NEWS AND COMMENTARY
January 8, 2001 
Good Times End For Bank of America
By Gary Silverman, The Financial Times
Recession Will Clobber Banks ... Weiss comments
NEW YORK - When NationsBank combined with Bank of America in 1998 the result was a bank without peer - a coast-to-coast US franchise that promised unprecedented economies of scale.
But, in practice, the merger to create America's largest retail bank has been a study in the perils of bigness.
Merger efficiencies proved elusive because of problems linking up computer systems. A push into investment banking raised costs. Retail revenues remained sluggish.
Now, investors are focusing on a more worrisome problem - deterioration in the massive loan book at Bank of America, which has $672 billion in assets, including $396 billion in loans.
This focus has been sharpened by the bank's exposure to the crisis affecting Californian utilities. Concerns have been growing about their ability to pay back debts and investment analysts reckon Bank of America's exposure could run to between $500 million and $1 billion.
On Friday, rumors of a big trading or loan loss even prompted a temporary suspension of trading in Bank of America stock. The company said it knew of no new problems and its shares ended down $3.81, or 7.4%, at $47.69. With Friday's fall, Bank of America's share price remained more than $10 above its 52-week low in December - hardly the sign of an imminent collapse.
However, the California situation is a symptom of a more gnawing problem at Bank of America. Like many US companies, it has behaved as if the good times would never end.
Analysts fear that in its haste to expand and meet earnings expectations, the bank has left itself ill prepared for a serious deterioration in the US economy.
Before the California crisis Charles Peabody, banking analyst at Mitchell Securities, said he reckoned the Bank of America could be facing $5 billion to $10 billion in potential loan losses.
But as recently as last quarter, the bank was lowering its loan-loss reserves even though federal regulators were warning of increasing problems involving large syndicated loans.
This behavior was all the more remarkable because Bank of America is one of two banks that dominate syndicated lending in the US - the other being JP Morgan Chase.
But whereas JP Morgan Chase focuses on bigger deals for bigger companies, Bank of America beats the bushes for smaller deals with the inevitable bigger uncertainties.
Those uncertainties grew last month when the bank warned that its problem loans were growing and that its head of leveraged lending - the well-known Tom Bunn - was leaving.
In its earnings statement, it said loan write-offs in the fourth quarter would hit $1.1 billion to $1.2 billion, more than double the level in an already worrying third quarter.
But that warning was accompanied by an interesting caveat. The bank said it was assuming the US economy was headed for a soft landing and that its business mix would remain unchanged.
With evidence of an economic slowdown growing, expectations are also rising that changes will have to be made at Bank of America.
Bank of America is clearly extremely vulnerable to the economic slowdown facing the U.S., but the entire banking industry is in peril. We've been telling you that the credit crunch will undoubtedly hurt funding for businesses, and by extension, revenue growth and earnings power.
But even as banks cut back drastically on lending, it's too late! Many banks are already exposed to $billions in bad loans and have failed to set up provisions for the downturn that has hit the U.S. economy. As the slowdown grinds into a recession, these banks will be lucky to stay in business at all.
Trading of Bank of America's stock was halted last week for no reason at all -- according to Bank of America. Worried investors treated the bank's explanation with skepticism, and the stock sold off, but it still has a ways to fall. As more problems come to light in the banking industry, look for the entire sector to face scrutiny and punishment on the stock market.
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