of $64 million on buyout loans and an additional $645 million on complex mortgage investments it could not sell.

Recent acquisitions are likely to keep Mr. Lewis from pursuing another blockbuster deal in the near future. Bank of America has its hands full integrating Countrywide and LaSalle Bank, a Midwest lender it bought last year, and is brushing up against a federal cap on deposits.

“The focus now is on profits sequentially and building our capital back to our targets. It’s an inward focus on one sense,” Mr. Lewis said. “We are actually having great success in the marketplace given that others are so inwardly focused.”