Jonathan Garner is a Managing Director and Chief Asian and Emerging Market Strategist at Morgan Stanley
Emerging market equities returned 75 per cent in dollars in 2009, outperforming developed market equities by around 50 per cent. Over the past decade they have returned more than 100 per cent in dollars with dividends reinvested, versus negative returns for developed market equities.
At Morgan Stanley, we estimate that emerging market economies will grow their gross domestic product by 6.5 per cent in 2010 against just 2 per cent for the advanced economies. But that is not the reason why we expect further outperformance of emerging equity markets.
In a recent Insight column in the Financial Times (“Busting the myth of Brics”), Peter Tasker argued that strong GDP growth in emerging markets was not a reason to invest in their stock markets. He cited academic work showing the lack of positive correlation between GDP growth and stock market returns. Long term bulls of emerging stock markets are also aware of this work. Rather, we have focused on the ability of companies in emerging markets to outperform their developed peers, selling both globally and into local markets.
Currently, the trailing return on equity (ROE) for the MSCI EM benchmark is 12 per cent versus 7 per cent for the developed markets MSCI World benchmark. On our estimates, 2010 is likely to be the 10th year in a row when the ROE of emerging market companies is superior to developed market firms. In fact, ROE in emerging markets has already troughed well above the prior cycle low, while developed markets may now be troughing at a level which is well below. For this track record one is asked to pay a 2.1 times price to book multiple and a trailing price/earnings (p/e) multiple of 18 times which is a 35 per cent discount to developed markets. The forward p/e multiple on consensus earnings is 14 times. These valuations are hardly in bubble territory and well below prior peaks in 2007, 1999 and 1993.
Our analysis of data for 650 non-financial companies in emerging markets shows that the main driver of superior return on equity is operating efficiency. Corporate leverage has remained low after the deleveraging of the 1997/98 cycle. This is important because, in true bubbles, like Japan in the late 1980s, not only were equity valuations far higher than in EM today, but higher levels of corporate leverage flattered ROE in the upswing. They also reinforced the economic and stock market downswing once the bubble burst.
A further resort of the bears is the argument that the economic growth of China, the largest index constituent in MSCI EM, is characterised by over-investment and under-consumption. Official data indicates that Chinese households consumed just 36 per cent of GDP in 2008, whilst gross fixed capital formation amounted to 47 per cent of GDP. Our analysis suggests that Chinese household consumption spending, properly counted, is probably much larger both in absolute terms and as a share of GDP (perhaps $2,800bn or 50 per cent of 2008 GDP).
A key area of understatement of both consumption and GDP is in relation to the income generation of those working in the services sector, especially in small companies. Its counterpart is under-estimation of services spending by households. China’s official statistics currently suggest that while the dollar value of Chinese household consumption of tradeable goods amounts to 38 per cent of the US total, consumption of services amounts to just 6 per cent of the US total.
The ratio of consumption of housing services is lower still at just 3 per cent of the US total. Hence, in per capita terms, the data indicates that the average Chinese person consumes $38 per annum of housing services versus over $5,000 per capita in the US ($500 per capita in Brazil). It is most unlikely that this reflects reality on the ground, in particular, given the transition to private rental markets and owner occupancy since the late 1990s housing reforms. China’s statisticians also continue to struggle to account for the burgeoning development of consumer services in areas such as financial services and insurance, communications, private medical provision and recreation.
Consumption clearly played a key role in China’s rapid exit from recession in 2009. China ended 2009 as the world’s largest market (in unit terms) in cars and mobile phone handsets and seems likely to overtake the US as the largest flat screen television market in 2010. There was also a far more rapid take up of property market inventory than most analysts expected, given the ratio of prices to official household income data.
There is every reason to believe the secular bull market in emerging market equities is more robust than the sceptics suggest. The burden of proof is on developed market companies to deliver the structural improvement in return on equity achieved by their EM peers after the crisis of 1997/98.
The stars may very well align for the IPO market in 2010. Literally.
Following one of the worst years in recent memory, public offerings are expected to rebound nicely this year, with potentially much of the action centered around several high-profile companies.
Embattled automaker General Motors, for example, has hinted since last summer that it could once again become a publicly-traded company by year’s end.
Private equity giants Kohlberg Kravis Roberts and Apollo Global Management, both of which missed entering the market at the peak of the buyout boom, have both mentioned as possible entries in 2010 recently.
And the IPO rumor mill has been working overtime since social networking giant Facebook introduced a dual-class stock structure in November, a move that often times has preceded a public offering. Google (GOOG, Fortune 500) did the same thing before it went public in 2004.
