Bank of America Corp, citing "recessionary conditions," on Monday halved its dividend and said it would sell at least $10 billion in new common stock to bolster its capital to offset rising loan losses.
The largest U.S. bank, which has worried some investors over the past year with big ticket takeovers of mortgage lender Countrywide Financial Corp and investment bank Merrill Lynch & Co Inc, also said quarterly earnings slid a steeper-than-expected 68 percent.
Bank of America, whose shares were down nearly 9 percent in extended trading after the surprise announcement, had been seen as one of the industry's pillars of strength but the results and accompanying moves to bolster its capital, showed that it too, is struggling with the credit crisis.
"These are the most difficult times for financial institutions that I have experienced in my 39 years in banking," said Kenneth Lewis, its chairman and chief executive officer, in a statement.
Bank of America warned that credit quality continued to weaken during the quarter, and Lewis said he expected higher credit losses and depressed earnings ahead.
Third-quarter net income dropped to $1.18 billion, or 15 cents a share, from $3.70 billion, or 82 cents a share, a year ago.
"It was a perfect storm kind of quarter," he said in a conference call with analysts.
Analysts looked for earnings per share of 60 cents, excluding one-time items, according to Reuters Estimates. It was not clear whether the estimate was comparable to the quarterly figure which was reported on a net basis.
The weaker earnings were driven by higher credit costs resulting largely from two of its most recent acquisitions -- Countrywide Financial Corp, which had been the country's largest independent mortgage lender, and Chicago-based LaSalle Bank.
"I'm sure it's a surprise. It's another tile in the mosaic. Things are not good with financial companies. This reflects it. This has to be a disappointment," said Lou Brien, market strategist at DRW Trading in Chicago.
Charlotte, North Carolina-based Bank of America said it was cutting its quarterly payout to 32 cents a share from 64 cents, which will add more than $1.4 billion in capital per quarter.
In addition, it aims to sell $10 billion in new common stock and could sell more based on demand, the bank's executives said on a conference call.
"I don't think anything is easy in this market, but they are perceived as one of the stronger franchises, and I think they will have a somewhat easier time than others (raising capital)," said Rick Meckler, chief investment officer of LibertyView Capital Management in New York.
So far this year, Bank of America shares have fallen 22 percent, outperforming the KBW Banks index, which has declined 28 percent over the same period.
Bank of America said its consumer credit card business saw a decrease in purchase volumes, slowing repayments and increased delinquencies during the quarter.
On a conference call with analysts and investors, Lewis said credit quality would continue to be an issue over the next several quarters.
He insisted the bank's long-term prospects were strong as weaker rivals like, Washington Mutual Inc and Wachovia Corp are forced to sell at distressed prices.
"On the other side of this, you've got a powerhouse," Lewis said.
The bank said it was benefiting from a "flight to quality," with retail deposits up $56 billion from the previous quarter to $586 billion. That included the addition of $35 billion from Countrywide.
Revenue from its capital markets and advisory services was hit hard by charges related to collateralized debt obligations (CDOs), which totaled $952 million, while write-downs on leveraged loans and commercial mortgages totaled $327 million. CDOs are securities backed by a pool of bonds, loans or other assets.
Equity investment income was hit by $320 million in write-downs on preferred stock of Fannie Mae and Freddie Mac.
"We are in a very, very tough time for financial services companies, and Bank of America is not immune," said Thomas Russo, partner at Gardner Russo & Gardner, which manages more than $3 billion.
"You see weakness across all asset categories. The irony is, commercial banks are considered to be safe havens for investment banks. That's the world we live in."
Lewis said he believed it was important for Bank of America to be at or near its 8 percent Tier 1 capital ratio target, given the recessionary conditions and outlook for still weaker economic performance. Tier 1 is a measure of a bank's capital strength.
Lewis said on the conference call the recent events had been "breathtaking." He said it would take time before any increased liquidity from the just-passed $700 billion U.S. financial bailout is seen.
Bank of America shares were down nearly 9 percent at $29.40 in after-hours trading, from the close of $32.22.