Problem Loans Hurt Banks, Stock Market

Some of the country's biggest banks have been reporting surprisingly strong earnings for the first three months of the year. Bank of America said Monday its profits more than doubled in the first quarter. However, it is saddled with a growing number of problem loans. The stock market was dragged down amid worries about the health of the banking sector.

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This is MORNING EDITION from NPR News. Good morning, I'm Renee Montagne.

Over the past week, some of the country's biggest banks have been reporting surprisingly strong earnings for the first three months of the year. Yesterday, it was Bank of America's turn. The company said its profits more than doubled in the first quarter. But then it gets complicated. To help us understand we're joined now by NPR's Jim Zarroli.

Good morning.

JIM ZARROLI: Good morning.

MONTAGNE: Bank of America's numbers looked pretty good at first glance. But investors didn't seem to buy it. What happened?

ZARROLI: No, they didn't seem to buy it. In fact, shares of Bank of America were down nearly 25 percent for the day. And that really was one of the big reasons why the market as a whole fell so much yesterday. What's happened is we've seen all these big banks come out and say their profits are up. But investors are starting to read the fine print.

And I think they're realizing that a lot of one time only factors are sort of making the numbers look artificially high. For instance, there's been an increase in certain kinds of trading activity that a lot of banks have reported and a lot of people don't think it will continue over the next quarter. So, as I say, that's really making investors question whether they were a little bit hasty about declaring a bank recovery.

MONTAGNE: How - Bank of America also said it was suffering a big increase in consumer loan defaults. How much did that contribute to its problems?

ZARROLI: Well, it's a big problem. I mean, Bank of America reported a big increase in delinquent consumer loan and credit card payments. You know, it's the same problem that's been reported by other big banks, like Citigroup. They've all noticed this uptick in late payments by consumers.

But the CEO of Bank of America, Ken Lewis, was really quite pessimistic about the credit business. He said it represented a real challenge for the bank going forward. And as a result, the bank added $6 billion to its reserves to cover potential losses. And this is just the kind of thing that shareholders hate, because it cuts into the bank's profits. So you saw this sell-off yesterday. And, as I said, it went beyond banks to the market as a whole.

MONTAGNE: And, Jim, is this rise in problem loans simply a symptom of the recession?

ZARROLI: Absolutely. It is the kind of thing that always happens in an economic downturn. Consumers have trouble paying off their debts, you know, for obvious reasons.

Now, this time it has been made a lot worse by the fact that the banks were so free, so generous, you might say, with credit during the boom years. You know, just a few years ago, you remember, you couldn't go to the mailbox without finding a lot of credit card offers, even if you bad credit. Now, a lot of these banks, I think, these credit card issuers are feeling, you know, kind of hangover.

They're stuck with a lot of customers who can't pay their bills. They're losing money. It's kind of similar to what happened with all those subprime mortgage loans.

MONTAGNE: In the long run, how much of a problem is this increase in bad loans going to be for banks?

ZARROLI: Well, there are analysts who think it's a huge problem for banks. They're staring at big potential losses in credit cards, especially as the recession drags on.

Not only that, but Congress is considering placing restrictions on interest rates they can charge, which will make it even harder for the banks to make money on credit cards.

MONTAGNE: Well, you know, we so much talk about credit and the need for credit during these hard times. What happens if banks keep cutting back on credit during the recession?

ZARROLI: Well, that is a problem for the economy, too, because you know, as credit cards become less profitable banks are lowering people's credit lines. They're even canceling cards. Now, you know, a lot of people might think that's not such a problem because we have too many credit cards as it is in the United States.

But we are in a recession. This is not the time when we want people to suddenly develop prudent spending habits. On the contrary, you know, we hope people will spend more. And to the extent they can't do that because their credit cards are taken away, you know, then that's just one more thing that might delay the recovery.

MONTAGNE: NPR's Jim Zarroli.

Thanks very much.

ZARROLI: You're welcome.

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