Is Bank of America too big to fail, or succeed?

By Jonathan Stempel

NEW YORK (Reuters) - Bank of America Corp may be too big to fail, but confidence is dwindling over the near-term prospects of the largest U.S. bank.

Its shares have fallen 68 percent since the bank agreed to a shotgun takeover of Merrill Lynch & Co on Sept 15, the same morning that Lehman Brothers Holdings Inc filed for bankruptcy protection. The Bank of America-Merrill merger closed on January 1.

The decline in Bank of America's shares dovetailed with an industrywide credit implosion that started with the housing sector and spread to other lending areas, such as credit cards and commercial loans. That has derailed the U.S. economy.

This month, several analysts lowered their earnings outlooks for Bank of America, and some now expect the bank to report a fourth-quarter loss.

That would be the first quarterly loss since the Charlotte, North Carolina, bank was created in 1998, when NationsBank bought BankAmerica, according to Reuters data.

"People are saying, 'Gee, things cannot be good,'" said David Dietz, chief investment officer of Point View Financial Services in Summit, New Jersey, which owns Bank of America stock. "We are bracing for commercial loans, commercial real estate loans just not performing. The sentiment is terrible."

Increased credit losses may also force the bank to cut its 32-cents-per-share quarterly dividend, which equates to a yield above 11 percent. The bank halved the dividend in October.

More losses may also foreshadow more capital raising. The company has raised $35 billion since September, including $25 billion as part of the government's $700 billion industry rescue.

Bank of America spokesman Scott Silvestri declined to comment on the bank's current business, citing a quiet period ahead of the fourth-quarter earnings report due on January 20. He said the bank expects the U.S. economy to hit bottom in the second half of 2009.

COST CUTS

It would be tough to argue that Bank of America is as troubled as Citigroup Inc, which appears to be shedding its "financial supermarket" status, just as Bank of America tries to do the same thing, without using the term.

Bank of America ranks first or second nationally in total brokerage, credit cards and retail deposits, and has one of the largest investment banks.

But analysts expect losses to keep rising in mortgages, including those from the former Countrywide Financial Corp, and in the credit card business, which had a quarterly loss from July to September -- the first loss since the 2006 takeover of MBNA Corp.

The bank has said card loss rates could eventually top 7 percent, up from the third quarter's 6.4 percent, and 4.75 percent in the fourth quarter of 2007.

And Citigroup analyst Keith Horowitz on Monday said Bank of America may be only one-third of the way through $165 billion in credit losses and writedowns expected from 2008 to 2011.