LOTS OF HURDLES: "Pressure on yields" in the "competitive" market for loans to midsize companies has made loan growth difficult, B of A CEO Brian Moynihan said.
LOTS OF HURDLES: "Pressure on yields" in the "competitive" market for loans to midsize companies has made loan growth difficult, B of A CEO Brian Moynihan said.

Bank of America's turnaround picture has suddenly turned cloudy.

It has shelled out billions of dollars to resolve legal matters and hacked away at expenses. For more than two years now, Chief Executive Brian Moynihan has promised investors that a stable banking business would emerge after the company made those costly, but necessary, moves.

But that plan suffered dual blows Wednesday after the markets took a dive and B of A broke the news that revenue fell in the third quarter.

Moynihan told analysts early in the day that he continues to be cautious on where rates are headed because of the past month's volatility, and that concern was only amplified as U.S. treasuries and stocks fell during the day.

Revenue growth in a low-rate environment has been hard, and for B of A in particular the task just got harder. B of A, with its large deposit base, is considered to be more exposed to interest rates than some of its peers.

Its revenue declined 1.5%, to $21.2 billion, from a year earlier. The other megabanks this week reported revenue growth: 9.5% for Citigroup, 4.9% for JPMorgan Chase and 3.6% for Wells Fargo.

B of A also noted that revenue fell 3% from the second quarter, blaming lower equity-investment gains, investment banking fees and mortgage banking revenue.

Shares of Bank of America fell 4.6%, to $15.76. The broad market sell-off also hit Citigroup (down 3.5%) JPMorgan Chase (down 4.2%) and Wells Fargo (down 2%).

Moreover, analysts zeroed in on whether B of A will be able to reduce expenses in its legacy mortgage business as quickly as expected.

On the conference call it became clear that its goal of cutting legacy servicing costs to $500 million a quarter will be put off until late next year — and there is no certainty it can reach that number. B of A said it expects legacy servicing costs of $1.1 billion in the first quarter, and will try to whittle them down to $500 million by the end of 2015. Neither Moynihan nor Chief Financial Officer Bruce Thompson would commit to getting costs that low next year.

That means B of A's legacy servicing costs could be as high as $3 billion next year, compared with earlier projections of $2 billion, and will cut into earnings, analysts said.

"They're righting the ship as quickly as they can but it's not righting quickly," said Guy Moszkowski, a managing partner of Autonomous Research USA.

Thompson acknowledged that the Charlotte, N.C., bank had fallen behind on its own forecast.

"Clearly $1.1 billion of legacy-asset-servicing expenses that we've set to get to in the first quarter of 2015 is not where we would expect to operate on a longer-term basis and there's additional work that we need to do there," Thompson said. "We do expect given what litigation has been that over time it is going to come down."

Paul Miller, a managing director at FBR Capital Markets, said there is no way of knowing when B of A's legacy costs will be overcome once and for all.

"They've attacked litigation costs, but people are underestimating the time it will take to get all these costs out," Miller said.

B of A's third-quarter net income of $168 million, or a penny a share, included the previously announced charge of $5.3 billion for its settlement with the Department of Justice and six states. B of A earned $2.5 billion or 20 cents a share a year earlier.

B of A has sold of a large number of nonperforming loans but may have more difficulty doing so going forward, analysts said. B of A had $14.2 billion in nonperforming loans, leases and foreclosed properties at the end of September, down 29% from a year earlier.

While those legacy assets will eventually run off, B of A will be stuck servicing much of what it has left. B of A and other banks have been selling off mortgages and servicing rights, but the flow is expected to slow because regulators have recently blocked industry sales to nonbank servicers.

Meanwhile, B of A also is struggling to improve loan growth, which was just 2% in the quarter. Lending to midsize companies has become "the most competitive area," as banks jockey to offer additional services to those firms, Moynihan said.

"It's within...the middle-market commercial space where we're seeing the most pressure on yields," he added.

Bank of America's litigation and legacy servicing assets continued to overshadow the fact that four out of its five main businesses reported gains. The bank posted record revenue and earnings in global wealth and investment management, with investment banking fees up 4%, to $1.4 billion from a year earlier.

Sales and trading revenue rose 9% to $3.3 billion from a year ago.

"Many of their revenue items did well," said Erik Oja, an equity analyst at S&P Capital IQ. "There is a lot of strong growth, but it always seems that something hurts their growth. If there's anything that's going to affect their earnings trajectory it's that they can't figure out a way to reduce the legal and legacy expenses."

Analysts also questioned Moynihan about whether the bank had to consult with regulators when it recently gave him the chairman's title in addition to CEO; corporate governance experts normally frown on letting one person hold both jobs.

Moynihan avoided a direct answer, instead citing documents from the Federal Reserve and the Office of the Comptroller of the Currency that showed "they care about the engagement of the board."

"We have a good board, and it's experienced and has all the diversity...and that's the core of the governance point that [regulators] make," Moynihan said.

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