(Reuters) ? Signs of improvement in the economy and gains from asset sales helped Bank of America Corp post a quarterly profit, sending its shares higher on Thursday, but the second-largest U.S. bank still needs more capital and with little left to sell, it is becoming creative.
Bank of America said it was considering issuing $1 billion in common stock to certain employees in lieu of a portion of their year-end cash bonuses next month.
The move, a large stock issue to effectively captive investors -- its employees -- could further pad the bank's capital levels, but at the same time dilute shareholders' interest and may stir discontent among some bankers.
Investors, however, seemed to shrug aside such fears and focus instead on Chief Executive Brian Moynihan's success so far in building up capital levels and fixing the bank's problems.
The fourth-quarter profit after a year-ago loss, improving loan demand and better credit quality, all helped buoy Bank of America's shares, which rose 5.7 percent to $7.19 in morning trading on the New York Stock Exchange.
"Bank of America looks like it's making good progress on the capital build-up," said Derek Pilecki of Gator Capital Management in Tampa, Florida. "It's a work in progress with expense cuts continuing. They have to issue stock to make capital targets, but the dilution isn't overwhelming."
Bank of America was still trying to recover fully from the aftermath of the 2008 financial crisis and a disastrous acquisition of mortgage lender Countrywide Financial that has saddled the company with losses.
Moynihan is working to show Bank of America has enough capital to absorb these mortgage-related losses and to meet new international capital standards. Over the past two years, he has been shedding noncore businesses to boost capital levels and streamline the company.
Last spring, Bank of America launched a wide-ranging efficiency program called Project New BAC, which is expected to eliminate 30,000 jobs in its first phase over the next few years.
On a conference call with analysts on Wednesday, Chief Financial Officer Bruce Thompson said the bank should start to see the benefits of job cuts in first quarter expenses.
"We enter 2012 stronger and more efficient after two years of simplifying and streamlining our company," Moynihan said in a statement. "We built our capital ratios to record levels during 2011 on the strength of our core businesses and by shedding those that are not core to serving customers and clients."
Bank of America said its Tier 1 common equity ratio, a key measure of capital against risk-weighted assets, reached 9.86 percent at the end of December.
That was up from 8.65 percent at the end of September and higher than the 9.25 percent minimum the bank had projected.
ONE-TIME GAINS
Bank of America said net income applicable to common shareholders was $1.58 billion, or 15 cents per share, in the fourth quarter, compared with a loss of $1.6 billion, or 16 cents per share, a year earlier.
The Charlotte, North Carolina-based bank benefited from pretax gains of $5.3 billion from the sale of China Construction Bank Corp shares, and gains from the exchange of trust preferred securities and the sale of debt securities.
Various accounting charges and litigation expenses reduced earnings by $3.7 billion.
The bank set aside $2.9 billion in the quarter for loan losses, down from $5.1 billion a year ago. Bank of America, which is working to shed risky assets, also said total loans decreased to $926 billion from $932 billion in the third quarter.
Like rivals Wells Fargo & Co, JPMorgan Chase & Co and some regional banks, Bank of America reported loan growth in the fourth quarter, potentially boding well for the U.S. economy.
In its corporate bank, average loans and leases increased 29 percent to $107.5 billion, with growth in both U.S. and international commercial loans.
But also like other banks with large investment banking operations, such as Citigroup Inc, JPMorgan, Goldman Sachs Group Inc and Morgan Stanley, Bank of America was hurt by lackluster trading and investment banking revenue in the fourth quarter as clients roiled by the European debt crisis shunned capital markets and put off deals.
Sales and trading revenue in Bank of America's banking and markets unit increased to $1.9 billion, excluding an accounting charge, from $1.1 billion in the third quarter but was down from $2.4 billion a year ago.
Investment banking fees were flat from the third quarter at $1 billion but down from $1.6 billion a year ago.
Bank of America bulked up its investment banking business with the 2009 purchase of Merrill Lynch.
In December, Moynihan said the bank had seen better results in this business in the fourth quarter after a weak third quarter.
The bank also continued to struggle to show revenue growth at a time of low interest rates and regulatory restrictions on fees earned from debit card transactions.
Total revenue declined to $24.9 billion from $28.5 billion in the third quarter but was up from $22.4 billion a year ago.
The bank said the Durbin amendment, the provision in the Dodd-Frank financial reform bill that curbed debit-card swipe fees, decreased card services revenue by $430 million.
"Bank of America had a solid quarter, but not quite enough to make you pop the champagne" said Allerton Smith, senior director at Moody's Analytics.
"Capital ratios are up, liquidity is stronger and there is a noticeable decline in problem loans," Smith said.
(Reporting By Rick Rothacker; Additional reporting by Ben Berkowitz in Boston and Jed Horowitz in New York; editing by Paritosh Bansal, Maureen Bavdek and John Wallace)
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