“I don’t think it is a matter of if[Facebook] can or cannot, it is a matter if they want to,” notes finance author Tom Taulli, who has written extensively about the IPO market.
If Facebook, GM and other brand-name firms decide to enter the public markets, that could help push the number of U.S. offerings far beyond 2009 levels. Last year, just 63 companies went public as investors avoided wading into the market chaos that defined the first half of last year.
Those that did brave the turmoil included a rather strange group of bedfellows —including a Chinese online gaming firm, a company developing lithium-ion batteries for cars and nearly two dozen companies that were backed by private equity firms.
This year though, experts are betting that the IPO market will largely be dominated once again by companies that have been bankrolled by venture capital investors. These companies are typically younger firms as opposed to the mature companies that private equity companies often buy.
During the final months of 2009, 16 venture-backed firms filed to go public, according to Renaissance Capital, a Greenwich, Conn.-based investment firm specializing in IPOs, including drugmaker Ironwood Pharmaceuticals and solar panel producer Solyndra.
With that in mind, Linda Killian, a portfolio manager of the IPO Plus Aftermarket Fund at Renaissance Capital, said that more growth companies are likely to be in this year’s crop of IPOs.
And in the growth company category, there is no industry more buzzed about than social networking.
In addition to Facebook, social networking hotshots Twitter, LinkedIn and Zynga have all been rumored as possible IPO candidates.
Experts tend to agree that it is only a matter of time before many of these firms start considering acquisitions however. And with publicly traded stock, that would certainly give them the currency to do so.
John Fitzgibbon, founder and publisher at IPOScoop.com, said if one social networking company goes public and does well, then conditions would be ripe for the rest to follow.
“You need the trailblazer,” he said. “If Facebook goes into the pipeline, you will probably see more of its competitors start there.”
Still, even though financial markets have rebounded from last year’s lows, some think the climate for offerings remains less than ideal. Investors are on edge about inflation and a possible economic double dip.
Partly for those reasons, experts said more IPOs could also come as a result of spin-offs from already public companies in the coming year. More businesses may want to take a hard look at their different units and sell off divisions that no longer fit strategically.
Time Warner (TWX, Fortune 500) reversed its ill-fated merger with AOL by spinning off the former dial-up giant in December. (Time Warner is the parent company of CNNMoney.com.) And in one of its last major moves before the end of 2009, Citigroup (C, Fortune 500) filed to take its life insurance unit Primerica public.
Theo tin mới nhất ICTnews vừa nhận được, Viettel đã đề nghị mua lại 70% cổ phần của công ty viễn thông nhà nước của cộng hòa Haiti - Teleco.
Được biết, đề xuất khoản 59 triệu USD cho số cổ phần trên do Viettel đệ trình là hồ sơ thầu duy nhất đủ điều kiện. Lời đề nghị từ Ngân hàng Trung ương Haiti và từ hai nhà cung cấp dịch vụ mạng GSM (Digicel Haiti và Comcel) đã bị từ chối.
Đề xuất của Viettel đối với công ty Teleco gồm việc thiết lập mạng cáp quang 2.000 km để mở rộng truy cập Internet băng rộng đến những thị trấn xa xôi.
Thương vụ này, dự kiến sẽ hoàn thành vào tháng 4/2010, đánh dấu bước mở rộng mới nhất của Viettel, tập đoàn đã mở hoạt động sang Campuchia và Lào. Gần đây, Viettel được đưa tin đang muốn đầu tư 300 triệu USD vào mạng di động Teletalk của Bangladesh.
Theo từ điển bách khoa trực tuyến Wikipedia, Teleco là một trong 3 nhà cung cấp dịch vụ di động của Haiti, quốc gia ở vùng biển Ca-ri-bê hiện có 8,1 triệu dân với thu nhập bình quân đầu người khoảng 1.317 USD vào năm 2008.
Being cheap is sometimes looked to as being a good thing and sometimes a bad thing. Some entrepreneurs will tell you that being cheap is a good thing, while others may say that cheap people never prosper. I personally believe there are times to be cheap and times that require you not to be cheap. Well, how can a person go both ways? I’ll show you…
1. Buying that car - It is time for you to buy a new car, you are in the market to buy something nicer than you drove before, so you look at a few luxury cars. Question: Do I need to go with every option the car can possibly come with, or can I live without somethings and have them installed after-market and save a few bucks? I would say this scenario would call for being cheap. If you find that it is cheaper to have things installed afterwords, why not! Also, it isn’t always necessary to buy new, buying used can be a money saver too. -If you buy cars for your business, don’t buy the one with options you don’t need! Buy the cheaper cars because employees don’t usually take car of cars like they are their own.
