How can a bank lose money when they can borrow at 0% and lend at 5%? Most won't lose money, and Bank of America was no exception when it released its second quarter earnings this past week, but they came close.
A couple of things from a Reuters report that are worth pointing out:
First, "Results included a $5.3 billion pre-tax gain from the sale of one-third of the bank's stake in China Construction Bank Corp".
Second, "Second-quarter net income applicable to common shareholders fell 25 percent to $2.42 billion".
When you add these numbers up you can see that Bank of America was profitable because they are selling assets. Unfortunately selling assets negatively impacts the potential for growth moving forward, Jim Cramer.
Third, what is more alarming is that, "Nonperforming assets surged 21 percent to $30.98 billion" from the previous quarter.
CEO Ken Lewis was quoted as saying, "Difficult challenges lie ahead from continued weakness in the global economy, rising unemployment and deteriorating credit quality that will affect our performance for the rest of the year and into 2010".
When you connect the dots what this reveals is that Bank of America has some significant challenges ahead of them. Not only are they selling good assets in order to turn a profit, but the number of bad assets that they have are surging. Additionally, the revenue that they have produced from the mother of all refinance booms is unsustainable. Their profitability moving forward remains clouded and will be complicated by a deteriorating housing market that saw foreclosure filings surge 33% year over year according to RealtyTrac.