Bank of America’s Profit Exceeds Estimates

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Bank of America’s earnings soared to $3.4 billion in the fourth quarter from $732 million in the same period a year ago.Credit Brendan McDermid/Reuters

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Updated, 12:18 a.m. | Bank of America has spent the last five years digging out from its mortgage problems, shoring up its capital levels and laying off employees.

Now comes the hard part of trying to rebuild a banking business in a sluggish economy without reverting to the loose lending practices that nearly brought the company to its knees during the financial crisis.

That uphill battle came into focus on Wednesday as Bank of America reported fourth-quarter earnings that were stronger than expected.

The bank’s profits exceeded Wall Street estimates, helped in large part by its success at driving down expenses related to its troubled past, including the 2008 acquisition of the mortgage lender Countrywide Financial.

“Going forward, the biggest challenge will be finding revenue growth,” said Shannon Stemm, a banking analyst at Edward Jones. “The macroeconomic environment isn’t making that easy.”

With the economy growing tepidly, the bank has had success catering to wealthier customers and corporations — two segments that have come through the financial crisis better than others.

One telling statistic from the fourth quarter: As the bank’s traditional mortgage business shrank, about 20 percent of its mortgage production by dollar amount came from its wealth-management business.

Bank officials said on Wednesday that it was profitable to hold these mortgages, which are often too large to be guaranteed by Fannie Mae and Freddie Mac, on its balance sheet.

“They are not out there trying to be a broad-based mortgage banker,” said Moshe Orenbuch, a banking analyst at Credit Suisse. “They are trying to cater to their upscale customers.”

Such strategies leave a large portion of homeowners shut out of the housing market as credit standards remain tight for many Americans. Bank of America’s mortgage originations declined 46 percent in the fourth quarter compared with those in the period a year earlier. Earlier this week, Wells Fargo and JPMorgan Chase also reported big drops in their mortgage revenue.

Bank of America officials said they expected to bolster the company’s wealth-management staff as they seek to attract more customers who want advice about how to invest their money.

Another bright spot for Bank of America was investment banking. Revenue from merger advisory fees surged, driven by a pickup in deals late last year. Trading revenue also rose, underscoring the strength of the company’s Wall Street operations.

There were some broadly hopeful signs for Bank of America in the fourth quarter and the overall economy. The company’s chief executive, Brian T. Moynihan, said that customers had been spending more on their credit cards in recent months and that the bank had issued about 1,000 new cards in the fourth quarter.

“It is good news from an economy perspective,” Mr. Moynihan told analysts during a conference call on Wednesday.

Over all, the bank, based in Charlotte, N.C., said quarterly net income rose to $3.4 billion, or 29 cents a share, compared with $732 million, or 3 cents a share, in the period a year earlier, exceeding the 26 cents that Wall Street analysts had expected the bank to make. Revenue rose 15 percent, to $21.7 billion.

While analysts and investors largely cheered the progress the bank has made cleaning up its balance sheet since the financial crisis, the company is not yet out of the woods.

Looming over the entire banking industry is the $13 billion settlement that JPMorgan reached with the Justice Department and other authorities in November over the bank’s sale of questionable mortgage securities leading up to the financial crisis.

In light of those large settlements, analysts expect that Bank of America and other big mortgage players will have to set aside billions of dollars more in case of future regulatory settlements, which could weigh on earnings.

The bank’s litigation expenses in the fourth quarter more than doubled from the third quarter, to $2.3 billion, but bank officials declined to say whether that legal tab was likely to grow.

Bank of America took many of its biggest lumps early, setting aside huge reserves in 2011 to deal with mortgage-related costs. But with the number of troubled loans declining, the bank in the quarter was able to reduce its provision for credit losses to $336 million from $2.2 billion a year ago.

Having to reserve less capital for losses could free money for the company to buy back more of its shares — a move that could continue to endear the bank to investors. Bank of America’s shares rose 35 percent in 2013, surpassing the Standard & Poor’s 500-stock index. On Wednesday, they rose 38 cents, or 2.3 percent, to $17.15.

Bank officials cautioned that declining loan-loss reserves and the accompanying windfalls of freed capital would not go on forever. At that point, investors’ scrutiny of the company’s efforts to expand its core businesses could intensify.

“This is a big ship and they have turned that big ship,” said William Schwartz, head of the US Financial Institutions Group at DBRS, a credit rating firm. “Now they have to move it forward.”