Bank of America, Wachovia Profits Slump on Writedowns

(Bloomberg) -- Bank of America Corp. and Wachovia Corp., the second- and fourth-largest U.S. banks, said earnings plummeted after more than $6 billion of combined mortgage- related writedowns.

Bank of America's fourth-quarter profit dropped 95 percent to $268 million, while net income at Wachovia was almost wiped out, plunging 98 percent to $51 million. Bank of America gained 15 cents to $36.12 at 10:25 a.m. in New York trading. Wachovia declined $1, or 3.3 percent, to $29.78 after the Federal Reserve lowered its benchmark interest rate in an emergency move for the first time since 2001.

Kenneth Lewis, Bank of America's chief executive officer, and Kennedy Thompson, his counterpart at Wachovia, said in separate statements today that the companies were battered by the fixed-income markets. Lewis said he expects economic growth to ``be anemic at best in the first half.'' Bank of America's reserve to cover losses from loans and debt securities doubled to $3.3 billion in the fourth quarter.

Bank of America and Wachovia, both based in Charlotte, North Carolina, reported the lowest quarterly profits in at least six years during the country's worst housing slump in more than two decades. The world's biggest banks and brokerages have disclosed more than $120 billion of writedowns and credit losses since June, mostly caused by the collapse of the subprime mortgage market.

``The revaluation of assets that initially looked like a very exclusive subprime problem is emerging to be something much more,'' Kevin Fitzsimmons, analyst at Sandler O'Neill & Partners in New York, said today in an interview.

Missed Estimates

Bank of America earned 5 cents a share in the fourth quarter, excluding merger and restructuring costs and a gain from the sale of Marsico Capital Management LLC, falling short of the 21-cent average estimate from 21 analysts surveyed by Bloomberg. Wachovia's profit of 8 cents a share, excluding takeover-related costs, also missed analysts' estimates.

National City Corp., Ohio's largest bank, reported a loss, and Fifth Third Bancorp and KeyCorp, the state's No. 2 and No 3 lenders, said profit declined.

``Our fourth-quarter results were severely impacted by ongoing dislocations in capital markets and the slowing economy,'' Lewis said in today's statement. He added that the company is ``cautiously optimistic about 2008.''

Bank of America increased its bet on the faltering U.S. economy earlier this month by agreeing to acquire Countrywide Financial Corp., the largest U.S. mortgage lender, for about $4 billion in stock.

Countrywide Financial

Countrywide would give Bank of America a 25 percent share of U.S. mortgage originations, Lehman Brothers Holdings Inc. analyst Jason Goldberg wrote in a Jan. 11 report to clients. Almost two-thirds of Countrywide's loan originations in 2007 came from mortgage brokers and other third parties, a practice that Lewis has said Bank of America expects to curtail.

The corporate and investment bank lost $2.76 billion, compared with a profit of $1.4 billion a year earlier, and earnings at the consumer and small-business banking unit declined 28 percent to $1.87 billion. Lewis has scaled back investment banking by cutting 1,150 jobs since October and putting the hedge-fund brokerage unit up for sale.

First Drop Since 2001

``Investment banking isn't Ken Lewis's core competency and he doesn't need it,'' said Bruce Foerster, a former Lehman Brothers managing director who's now president of the South Beach Capital Markets advisory firm in Miami.

Bank of America's total fourth-quarter revenue fell 31 percent to $12.7 billion, while non-interest costs rose 15 percent to $10.1 billion. Return on equity, a gauge of how effectively the company reinvests profit, declined to 11.1 percent for the year from 16.3 percent in 2006.

Full-year earnings dropped for the first time in Lewis's tenure since the 60-year-old CEO succeeded Hugh McColl Jr. in 2001, with net income sliding 29 percent to $15 billion.

Wachovia's fourth-quarter earnings were the lowest since 2001 after $1.7 billion of writedowns, including $1 billion for subprime mortgage-related holdings. The company's corporate and investment bank had a loss of $596 million after the costs.

``The continued turmoil in the capital markets and the dramatic change in the credit environment diminished our fourth- quarter results substantially,'' Thompson said in the statement.

Fourth-quarter revenue fell 17 percent to $7.2 billion. Return on equity was 0.28 percent, down from 13.1 percent a year earlier. The net interest margin, the difference between what Wachovia pays for deposits and what it charges on loans, narrowed to 2.88 percent from 2.92 percent on Sept. 30.

 

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Corporate Default Risk Soars as Fed Rate Cut Signals Recession

(Bloomberg) -- The risk of companies defaulting soared on concern that an emergency interest rate cut by the Federal Reserve will fail to halt a worsening global economic slowdown, credit-default swaps show.