2. Buy on sale - This can go with anything. If you don’t need something right this minute, wait for a sale to come buy and pick it up for 1/2 price. Saving a few bucks can add up to your wealth in the long run.
3. Negotiate - If you are buying a pack of gum, you shouldn’t negotiate, but if you are spending a few grand on something, try to get a deal. Who knows…you may end up saving a few hundred dollars.
4. Rent/Lease, when you can. - If you need something for a one time use, see if you can rent it, if you can, it will probably be cheaper than buying something to use one time.
5. Pre-plan- If you know what you will need to buy for a certain project and pre-plan it, you will have time to search and do your homework on a variety of deals going on.
When should you not be cheap?
1. Don’t waste time after seeking a sale. - If you are trying to hunt down a sale, closely tracking every store for a few weeks, think of all the time you are wasting. If you don’t find a sale in a few days of your product search…just buy it already. With all the time involved in “window-shopping,” you could be spending that same amount of time MAKING money.
2. If you need something, you need it. - Don’t try to do good without buying something because it is too expensive. Don’t substitute when you can’t. If you are running a business and you need a product, then buy it. If you compromise, it will probably affect your business in a negative manner.
3. If you didn’t pre-plan- Don’t be cheap, if you are running around for something last minute. Make a wise decision and just buy what is needed.
4. Don’t be cheap in these situations- If you are on your Honeymoon, don’t be cheap. If you are out with your boss, don’t be cheap. If you are with a friend- well it depends.
In the end, cheap people CAN prosper and a whole lot of cheap can be quite beneficial to you in the long run. Being cheap isn’t a bad thing, but being cheap is a luxury you CAN afford. A lot of the most successful entrepreneurs are cheap.
Is it my imagination or are brands not nearly as big a deal today as they were thirty years ago? When I was growing up, there were endless discussions of Coke versus Pepsi, McDonalds versus Burger King, and Haagen Dazs versus Ben and Jerry’s. Over the past few years, however, I think that debates of that nature have all but disappeared.
Now, the issue seems to be not what is best, but what is both acceptable and affordable. As my wife pointed out today, her purchasing decisions are not brand driven as much as they are performance driven. I agree completely.
If a brand is good, it falls into the category of “brands that I will buy.” If a brand does not measure up, at least somewhat consistently, it falls into the category of “brands that I won’t buy.” After I filter out the brands that I won’t buy, my purchasing decisions are then motivated almost solely by price.
I think part of the reason that things have changed is that quality control has improved among all brands. As a result, there really is little difference among most brands. Sometimes the packaging on a generic product might be inferior to the packaging on a name-brand product, but usually the packaging deficiency does not make that much of a difference. Indeed, sometimes a generic product can be an improvement on a name-brand, especially where opinions can be subjective. My elder son, for example, will not eat Honey Nut Cheerios, but he will eat the Publix version by the box.
It took me a long time to get to the point where I recognized that brand name products are not necessarily better products. As a child, the pantry in my home was full of name brand products so that is what I expected as an adult. Tollhouse cookies could not taste as good, or so I believed, unless they were made with Nestle’s Tollhouse Morsels. After years of trying to convince me otherwise, my wife finally did a blind taste test and I found that I could not tell the difference among five brands of chocolate morsels. From that experience, it was not difficult for me to overcome my childhood prejudices, and I did so very quickly.
Interestingly enough, I have slowly begun to see a slight resurgence in brand loyalty over the past several months as some entrepreneurial minded business owners begin to develop their small brands on via social media. Big City Coffee, for example, has a very active Facebook community which I believe to be very much loyal to Big City Coffee’s coffee. Among relatively small groups, such personal interaction with a consumer base may go a long way towards re-instilling a brand loyalty but it remains to be seen how that will work with a larger consumer base.
Are you loyal to any brands? Do you find that you have become less brand-loyal and more value-oriented during the current economic downturn? Are there any status-brands that you still buy just so that you can be seen buying them? Are there any brands that you really believe are consistently better than their competitors?
By Andrew Ward in Stockholm and David Gelles in San Francisco
Published: October 22 2009 16:22 | Last updated: October 22 2009 21:21
Nokia, the world’s biggest mobile-phone maker, on Thursday launched a legal challenge against alleged intellectual property abuse by Apple, opening a new front in its battle against a US rival that is transforming the industry.
