Bank of America (NYSE: BAC) announced earnings this morning, and posted rather surprisingly negative results. The firm said it lost $7.65 billion during the third quarter, driven by a charge related to credit and debit card reform legislation passed over the summer.
Amidst the changing regulatory environment, the firm also commented that it will change its consumer banking strategy to focus on providing customers with incentives to do more business with the bank instead of generating revenue through penalty fees such as overdraft charges. Cross selling the customers will be the name of the game in the coming years, especially now as the firm has diversified it’s operations through the Merrill Lynch and Countrywide acquisitions.
Chief Executive Brian Moynihan commented “We are adapting to the regulatory environment.” BofA said that the regulatory change would reduce future revenues in its card business. Excluding the one-time charge, Bank of America earned $3.1 billion, or 27 cents per share, in the three months ending in September. That easily topped the 16 cents per share analysts polled by Thomson Reuters were expecting. Analysts don’t typically include special charges in their estimates.
The business as usual results were better than expected, and mostly tied to a sharp drop in loan losses tied to defaulting loans. During the quarter, the bank set aside $5.4 billion to cover bad loans, as compared to $11.71 billion during the same period a year ago. This is a recurrent theme in all the bank results – JPMorgan Chase & Co. (NYSE: JPM) made similar disclosures last week, and the equity research community expects increased earnings in the coming quarters as fewer loans turn bad.
A drop in defaults is a critical sign to showing health in the economy. Researchers interpret this as a sign that customers could be regaining their financial footing after the recession, which led to widespread defaults on mortgages, home equity loans and credit cards. To embolden the new strategy, the bank plans to begin testing new offerings in December that will reward customers for using certain kinds of banking products or keeping higher balances. This program could improve the liquidity and capital positions of the firm, leaving it poised for growth during the impending economic rebound.