Contracts on Ambac Financial Group Inc. rose to a record after the second-largest bond insurer reported its biggest-ever loss. Merrill Lynch & Co. increased on concern that ratings downgrades at bond insurers including Ambac will cause losses at financial firms to surge. Benchmark gauges of corporate default risk in the U.S. and Europe climbed to the highest since they were created in 2004.

``The Fed's behind the curve; they had to cut,'' said Mark Kiesel, who oversees $158 billion in corporate bonds as executive vice president at Pacific Investment Management Co. in Newport Beach, California. ``The big question is, `Can the Fed change the willingness to take risk?' I'm not so sure.''

Contracts on the Markit CDX North America Investment-Grade Index, tied to the bonds of 125 companies in the U.S. and Canada, climbed as much as 16 basis points to 126, before falling back to 117 at 10:45 a.m. in New York, according to Deutsche Bank AG. Contracts on the Markit iTraxx Europe index of 125 investment- grade companies rose as much as 10.25 basis points to a record 92.5 today before falling back to 81.75, according to JPMorgan Chase & Co.

``The issues that plague the markets and the economy aren't necessarily fixed by simple rate cuts, but it helps,'' said Gregory Peters, head of credit strategy at Morgan Stanley in New York. ``The overarching issue is the Fed seems extremely responsive to just the markets, which doesn't engender confidence necessarily.''

Stock Markets Tumble

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

The Fed lowered its benchmark interest rate in an emergency move for the first time since 2001 after stock markets tumbled from Hong Kong to London and amid increasing signs the U.S. economy is headed into a recession. The central bank lowered its target overnight lending rate to 3.5 percent from 4.25 percent.

U.S. stocks declined for a fifth day, the longest stretch of declines in 11 months.

Contracts on Ambac climbed 4 percentage points to 32 percent upfront and 5 percent a year, according to CMA Datavision in London. The New York-based company posted a $3.6 billion loss after writing down the value of guarantees on subprime debt by $5.21 billion. Armonk, New York-based MBIA Inc., the largest bond insurer, climbed 3 percentage points to 29 percent upfront and 5 percent a year, CMA prices show.

Risk of Default

Sellers of credit-default swaps demand upfront payments when they see a high risk of default.

Fitch Ratings cut Ambac's top grade last week and Moody's Investors Service and Standard & Poor's are reviewing the company, along with MBIA, for possible downgrade.

Credit-default swaps on New York-based Merrill Lynch, the biggest U.S. brokerage firm, rose 23 basis points to 190 basis points, prices from broker Phoenix Partners Group and CMA show.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Contracts With Insurers

``No one wants to wait to find out how it's all going to end,'' said Nigel Myer, a credit analyst at Dresdner Kleinwort in London. ``They just want to sell, preferably at last week's prices. The general reckoning is that the banks will be taking more charges.''

Banks led by Citigroup Inc. and Merrill Lynch have a net $1 trillion at risk because of contracts with insurers, according to the International Swaps and Derivatives Association.

Contracts on Charlotte, North Carolina-based Bank of America Corp. rose 6 basis points to 100 basis points, CMA prices show. The second-largest U.S. bank said today earnings dropped 95 percent after at least $5.28 billion of mortgage-related writedowns.

Financial firms have already lost more than $100 billion because of the worst U.S. housing slump for 27 years.

New York-based ACA Capital Holdings Inc., an insurer which guaranteed $26.6 billion of collateralized debt obligations backed by subprime mortgages, had its ratings cut to CCC from A by S&P in December. That prompted Merrill Lynch to announce $2.6 billion of writedowns on securities insured by the company.

 

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Ambac Reports Loss, Talks With `Potential Parties'

(Bloomberg) -- Ambac Financial Group Inc., the first bond insurer to be stripped of its AAA credit rating, reported its biggest-ever loss and said it is talking to ``a number of potential parties'' to help overcome a slump in the value of guarantees on subprime-mortgage securities.

New York-based Ambac, the second-largest bond insurer, jumped as much as 37 percent in New York Stock Exchange trading on optimism the company may be sold. Ambac posted a $3.26 billion loss after writing down the value of guarantees on subprime debt by $5.21 billion, according to a statement by the company today.

Ambac said ratings companies are ``underestimating'' its ability to weather the rout in credit markets. Ambac, an underwriter of $556 billion of municipal and structured finance debt, last week scrapped a $1 billion equity sale after a 71 percent drop in the stock and the departure of its chief executive officer, prompting Fitch Ratings to reduce its insurance rating to AA from AAA.

``They can't issue equity and they can't issue debt,'' said Robert Haines, an analyst at bond research firm CreditSights Inc. in New York. ``The new CEO might be prepping the company for a potential sale.''

Michael Callen, who became interim CEO after Robert Genader left last week, said in a statement today that Ambac is ``exploring the attractiveness'' of various alternatives. He wasn't more specific.