A lawsuit filed in a US federal court in Delaware accused Apple of infringing 10 Nokia patents in all 30m of its flagship iPhones sold since the US company entered the mobile market in 2007.
The move sets the stage for a court battle between the industry leader and its fastest-growing challenger over one of the hottest products in consumer technology.
Ilkka Rahnasto, Nokia’s head of legal affairs and intellectual property, accused Apple of seeking “a free ride on the back of Nokia’s innovation”.
The dispute comes as Nokia attempts a fightback against Apple in the rapidly expanding smartphone market as consumers shift from traditional handsets to phones that double as mini-computers. Nokia remains the biggest maker of smartphones, which offer services such as e-mail, music and video, but is losing market share to the iPhone and the BlackBerry range of devices made by Canada’s Research in Motion.
Their contrasting fortunes were highlighted this week when Apple announced a 47 per cent jump in third-quarter profits days after Nokia said it had fallen into loss.
Nokia said the disputed patents involved technologies that were “fundamental” to the manufacturing of third-generation mobile phones, including wireless data, speech coding, security and encryption.
“The basic principle in the mobile industry is that those companies who contribute in technology development to establish standards create intellectual property, which others then need to compensate for,” said Mr Rahnasto. “Apple is also expected to follow this principle. By refusing to agree appropriate terms for Nokia’s intellectual property, Apple is attempting to get a free ride on the back of Nokia’s innovation.”
Apple, which sold a record 7.4m iPhones in the third quarter of this year, did not return calls for comment.
Apple has established itself as a pioneer in the smartphone market, bringing together a powerful handheld computer with a sleek interface that has proved a hit with consumers and spawned imitators.
Apple has previously been seen as the aggressor when it comes to smartphone patents. Earlier this year, when Palm launched the Pre, Apple threatened to sue Palm over its multi-touch interface.
William A. Stofega, a mobile analyst with market research company IDC, said this had had a chilling effect on innovation: “The rumours were that certain devices were held back because of the threat of lawsuits.”
YouTube may pay less to be online than you do, a new report on internet connectivity suggests, calling into question a recent analysis arguing Google’s popular video service is bleeding money and demonstrating how the internet has continued to morph to fit user’s behavior.
In fact, with YouTube’s help, Google is now responsible for at least 6 percent of the internet’s traffic, and likely more — and may not be paying an ISP at all to serve up all that content and attached ads.
Credit Suisse made headlines this summer when it estimated that YouTube was binging on bandwidth, losing Google a half a billion dollars in 2009 as it streams 75 billion videos. But a new report from Arbor Networks suggests that Google’s traffic is approaching 10 percent of the net’s traffic, and that it’s got so much fiber optic cable, it is simply trading traffic, with no payment involved, with the net’s largest ISPs.
“I think Google’s transit costs are close to zero,” said Craig Labovitz, the chief scientist for Arbor Networks and a longtime internet researcher. Arbor Networks, which sells network monitoring equipment used by about 70 percent of the net’s ISPs, likely knows more about the net’s ebbs and flows than anyone outside of the National Security Agency.
And the extraordinary fact that a website serving nearly 100 billion videos a year has no bandwidth bill means the net isn’t the network it used to be.
But the lack of a monthly bill in the mailbox doesn’t mean Google’s internet connection is free — it’s just that it has purchased unused fiber optic cable known as “dark fiber” — and uses it to carry its traffic to other networks where it “peers” or trades traffic with other ISPs. Its costs for bandwidth are then amortized across the life of its fiber and routers.
YouTube has been mum on its actual costs, for competitive reasons, but did say in blog post in July that it has homegrown infrastructure and that traditional pricing models don’t apply.
There’s been a lot of speculation lately about how much it costs to run YouTube…. The truth is that all our infrastructure is built from scratch, which means models that use standard industry pricing are too high when it comes to bandwidth and similar costs. We are at a point where growth is definitely good for our bottom line, not bad.
In fact, YouTube’s low or nonexistent bandwidth bill points to a very important shift in the structure of the internet, which is rapidly becoming much more complicated.
Traditionally the net has been shaped like a pyramid with small ISPs at the bottom, connecting up to regional carriers, that connect to backbone and transcontinental carriers. It’s much more complicated now with the top 30 websites serving up 30 percent of net traffic, either from their own sets of pipes or from data centers around the world that connect much closer to your computer — and for much cheaper — than ever before.
It’s just one of many changes in how the net is structured, a change that started in 2007, according the report.
