Keep Bank of America on the hook

(breakingviews.com) -- The U.S. Treasury shouldn't let Bank of America out of the penalty box just yet.

The Charlotte, N.C.-based bank wants to repay $20 billion, or almost half of the capital it received from the Troubled Asset Relief Program, according to press reports. The bank's fortunes have certainly picked up since the depths of the banking crisis -- its stock has rocketed almost sevenfold. But it's hardly out of the woods.

For starters, it still trades at just 75% of book value, implying shareholders still see more pain ahead. And BofA's core business is hardly firing on all cylinders. Sure, the bank reported $7.4 billion of profit for the first half of the year. But that's illusory: BofA (BAC, Fortune 500) actually lost $3.5 billion -- $5.7 billion if dividend payments are included -- after stripping out tax benefits and one-off gains from selling chunks of businesses, including almost half its stake in China Construction Bank, and adjusting for accounting-driven gains and losses on its own liabilities.

What's more, some of the best-performing units in the first two quarters are unlikely to crank out such stonking revenues in the next two: mortgage refinancing, which accounted for as much as 80% of BofA's home-lending business, has died down and tighter fixed-income spreads make a repeat of its second-quarter trading bonanza unlikely. Even embattled boss Ken Lewis reckons the second half of the year is going to be tough.

Meanwhile, though the pace of loan losses may have decelerated in recent weeks, the bank will probably be adding to reserves well into 2010, even if the economy doesn't dip back into recession.

Then there's still the lingering question of Lewis's role after the shenanigans surrounding the acquisition of Merrill Lynch exposed flaws in the bank's risk management in general and his leadership in particular. And none of the three individuals who now appear to be in the running to be his successor has any experience managing such a large institution.

Granted, BofA looks much better positioned than fellow struggler Citigroup (C, Fortune 500). But with so many questions still hanging over its performance and leadership, paying back TARP cash now would be a mistimed PR stunt.