Bank of America has plenty to prove
Reeling from the fallout associated with its Merrill Lynch purchase, BofA CEO Ken Lewis may be able to silence critics with some strong numbers this quarter.
NEW YORK (CNNMoney.com) -- This earnings season, no company may have more on the line than Bank of America.
The last three months have been a painful time for the Charlotte, N.C.-based banking giant. There has been the never-ending string of headaches associated with last year's fateful purchase of Merrill Lynch, including a bonus scandal that the company can't seem to shake.
At the same time, there has been no shortage of criticism from shareholders about its stock price. Management has also been working hard to convince investors that last year's purchase of mortgage lender Countrywide was a smart move.
Elevating the stakes even further is the fact that many of Bank of America's peers, such as JPMorgan Chase (JPM, Fortune 500), Wells Fargo (WFC, Fortune 500) and Goldman Sachs (GS, Fortune 500), have shattered profit expectations so far this quarter.
Even Citigroup (C, Fortune 500), which has struggled mightily for more than a year to untangle itself from the big bets it made on the U.S. housing market, managed to eke out a profit of $1.6 billion in the latest quarter, much to Wall Street's surprise.
"[Bank of America] should theoretically have many of these same positive ingredients in its [first quarter] results," Nancy Bush, bank analyst and founder of NAB Research LLC, wrote in a note to clients last week. "If not - look out."
Analysts are currently betting that BofA will swing back into the black when it reports on Monday, after suffering a $1.79 billion loss last quarter. Current expectations are for the company to report a profit of $615 million, or 5 cents a share, according to Thomson Reuters.
To be fair, there have been a couple of bright spots for Bank of America in recent months, including a recent mortgage refinancing boom and widening profit margins on loans thanks to lower interest rates.
And there is the reigning belief that the bank is one of the best positioned to grow once the economy turns the corner, helped in no small part by its two high-profile, albeit controversial, purchases last year.
But industry analysts worry that many large lenders, including Bank of America, will face continued deterioration across a variety of loan portfolios, which will ultimately weigh on bank results at least for the remainder of the year.
JPMorgan Chase, for example, revealed rising credit costs in its sizeable credit card division and with so-called jumbo mortgages, or loans of more than $417,000. Jumbos have been a pocket of the housing market that has held up relatively well until now.
Friedman Billings Ramsey analyst Paul Miller points out that Bank of America is also a big player in credit cards and jumbo mortgages. What's more, he worries that the bank's commercial and industrial loan portfolio, which he estimates to be worth somewhere in the neighborhood of $280 billion, could be the next problem area for BofA.
"We do know that credit trends are worsening," said Miller. "You are not looking at losses peaking until the middle part of 2010."
But the bank's woes extend beyond just the company's income statement and balance sheet. While investors and taxpayers are angry at many bank executives in the wake of the credit crisis and resulting bank bailout, BofA chairman and CEO Ken Lewis arguably faces the biggest credibility gap of any bank leader.
Both shareholders and taxpayers were incensed after it was revealed in mid-January that Bank of America needed an additional $20 billion in government funds, along with guarantees on $118 billion in assets, to help the company absorb last fall's purchase of Merrill Lynch.
BofA had already received $25 billion from the government, which included $10 billion for Merrill Lynch, during the first round of the financial bailout.
Much of the outrage has failed to moderate in the months since, which means Bank of America will have many questions to answer from critics after it reports its results and at the company's annual shareholder meeting later this month.
Two activist shareholder groups -- CtW Investment Group, an investment advisor to pension funds and Finger Interests, which holds 1.1 million in company shares -- have been running an aggressive campaign aimed at ousting lead director O. Temple Sloan and members of the company's asset quality committee for failing to spot the problems at Merrill before the deal was completed.
But perhaps the biggest change could come directly at the top. Two independent proxy advisory firms have all thrown their support behind a proposal which would split the role of chairman and CEO. That proposal is considered a direct challenge to Lewis, who has held both positions since 2001.
Few would deny that Lewis helped transform Bank of America from a regional banking giant into the nation's largest bank based on deposits during his leadership. And until now, many viewed him as one of the savviest bankers in the industry.
But with the company's stock continuing to trade 74% below its yearly highs and the taint of the Merrill purchase still fresh in the minds of investors, Lewis may have no other choice but to relinquish some control.
Then again, one analyst who asked not to be named suggested that if Bank of America reports results as strong as its peers and the stock goes up, that could go a long way toward redeeming Lewis in the eyes of shareholders.