$6bn fund to cover bad debts at Bank of America

Stephen Foley
Tuesday 22 April 2008 00:00 BST
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US homeowners with second mortgages, housebuilders and small business owners are among those now defaulting on loans in increasing numbers, the nation's largest retail bank warned yesterday.

As Bank of America said it was setting aside more than $6bn (£3.03bn) to cover the soaring number of bad loans, its chief executive Ken Lewis warned he saw the US economy managing only a modest rebound later this year. "The litany of negative issues left a clear mark on earnings," he added. "It would be too early to strike up the band and sing 'Happy Days Are Here Again'."

The provisions for bad loans in the first three months of the year were five times the level in the same period last year, and were up 80 per cent on the final quarter of 2007. As a result, the bank's quarterly profit was down by more than three-quarters to $1.21bn (£606m), significantly below Wall Street's expectations.

Weakening credit quality led the rating agency, Moody's, to downgrade Bank of America's debt yesterday, but Mr Lewis said he would not alter the dividend policy of the company, which has raised the payout every year for more than three decades. Other US banks have been cutting their dividends to preserve cash.

Bank of America has the largest branch network in the US and had been expanding its presence in investment banking and Wall Street trading until the credit crisis unfolded last year. The company booked another $1.5bn (£758m) in writedowns on mortgage derivatives, $439m (£222m) for loans to fund leveraged buyouts, and additional trading losses of $1.3bn (£656m).

Walter O'Haire, an analyst at financial research company Celent, said: "Credit quality deteriorated in several areas, most notably in regions that have experienced the most significant home price declines, which includes the former high-flying areas such as California, Arizona, and Florida. With the price of oil at all-time highs, a surge in food prices, foreclosures and defaults in many areas of the country, it is hard to imagine that US consumers' financial health will be on an upswing in the near term."

Bank of America was budgeting for little if any growth in the US economy in the first half of the year and only a modest rebound in the second half, Mr Lewis said, but still expected its profits to grow this year.

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