BofA CEO Lewis could dodge stress test bullet

NEW YORK (Reuters) - Bank of America Corp may find it relatively easy to raise the $34 billion in capital required by a U.S. stress test without increased government intervention, welcome news for its much maligned CEO.

Analysts say the No. 1 U.S. bank's most likely route to the massive capital boost will be a conversion of private preferred stock to common, a move that could dilute existing shareholdings, but save Kenneth Lewis's job -- at least for now.

"They will probably convert the private preferreds," said Nancy Bush, an analyst and founder of NAB Research. "I think they will really, really try to minimize the further government impact."

Lewis led the bank to buy struggling investment bank and brokerage Merrill Lynch & Co in January and many investors believe this has resulted in little more than spiraling losses that forced it to take a $20 billion emergency injection from the U.S. government.

Frustrated shareholders last week voted to strip him of his chairmanship of the largest U.S. bank's board.

But shares in the bank soared 17 percent on Wednesday when an industry source familiar with the results of the government's "stress tests" put the bank's shortfall at $34 billion and analysts said converting privately-held preferred stock will cover most of this.

"It's a big number, but it could have been worse," said Walter Todd, portfolio manager at Greenwood Capital Associates, who owns shares in the bank, adding he had seen estimates of up to $60 billion.

Bank of America can convert about $33 billion of preferred stock without raising the government's stake in the bank, analysts at Citigroup said in a report on Wednesday.

Avoiding further government involvement is important for a bank that has already received $45 billion in total government investment -- the most of any Wall Street bank bar Citigroup Inc, which has also received $45 billion.

Citi, the No. 3 U.S. bank, got a somewhat easier result from the test, needing just $5 billion according to a person familiar with the bank. But Citi has already committed to converting some of its government-held preferred stock to common shares.

"My preference would be that (Bank of America) convert private preferred stock as opposed to government preferred stock, just to avoid further government influence over the way the institution is run," said Jonathan Finger, a shareholder who, with his father Jerry Finger, led a campaign to oust Lewis as chairman of the board.

The bank has other options too, including selling its holding in China Construction Bank. A lock-up period on these shares expires on Thursday and the bank could net about $6 billion by selling the shares, the Citi analysts wrote.

Selling stakes in Brazilian bank Itau Unibanco and Spanish bank Banco Santander SA could also be worth about $2 billion, according to veteran banking analyst Dick Bove.

The bank has said it may sell private bank First Republic -- which Merrill bought for $1.8 billion in 2007 -- and it could also sell asset manager Columbia Management. Bloomberg reported on Wednesday that Bank of America has received preliminary offers for the asset manager, which Citi analysts valued at between $3 billion and $5 billion.

In addition, Charlotte, North Carolina-based Bank of America could sell some or all of its large stake in BlackRock Inc, which it acquired through purchasing Merrill Lynch, or spin off parts of Merrill's trading operations, said Bove, now an analyst at Rochdale Securities.

"There are multiple ways that Bank of America can approach this," Bove said.

LEWIS: SAFE, FOR NOW?

These options may give Lewis some breathing room after months under pressure from regulators and shareholders.

At the bank's annual meeting last week, he faced complaints about the bank's failure to quickly disclose huge losses at Merrill.

The deal -- and in particular bonuses paid to Merrill staff before the acquisition -- is also the subject of shareholder lawsuits and investigations by members of the U.S. Congress, as well as regulators including the U.S. Securities and Exchange Commission and New York Attorney General Andrew Cuomo.

For now, shareholders appear to be content with Lewis' removal as chairman, but this could fade if the bank struggles to fill its capital shortfall.

"If the bank is not able to raise the money and the government has to put more money in, then I think that changes things for Ken Lewis, but I think that's highly unlikely," said Finger.

(Reporting by Elinor Comlay, additional reporting by Dan Wilchins; Editing by Andre Grenon)