BofA (BAC) Sinks 15% On Weak Earnings, Stock Offering and Dividend Cut
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Shares of Bank of America (NYSE: BAC) are down 15% mid-day after reporting disappointing earnings, announcing a $10 billion common stock offering and announcing a 50% dividend reduction.
After the close, BofA surprised Wall Street with the early release of their Q3 results. The results were disappointing to say the least. BofA reported third quarter net income of $0.15 per share, well below the consensus of $0.62 and down a whopping 82% from last year. The drop in earnings was driven by a significant increase in loan provision expense.
BofA also announced two initiatives to raise capital, targeting an 8 percent Tier 1 capital ratio. First, the company announced plans to sell $10 billion in common stock. Second, the company cut their quarterly dividend from $0.64 per share to $0.32. The company said the dividend cut will add $1.4 billion in additional capital per quarter.
CEO Ken Lewis said it is important to be at or near their 8 percent Tier 1 capital ratio target given the recessionary conditions and outlook for still weaker economic performance which they expect to drive higher credit losses and depress earnings.
BofA also said its consumer credit card business experienced a decrease in purchase volumes, slowing repayments and increased delinquencies during the quarter.
On a positive note, BofA is benefiting from consumer and business flight to safety, as shown by year-over-year increases in loans and deposits. Retail deposits increased $56 billion to $586 billion from June 30 to September 30, 2008, which includes of $35 billion in deposits from Countrywide.
Commenting on the results, Deutsche Bank's banking analyst Mike Mayo highlighted credit quality as an issue. Mayo noted that problem assets increased 37% in only three months. Mayo said loan issues were not just residential mortgages, but included commercial real estate, small business, credit cards and home equity loans. The firm lowered their price target on BofA from $28 to $26, while maintaining a Hold rating.
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