Tuesday, February 22, 2011

Bank Of America Credit Quality Deteriorating

This most recent earning season saw all of the large banks quote improved credit quality as the basis to reduce reserves for credit losses and subsequently beat on the bottom line.  Recently that has been called into question with the departure of Howard Atkins, CFO of WFC.  This weekend's actions by BAC further question the improving credit quality assumption.

Feb. 22 (Bloomberg) -- Bank of America Corp., the biggest U.S. lender by assets, almost doubled a goodwill impairment for its credit-card unit to $20.3 billion to reflect increased defaults and an almost 2-year-old change in rules.

The bank restated federal regulatory filings to record the writedown to its FIA Card Services unit in 2009’s first half, the firm said yesterday in a statement. The non-cash charge, which replaced a $10.4 billion impairment booked on the unit last year, doesn’t affect “the financial results, safety and soundness or the capital position” of the Charlotte, North Carolina-based parent company, said Robert Stickler, a spokesman.

In November, the bank said some measureswould cut annual revenue by $1 billion, undermining efforts by Chief Executive Officer Brian T. Moynihan, 51, to improve returns for investors. The firm yesterday said the act and “deteriorating credit quality” caused the revision.

With deteriorating home and commercial real estate prices, rising unemployment (read beyond the BLS headlines), a rising interest rate environment and a US economy stuck at stall speed, BAC very likely will be forced to begin adding to reserves for credit losses in the coming quarters as the truth about "improving credit quality" is exposed.  Don't confuse the recent dead cat bounce in this stock as a sign of corporate health.


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