The fourth-quarter net loss, which equated to $31.85 a share, took the 2007 deficit to $3.23 billion, the company's first ever annual loss. Ambac on Jan. 16 forecast a fourth- quarter net loss of about $32.83 a share. The company reported an operating loss, excluding writedowns on contracts to guarantee subprime securities, of $6.21 per share.

Hobbled by Expansion

The AAA rated bond insurers place their stamp on $2.4 trillion of debt. Losing those rankings may cost borrowers and investors as much as $200 billion, according to data compiled by Bloomberg. The industry guaranteed $127 billion of collateralized debt obligations linked to subprime mortgages that have plunged in value as defaults by borrowers with poor credit soar to records.

Ambac, which pioneered municipal bond insurance in 1971, has been hobbled by its expansion into CDOs, which package pools of debt and slice them into pieces with varying ratings. The CDO declines forced Ambac and others to reduce the value of contracts designed to protect CDO holders from default. Ambac said most of the writedowns aren't necessarily permanent losses and it hasn't paid any claims on its CDO portfolio.

Dividend Cut

Ambac shares rose 99 cents, or 16 percent, to $7.19 at 9:41 a.m. in New York Stock Exchange composite trading. The stock has tumbled 93 percent in the past year, shaving $8.8 billion from the company's market capitalization.

Ambac on Jan. 16 slashed its dividend 67 percent and said it would sell stock or equity-linked notes to bolster its capital, in part to meet Fitch's demand to raise $1 billion by the end of January. Two days later it scrapped the share sale.

The plan provoked a boardroom dispute that led to the departure of Genader, who disagreed with the capital raising, according to the company's regulatory filings.

Ambac's loss reported today followed the company's first- ever loss in the third quarter. Before 2007, Ambac had reported profit increases every year for the past decade.

``In retrospect, insurers wish they'd never heard the term structured finance, much less written the business,'' said Donald Light, an insurance analyst at Celent, a consulting firm in Boston.

Credit-Default Swaps

Prices for credit-default swaps that pay investors if Ambac can't meet its debt obligations imply a 72 percent chance it will default in the next five years, according to a JPMorgan Chase & Co.

Contracts on Ambac climbed 2.5 percentage points to 30.5 percent upfront and 5 percent a year today, prices from CMA Datavision in London show.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

 

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Lekgotla to solve energy crisis

(Fin24) - Eskom CEO Jacob Maroga will face some tough questions from the South African government which will use its two-day Lekgotla, starting January 23, to help solve the country's energy supply shortfall.

Maroga joins the Lekgotla which brings together all ministers and their deputies, premiers, director-generals and representatives of the South African Local Government Association.

Rolling blackouts throughout South Africa have ground business to a halt and severely disrupted roads and other infrastructure, as well as weakened confidence in the country's ability to attract and support future investment.

After the Lekgotla all eyes will be on February 8, when President Thabo Mbeki's state of the nation address in parliament is expected to detail some of the Lekgotla's findings.

A statement released by the cabinet today apologised for the electricity predicament and the impact it has had on the country's citizens, economy and image.
 

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Rand climbs after US rate cut

(Fin24) - The rand has climbed against the dollar on Tuesday, after the US Federal Reserve cut its overnight rate, and global stocks pared their losses.
 

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Stocks Plummet in Germany, Hong Kong, India, Brazil in Rout

(Bloomberg) -- Stocks plunged in Germany, Hong Kong, India and Brazil, and U.S. index futures dropped on mounting speculation that the global economy is slowing and company defaults will rise.

Europe's Dow Jones Stoxx 600 Index fell the most since the Sept. 11 terrorist attacks and sank into a bear market, as Allianz SE and BNP Paribas SA slid. Hong Kong's Hang Seng Index had its biggest drop in six years after BNP Paribas said Bank of China Ltd. may write down overseas securities by $4.8 billion because of losses from U.S. subprime mortgages. Citigroup Inc. retreated in Frankfurt.

The MSCI World Index slipped 2.3 percent to 1,405.27 at 1:53 p.m. in London, extending its decline from an Oct. 31 record to 16 percent. India's Sensitive Index lost the most since 2004, while Germany's DAX slid the most since March 2003. Futures on the Standard & Poor's 500 Index sank 3.5 percent. Trading in the U.S. is closed today for Martin Luther King Day.

``It's the worst I've ever seen,'' said Johan Stein, who helps manage the equivalent of about $14 billion at Nordea Asset Management in Stockholm. ``The financial system is in terrible shape, and no one knows where this will end.''

Today's declines follow the worst week for U.S. stocks in five years after President George W. Bush's $150 billion plan to revive the economy and expectations of interest-rate cuts failed to allay recession concerns.

The risk of European companies defaulting soared to a record today on speculation credit-rating cuts at bond insurers including Ambac Financial Group Inc. may trigger forced asset sales. European Central Bank council member Nout Wellink said economic growth in the region may slow more than policy makers had expected.