In 2007, the majority of the internet’s traffic came distributed by 30,000 blocks of servers around the net (technically Autonomous System Numbers).
In 2009, 150 blocks served up half of the net’s traffic.
“What we mean by the internet is changing and it’s happening really quickly,” Labovitz said. “I was blown away to find out that one-tenth of the internet is going [to] or coming from Google.”
Those blocks include Google and increasingly popular and cheap content-delivery networks, such as Akamai and Limelight, which serve content from websites such as Wired.com from server farms around the net — often at rates far cheaper than self-hosting.
Which is to say that the real money is in the ads and services in the packets, not in moving the bits from computer to computer. The cost of bandwidth has fallen and so too have the profit margins for moving bits, even as traffic grows at an estimated 40 percent a year.
With the growth of Google’s network and Content Delivery Networks, the economics of who pays whom to connect grows more complicated than the early days of the net when money flowed upwards — little ISPs paid regional ISPs who paid major ISPs who paid backbone operators.
Now if you are Google, you might even begin asking Comcast to pay up to connect its Google Tubes straight to their local cable ISP networks. That way, YouTube videos and Google search results would show up faster, letting the ISP brag that YouTube doesn’t stutter on their network, a potential commercial advantage over its DSL competitors.
“Who pays whom is changing,” Labovitz said. “All sorts of negotiations are happening behind closed doors.”
Unfortunately, few will know the outcomes of those talks, since most of the net’s architecture, let alone the financial machinations behind them, remain a secret cloaked in nondisclosure agreements.
But Labovitz says the changes will have a big upside for typical net users, who are already seeing faster downloads. For instance, many videos on YouTube now come in HD, an option that would have been unthinkable in the days when its video always seemed to be stuttering and buffering.
Labovitz also expects ISPs to react to falling margins for moving internet traffic by continuing to offer more and better services, such as backup services, smartphone apps to control their in-the-cloud cable DVRs or online video services like the controversial ESPN 360. That’s all part of their attempts to become something other than just dumb pipes ferrying YouTube videos — and Google’s ads — to your computer.
A full report, co-written with select academics, will be presented at the end of the month at the NANOG47 meeting, a gathering of net traffic engineers from North America. However, the Arbor Networks data is not available to other researchers due to confidentiality agreements, according to Labovitz.
Vodafone faces a fight over one of its prime African acquisitions after an official review in Ghana challenged the legality of its $900m (£557m) purchase of a leading local telecoms group.
But the new government which took office in January ordered a review, claiming the sale was “fraught with irregularity”.
“Most of the terms of the [sale agreement] are inimical to Ghana’s interest,” the review committee found, according to a statement issued by the government on Friday.
It advised the government to “consider the option of renegotiating” a deal whose value is equivalent to 5.6 per cent of Ghana’s gross domestic product last year.
Vodafone said it would not comment on the review until it had been provided with the full document.
Ghana is regarded as lucrative territory for telecoms groups seeking to capitalise on the rapid growth of mobile telephony.
At the time of the deal, Arun Sarin, then Vodafone chief executive, said: “Ghana is one of the most attractive markets in Africa with mobile subscribers growing at more than 55 per cent per annum and mobile penetration around 35 per cent.”
Vodafone had said in a statement when the deal was struck that it had paid “a consideration of $900m on a debt-free, cash-free basis” for the stake.
But the review committee claimed that the government had only received $267m from the sale due to “complicated financial arrangements” and warned that the deal might be “unconstitutional” because it was conducted through a Netherlands-based holding company.
It said Telkom, one of South Africa’s big three phone groups, has made a separate offer of $947m for a two-thirds stake. Telkom declined to comment.
A person familiar with the matter said the company had made an indicative offer for Ghana Telecom but did not disclose the amount.
The review challenged a clause in the Vodafone sale which it said precluded the government, which retained a 30 per cent share, from bringing corruption proceedings against “any member of the enlarged [Ghana Telecom] group”.
The review said there had been “highly irregular … executive interference in the sale” by John Kufor, then president. John Atta Mills, his successor, ousted Mr Kufor’s party at subsequent elections.
Ghana’s telecoms market is increasingly crowded. MTN, Africa’s biggest mobile group, leads a field of six operators, followed by Luxembourg-based Millicom and Ghana Telecom.
Local media quoted the government saying it would decide how to proceed within a fortnight.
Published: October 17 2009 03:00 | Last updated: October 17 2009 03:00
The government and financial regulators will this weekend hold talks over the planned refinancing of Lloyds Banking Group to finalise their views on whether the bank can succeed in its ambitious bid to escape the asset protection scheme.
