Wednesday, January 11, 2012

Don't expect debt valuation accounting gains in fourth quarter

Remember those accounting gains that helped Bank of America and other large banks in their third quarter earning reports? Don't expect them this time.

The big banks begin reporting fourth quarter earnings this week. Bank of America reports next Thursday, two days after Wells Fargo.

Last time, Bank of America booked a $1.7 billion pretax gain on debit valuation adjustments, and $4.5 billion gain on fair value adjustments for structured liabilities. In essence, these gains come from the deterioration in the bank's creditworthiness since the value of protecting its own debt is greater, and the value of its debt declines.

But in the fourth quarter, analysts with Barclays Capital expect such gains to turn into "modest" losses for Bank of America, according to a research report published this week.

The analysts also predict Citigroup's valuation adjustments to turn negative, and expect JP Morgan Chase to at least not post significant gains.