Bank of America’s $4 billion all-share purchase of Countrywide
Financial could be the first of a number of heavyweight mergers or
acquisitions in a US market bracing itself for sweeping changes in
the wake of the subprime collapse. One tie-up gaining ever-greater
credence is the acquisition of a brittle Washington Mutual by a
bullish JPMorgan Chase. The latter has also been linked, vaguely,
to Citi, PNC Financial and SunTrust Banks.
The deal by Bank of America (BofA) for Countrywide Financial has
largely saved Countrywide, still the largest mortgage originator
($408 billion) and servicer ($1.5 trillion), from possible collapse
– and is a stark indication of the abrupt U-turn in business
sentiment in the US banking industry. BofA, which has long wanted
to increase its relatively underweight mortgage business (it was
the fifth-largest player in terms of originations before the deal),
will become the largest mortgage originator and servicer by a fair
distance.
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The purchase is expected to close in the third quarter and be
neutral to BofA earnings per share in 2008 and accretive in 2009,
excluding merger and restructuring costs. The bank expects $670
million in after-tax cost savings from the transaction, with
savings fully realised by 2011.
Cross sell! Cross sell! Cross sell!
The primary plan is to cross sell group products such as BofA
credit cards to Countrywide’s vast mortgage customer base.
“Countrywide presents a rare opportunity for Bank of America to add
what we believe is the best domestic mortgage platform at an
attractive price,” said Ken Lewis, CEO of BofA. Countrywide
customers will gain access to a broad set of consumer products
including credit cards and deposit services.”
Origination of subprime loans is not planned for the combined
company – BofA has not targeted that segment since 2001 – and both
companies have put out public statements saying they share the goal
of “keeping distressed mortgage borrowers in their homes when
possible”. In terms of the wider problems affecting the US banking
industry, Lewis added: “We are aware of the issues within the
housing and mortgage industries. The transaction reflects those
challenges. Mortgages will continue to be an important relationship
product, and we now will have an opportunity to better serve our
customers and to enhance future profitability.”
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By GlobalDataThe good news for BofA is that Countrywide did not have as bad a
trading month in December last year as expected. “Our fourth
quarter ended with a number of positive operational trends,” said
David Sambol, president and COO of Countrywide, in a statement
published on 9 January. “Total loan fundings were $24 billion for
the month, up [1 percent] from November and ahead of our forecasts.
This pushed our fourth-quarter fundings to $69 billion, also
exceeding our expectations. Although average daily mortgage loan
applications and the pipeline of mortgage loans in process
decreased from November [by 21 percent and 18 percent,
respectively], this reflected a seasonal decline typically seen
this time of year.”
US housing market at new lows
According to the benchmark National Association of Home
Builders-Wells Fargo market index, a housing industry measurement,
the US housing market fell to new lows in December. The index
tracking new single-family homes remained unchanged for a third
consecutive month at a score of 19, its lowest reading since the
series began in January 1985. The index gauging the traffic of
prospective buyers declined three points to 14.
On 22 January, BofA posted its fourth quarter and full-year 2007
figures: full-year 2007 net income declined 29 percent to $14.98
billion from $21.13 billion a year earlier. Fourth quarter net
income was a paltry $268 million, compared with $5.26 billion a
year earlier. Trading account losses of $5.44 billion in the fourth
quarter compared with trading profits of $460 million a year
earlier.
But total retail sales increased 9 percent to 49 million products,
including strong growth in checking and savings products, first
mortgage and online banking activations. Year-end retail deposits
increased nearly $48 billion, or 10 percent, on higher account
balances, new account growth and acquisitions. Debit card purchase
volume increased 12 percent due to new accounts and higher card
usage.