Both the Financial Services Authority and the government have signalled that they are concerned about the “achievability” of Lloyds’ plan to raise up to £25bn of capital through the combination of a rights issue, debt for equity swap and structured asset sale. The government owns a 43.5 per cent stake in the bank.
Lloyds, which signed up to the asset protection scheme in March, has in recent weeks become hopeful that it can find an alternative solution. It is keen to avoid the £15.7bn fee that it would have to pay under the scheme.
Even if the bank does manage to escape the scheme it would still have to make significant asset disposals as part of the state aid ruling that is being finalised in Brussels.
The European Commission wants Lloyds to dispose of a significant chunk of its assets and market share as compensation for the extensive government support it has received and to stimulate competition in the market.
Its priority is to see a dramatic reduction in the number of current accounts managed by Lloyds.
The bank, which took over HBOS at the height of the financial crisis, provides almost a third of all current accounts in the UK. The commission wants to see Lloyds’ share of the market reduced by about 8 percentage points, according to people familiar with the situation.
In order to shrink its market share by this amount Lloyds may have to sacrifice one of its leading high-street brands, such as Bank of Scotland in England and Wales or Lloyds TSB in Scotland.
One person close to the talks said the divestment would need to include a standalone brand that consumers can identify with as well as a network of branches. It is unlikely that Lloyds will have to dispose of all of its Halifax branches.
“Halifax is probably a bridge too far,” they said.
The branch sales are likely to be concentrated in Scotland but will cover the whole of the UK. Branches could be sold along with customers who have savings or loans based with them. These customers could be given incentives to stay with the new provider.
Lloyds would not comment yesterday.
Estate agency chain sold for £1
Lloyds Banking Group has agreed to sell its lossmaking Halifax Estate Agencies arm to LSL Property Services for £1.
The disposal will lead to the closure of 121 Halifax banking counters that are located inside the estate agency chain’s branches, with up to 460 people losing their jobs.
HEA is the UK’s fourth-biggest network of estate agencies with 218 branches. The group has been badly hit by the downturn in the property market, which pushed it into a pre-tax loss of £2m last year compared with a £34m profit in 2007.
The purchase will make LSL the second-biggest network of estate agencies in the UK by number of outlets. The company, which already owns the Your Move, Reeds Rains and InterCounty brands, expects to strip about £40m of costs out of the business and return it to profitability within two years, assuming a modest market recovery.
Shares in LSL rose 23p to close at 285p. It also said trading had beaten expectations since July, although turnover for the eight months to August 31 was down by 18 per cent.
Lloyds acquired the estate agency business when it bought HBOS in a rescue deal completed earlier this year.
Bank of America (BoA) slid to a $1 billion net loss in the three months to September in the last quarterly results to be announced by Kenneth Lewis, the company’s outgoing chief executive.
BoA’s results were hit by a number of non-core costs, including $402 million it set aside to cover the cost of closing down a Government guarantee on its assets.
The bank also took punishment from the continuing financial difficulties being suffered by consumers.
Net income from deposits plunged by 40 per cent to $798 million compared to the three months to September 30 last year.
BoA’s global card services division made a $1 billion loss and home loans and insurance made a $1.6 billion loss. Profits were also impacted by a $2.6 billion charge which came mainly from an improvement in BoA’s creditworthiness, which meant that it would cost more to buy back debt sold by BoA and Merrill Lynch, the investment bank it bought last year. Banks must account for this cost every quarter.
BoA’s first quarterly loss since the fourth quarter last year came despite a 32.6 per cent year-on-year increase in revenue to $26 billion.
Despite the loss in the third quarter, which compares with a $1.1 billion profit in the same period last year, Mr Lewis said: “we are heartened by early positive signs, such as the leveling of delinquencies among our credit card customers.”
Mr Lewis said that deteriorating loans were the bank’s major challenge going forward, echoing comments made by Vikram Pandit, chief executive of Citigroup, who yesterday revealed that the bank made a $101 million net profit despite similar problems with bad debts.
It is a humbling exit for Mr Lewis, who has spend 40 years at the bank and until recently was lauded as a national hero for buying Merrill Lynch, the troubled investment bank, at the height of the financial crisis.
But yesterday Mr Lewis agreed to give up his bonus and salary for 2009, under pressure from President Barack Obama’s Pay Czar. The chief executive will retire at the end of the year. BoA is searching for a replacement.