Market Crisis

``This is a stock-market crisis,'' said Alberto Roldan, head of research at Inverseguros SVB in Madrid. ``Investors believe that neither a government package nor a huge rate cut is going to help evade a recession in the U.S.''

The Stoxx 600 slid 4.2 percent, extending its drop from a 6 1/2-year high on June 1 to 22 percent. A decline of more than 20 percent is the common definition of a bear market. The gauge earlier fell as much as 5.8 percent, which would have been the biggest drop in six years. France's CAC 40 lost 5.1 percent. The U.K.'s FTSE 100 sank 4 percent, and Germany's DAX slid 5.9 percent.

The VDAX-New Index, a benchmark gauge of European stock- market volatility, surged as much as 39 percent, the most since 2001. The measure of expected price swings for stocks is derived from prices paid for options on Germany's DAX.

The MSCI Asia Pacific Index lost 3.7 percent. Australia's S&P/ASX 200 Index slumped for an 11th day. Hong Kong's Hang Seng Index lost 5.5 percent. Japan's Nikkei 225 Stock Average dropped 3.9 percent as the Finance Ministry cut its evaluation of five of 11 regional economies as housing investment fell and employment worsened.

`Sharp Contraction'

The MSCI Emerging Markets Index, a global benchmark, sank 5.1 percent, extending its retreat from an October record to 19 percent.

Brazil's Bovespa index slid 6 percent, the most since February 2007. Russia's Micex Index declined 5.9 percent, the biggest drop in a year.

Allianz, Europe's biggest insurer, tumbled 8.4 percent to 122.01 euros. BNP Paribas, France's second-biggest bank, sank 6.1 percent to 65.15 euros. ING Groep NV, the biggest Dutch investment bank, declined 7.6 percent to 21.66 euros.

``The market is finally catching on to the fact that a recession will lead to a sharp contraction in earnings,'' said Jane Coffey, head of equities at Royal London Asset Management, where she helps oversee about $11 billion. ``We need to see more aggressive changes to forecasts before investors become more positive about looking through the downturn.''

Swiss Reinsurance Co. decreased 8.5 percent to 69.9 Swiss francs. UBS AG cut its share-price estimate for the world's largest reinsurer to 80 francs from 88, citing the probability of more investment losses related to credit-market problems.

Earnings Risk

``We see on-going downside risk to earnings and stock performance until we have better visibility,'' London-based analysts including Ben Cohen wrote in a report to investors.

Bank of China, which has the largest holdings among Asian banks of U.S. subprime mortgages, slid 4.7 percent to HK$3.43. The bank may write down 17.5 billion yuan ($2.4 billion) for the fourth quarter of 2007, and an equal amount for this year, Dorris Chen, a Shanghai-based analyst at BNP Paribas wrote in a note on Jan. 18.

Commonwealth Bank of Australia, the country's second largest, dropped 2.5 percent to A$51.89. National Australia Bank Ltd., the nation's largest, declined 2 percent to A$35.55.

Morgan Stanley raised its 2008 forecast for loan-loss charges at the country's major banks by 26 percent, analyst Richard Wiles wrote in a note today, citing a deteriorating global economy and ``the difficulty faced by some companies in refinancing maturing debt.''

 

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Iron ore supply deficit seen in 2008: report

(Reuters) - A worldwide iron ore supply deficit of between 20 million and 25 million tonnes is likely in 2008, Credit Suisse forecast in a report on Monday, on the back of high demand from steel mills.

Iron ore miners are earmarking billions of dollars to expand mines, build new ore freighters and automate operations to dig faster and deeper to satisfy steel mills hungry for more ore.

Credit Suisse also said it expects annual term iron ore prices to rise by 55 percent versus a consensus forecast of a 35 percent hike.

Iron ore prices are set annually by the big three mining companies, Vale (VALE5.SA: Quote, Profile, Research)(RIO.N: Quote, Profile, Research), Rio Tinto Ltd./Plc. (RIO.AX: Quote, Profile, Research)(RIO.L: Quote, Profile, Research) and BHP Billiton Ltd./Plc. (BHP.AX: Quote, Profile, Research)(BLT.L: Quote, Profile, Research), after closed negotiations with big steel producers in Europe, Japan and more recently China.

Demand for iron ore has taken off in recent years, led by rising steel production in China, now the world's top importer.

"Despite the expected slowdowns in the U.S. and credit tightening in China, 2008 will look very similar to 2007," Credit Suisse said in a report.

It said 2007 was one of the tightest markets ever for iron ore, leaving some steel makers short of the raw material.

"We are estimating another deficit of about 20 million-25 million tonnes against seaborne trade of about 870 million tonnes," it said.

 

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