Updated Wednesday, October 22, 2014 as of 9:41 PM ET

BofA Earnings Decline on Shrinking Revenue

(Bloomberg) -- Bank of America Corp. led decliners in the Dow Jones Industrial Average after reporting profit dropped 63 percent, hurt by shrinking revenue and more costs from cleaning up bad mortgages.

The stock fell 3.7 percent to $11.35 at 9:48 a.m. in New York. Fourth-quarter net income dropped to $732 million, or 3 cents a diluted share, from $1.99 billion, or 15 cents, a year earlier, according to a statement today from the Charlotte, North Carolina-based firm. Revenue declined 25 percent as unwanted units were sold and results were sapped by regulatory settlements and accounting expenses.

Chief Executive Officer Brian T. Moynihan has spent his first three years cleaning up after his predecessor’s takeover of Countrywide Financial Corp. and Merrill Lynch & Co., divesting more than $60 billion of assets in the process. The bank announced an $11.7 billion deal to end disputes with Fannie Mae on bad home loans this month and joined an $8.5 billion industry accord to compensate for abusive foreclosures.

Last year “was about resolving as many issues as they could,” said Marty Mosby, an analyst at Guggenheim Securities LLC, which manages more than $100 billion, including Bank of America stock. “While they’ve had to absorb some losses, they were less than the worst case, and that signifies progress.”

Bank of America, ranked second by assets among U.S. lenders, said revenue declined to $18.7 billion from $24.9 billion a year earlier. Consumer and business banking’s profit advanced 15 percent to $1.4 billion as credit costs and expenses eased. Profit at the global banking unit rose $95 million to $1.4 billion from a year earlier as firm-wide investment banking fees increased 58 percent, the bank said.

Mortgage Costs

“We feel very good about the momentum we’ve seen, particularly in the second half of the year,” Chief Financial Officer Bruce Thompson told reporters. “Revenues have stabilized and activity across the company has picked up significantly.” He cited growth in deposits and loans and said production is rising in the mortgage business.

The company has booked almost $50 billion in costs since 2007 including refunds and litigation tied to defective home loans and improper foreclosures. In September, Moynihan agreed to pay $2.4 billion to investors who said management hid the extent of Merrill Lynch losses ahead of its 2009 acquisition.

For the full year, profit more than doubled to $4.19 billion, or 25 cents a share, as revenue declined to $83.3 billion from $93.5 billion.

Dividend Outlook

The past year showed “massive improvement in their capital ratios” and sets up the company to boost payouts to shareholders, said Thomas Brown, chief executive officer at Second Curve Capital LLC and a Bloomberg contributing editor, in a television interview on “In the Loop” with Betty Liu. “It’s going to be a great dividend and share repurchase story.”

The lender said Jan. 7 it was posting more than $5 billion in pretax fourth-quarter charges to cover the Fannie Mae payments, the foreclosure settlement and mortgage litigation. Results were also skewed by accounting charges tied to changes in the value of the firm’s debt and a tax benefit from non-U.S. subsidiaries.

The deal with Fannie Mae compensates the U.S.-backed mortgage finance firm for defective loans that were sold by Countrywide and Bank of America from 2000 through the end of 2008. The bank also agreed to repurchase $6.75 billion in mortgages from Fannie Mae, and sell $306 billion in loan servicing agreements.

Legacy Costs

Previously, bank executives including Thompson said the lender wasn’t responsible for defaults that happened two years or more after a mortgage was originated.

“We’re far past the peak on that, I think we’re starting to see it wane,” said Josh Rosner, an analyst at New York-based Graham Fisher & Co., in a “Bloomberg Surveillance” interview with Tom Keene. “The legacy issues are being slowly put behind them.”

Bank of America shares surged 109 percent last year, the best showing in the Dow Jones Industrial Average and Moynihan’s first annual gain, as investors became more confident that the bank has enough capital. The stock has added 1.5 percent this year, closing yesterday at $11.78 in New York.

The company agreed to sell its 49 percent stake in a private bank venture to Mitsubishi UFJ Financial Group Inc. for 39 billion yen ($441 million), people with knowledge of the transaction said last month. The U.S. lender, previously led by CEO Kenneth D. Lewis, entered the partnership with Tokyo-based Mitsubishi in 2006.

Buffett’s Stake

The stock’s advance has been driven by speculation that the company may boost its dividend this year. In 2011, concern that Bank of America didn’t have an adequate cushion against losses prompted a $5 billion investment from billionaire Warren Buffett’s Berkshire Hathaway Inc., and the firm’s shares dipped below $5.

Bank of America may commit as much as $10 billion to dividends and share repurchases in 2013, Ed Najarian, an analyst at International Strategy & Investment Group Inc., said in a November research note. The lender has improved capital by the most among the biggest U.S. banks and could fare comparatively well after Federal Reserve stress tests, he wrote.

Moynihan, 53, said Dec. 4 he’s confident Bank of America will pass. The Fed’s approval could lead to a higher dividend or share repurchases.

The Fed subjects the biggest financial firms to stress tests designed to show whether they can handle a set of theoretical economic setbacks and shocks. The results can determine whether payouts increase. Bank of America’s quarterly dividend has been 1-cent a share since March 2009.

JPMorgan Chase & Co. and Wells Fargo & Co., the No. 1 and No. 4 U.S. banks by assets, reported fourth-quarter earnings that exceeded analysts’ estimates. New York-based JPMorgan’s earnings jumped 53 percent to $5.69 billion and San Francisco- based Wells Fargo profit advanced 24 percent to a record $5.09 billion.

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