Bank of America, the third biggest US bank, is to take a $1.25bn charge to shut risky businesses making car and home loans to US consumers. The announcement came two days after the bank unveiled a national advertising campaign depicting a boy peering into a lake and praising those with the courage to jump. But the charge was a tacit acknowledgment that Bank of America may have leap too quickly into new businesses during its years of rapid expansion. Investors reacted calmly to the news, hoping the charge was a sign that Kenneth Lewis, the new chairman and chief executive, was bringing discipline to the bank. Mr Lewis succeeded Hugh McColl earlier this year.
At midday, Bank of America shares had gained 44 cents to $63 - up more than 70 per cent since December, when there were worries about its commercial loan portfolio. "This is a company that is huge in all manner of business and yet they are not best-in-class across the board," said Diane Glossman, bank analyst at UBS Warburg. "Part of the issue for Bank of America has been whether they would be more stringent in the way they run their business." Bank of America said it would immediately stop issuing car leases and making sub-prime home loans, which are often used by consumers to pay off other debts such as credit cards.
Mr Lewis said: "Both of these businesses have very volatile earnings streams, have become unattractive from a risk-reward standpoint and have not produced required rates of return." The bank said it planned to manage its $9.7bn car lease portfolio until it expired. It will sell its $26.3bn sub-prime real estate portfolio in seven to nine months. The company said it had found two buyers for its sub-prime branch network and was still looking for someone to buy its servicing operation.
As a result of the changes, Bank of America said it would add $256m to its reserve for car lease losses and would write down $253m in sub-prime real estate loans. Bank of America is one of a number of US banks, including First Union, Bank One and KeyCorp, that have moved out of auto leasing amid heavy losses. The business deteriorated after banks rushed to extend credit to consumers. At the same time, many overestimated the resale value of cars after leases expired.
Commercial banks have also had mixed results in sub-prime mortgage lending after piling into the market in the 1990s in search of higher returns. The Bank of America charge adds to concerns that consumer credit quality is declining, said Michael Mayo, Prudential Securities analyst.
At midday, Bank of America shares had gained 44 cents to $63 - up more than 70 per cent since December, when there were worries about its commercial loan portfolio. "This is a company that is huge in all manner of business and yet they are not best-in-class across the board," said Diane Glossman, bank analyst at UBS Warburg. "Part of the issue for Bank of America has been whether they would be more stringent in the way they run their business." Bank of America said it would immediately stop issuing car leases and making sub-prime home loans, which are often used by consumers to pay off other debts such as credit cards.
Mr Lewis said: "Both of these businesses have very volatile earnings streams, have become unattractive from a risk-reward standpoint and have not produced required rates of return." The bank said it planned to manage its $9.7bn car lease portfolio until it expired. It will sell its $26.3bn sub-prime real estate portfolio in seven to nine months. The company said it had found two buyers for its sub-prime branch network and was still looking for someone to buy its servicing operation.
As a result of the changes, Bank of America said it would add $256m to its reserve for car lease losses and would write down $253m in sub-prime real estate loans. Bank of America is one of a number of US banks, including First Union, Bank One and KeyCorp, that have moved out of auto leasing amid heavy losses. The business deteriorated after banks rushed to extend credit to consumers. At the same time, many overestimated the resale value of cars after leases expired.
Commercial banks have also had mixed results in sub-prime mortgage lending after piling into the market in the 1990s in search of higher returns. The Bank of America charge adds to concerns that consumer credit quality is declining, said Michael Mayo, Prudential Securities analyst.
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