NEW YORK (CNN/Money) -
Bank of America, the No. 2 U.S. bank, expects to see higher loan charge-offs in the fourth quarter as consumers rushed to file for bankruptcy ahead of the new bankruptcy legislation, joining a chorus of banking behemoths.
The news came as the Charlotte, N.C.-based company reported its third-quarter profit increased 10 percent as surging revenue from credit card fees, investment gains and trading offset an increase in bad loans.
Speaking at the company's third quarter earning conference call Wednesday, Bank of America (Research)'s new financial chief Alvaro de Molina, said the company expects "meaningfully higher charge-offs" but declined to estimate just how much of a loss the company expects. Chargeoffs are money lost, or written off, from uncollectable loans.
He added that while there are "higher and higher potential losses in the fourth quarter, how much are those that would have been reflected in 2006 and were just brought forward" remains to be seen. He said the company's increase in bad loans wasn't reflective of any fundamental change in the economy or credit trends but a function of higher bankruptcies spurred by the new bankruptcy laws.
Bank of America set aside $1.16 billion for bad loans in the third quarter, up more than 78 percent from $650 million a year earlier, and one-third higher than the second quarter. Net charge-offs rose about 60 percent from a year earlier and about 31 percent from the second quarter.
Bankruptcies hit the sector
Competitor JPMorgan Chase (Research) reported earlier Wednesday that it expects a $500 million charge-off from the spike in bankruptcies while Citigroup (Research) said on Monday that it sees a $310 million bankruptcy-related loss in the fourth quarter. Both companies said the majority of those bankruptcies were likely accelerated to meet the deadline before the new bankruptcy litigation and they expect to reap some benefit in 2006 from putting those bankruptcies behind them.
In the third quarter, net income for Bank of America increased to $4.13 billion, or $1.02 per share, from $3.76 billion, or 91 cents, a year earlier.
Excluding merger and restructuring costs, profit totaled $1.04 per share. On that basis, a consensus of analysts polled by earnings tracker Thomson First Call expected the company to post $1.02 a share in third quarter profit.
The company set aside $50 million in reserves for exposure to Hurricane Katrina but de Molina said that the company's consumer business isn't present in the principle area that was impacted, although its mortgage and auto businesses do have exposure to the region.
He added that the company has little credit or trading exposure to troubled futures trading firm Refco and while the company may have some issues to deal with on the litigation side, its fundamental operating risk is small.
De Molina said the company's integration of its FleetBoston merger continues to be successful and the company expects one more quarter of charges related to the merger, similar to those experienced in the last two quarters. Bank of America posted an after-tax merger-related charge of $81 million in the third quarter and $80 million in the second quarter.
He added that the company hopes to close its MBNA (Research) acquisition by Jan. 1 and based on some of the integration work so far, "we feel better about prospects for the merger."
Bank of America agreed to buy MBNA for $35 billion in June. MBNA said third-quarter net income fell 1 percent to $717.9 million from $728.3 million. Profit per share was 56 cents in both periods. Analysts, on average, had forecast 53 cents.
Bank of America shares climbed 16 cents, in morning trade to $41.73.
How did Citigroup fare in the third quarter? Find out here.
JPMorgan Chase's COO is taking the helm by the end of this year. Find out more here.