Bank of America May Take $6.5 Billion Loss Provision

Bank of America May Take $6.5 Billion Loss Provision

March 22 (Bloomberg) -- Bank of America Corp., the second biggest U.S. bank by assets, may take a record $6.5 billion provision in the first quarter to cover possible future losses in its home equity and mortgage portfolios, Punk Ziegel and Co. analyst Richard Bove wrote.

Whether the two portfolios have that level of loss will depend on the economy and developments in the housing markets, Bove wrote in his e-mailed March 24 report. The bank, meanwhile, will experience only a shift in equity and still report a profit, he wrote. The Charlotte, North Carolina-based bank plans to release first-quarter results April 21.

``At the moment, I do not foresee the economy plunging to a level that will substantiate this reserve build,'' wrote Bove, who has a ``buy'' on the shares and doesn't own any of the stock. ``This is due to a belief that the change in the value of the dollar will stimulate growth and that the actions by the Federal Reserve will take effect.''

The world's biggest banks and securities firms have disclosed at least $195 billion in writedowns and credit losses since the start of 2007, as mortgage and debt markets seized up. Bove advised selling financial shares eight months ago, before they tumbled.

Countrywide Purchase

Bank of America plans to buy Countrywide Financial Corp., the biggest U.S. mortgage lender, in a stock swap originally valued at about $4 billion. Investors have speculated Bank of America may try to cancel or modify the accord because the housing market has continued to deteriorate.

The Fed has cut interest rates, agreed to accept a wider range of collateral on loans and extended credit to non-banks for the first time.

Bank of America is receiving payments for credit cards and mortgages from distressed households that are defaulting on home equity loans, Bove said. This indicates that people are trying to keep their homes, which conflicts with the premise that they are walking away and turning over their keys to the banks.

``Clearly they are trying to reach some accommodation to hold on to their houses and their credit ratings,'' Bove wrote. ``It is my impression that Bank of America is likely to accommodate these households under the theory that it makes no sense to repossess the house.''

Housing Eases

Housing is becoming affordable, Bove wrote, based on the research of Stuart Feldstein at SMR Research. Feldstein said the housing slump is bringing prices back in line with incomes, according to Bove's note.

The dividend may increase in August as the company's market share in the financial sector gains, margins benefit from wider spreads and costs are under control, Bove wrote.

Bank of America spokesman Scott Silvestri declined to comment. Bove delivered the report to Bloomberg News by e-mail today.

His 2008 estimate was reduced to $2.98 a share from $3.81, the 2009 estimate was cut to $3.96 from $4.30; and the 2010 estimate was reduced to $4.78 from $4.93, Bove wrote.

Bank of America rose $3.30, or 9 percent on March 20, to $41.86 in New York Stock Exchange composite trading.

Citigroup Inc. is the largest U.S. bank by assets, ahead of Bank of America.

BLOOMBERG