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

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.

Bank of America shares have fallen 18 percent this week alone, closing Tuesday down 78 cents, or 7 percent, at $10.65.

"In the short run, prices on housing have to stabilize before we're through this mess," said Donald Yacktman, a portfolio manager at Yacktman Asset Management Co in Austin, Texas, which owns a small amount of Bank of America stock.

Analysts also worry that the departures of Merrill president Greg Fleming and brokerage chief Robert McCann later this month reflect a culture clash that may ultimately drive some of Merrill's more profitable brokers out the door.

That could tarnish a business that Bank of America Chief Executive Kenneth Lewis has called Merrill's "crown jewel."

Lewis and John Thain, the former Merrill CEO tapped to oversee wealth management and investment banking in the new company, must stem defections as the bank prepares to slash up to 35,000 jobs and extract $7 billion in savings. Another 7,500 jobs are being cut from the Countrywide purchase.

Bank of America sold $10 billion in equity in October, and Merrill raised $25 billion through the U.S. Treasury Department's Troubled Asset Relief Program.

But analyst Jeff Harte of Sandler O'Neill & Partners LP expects "lean" year-end capital ratios, which measure the ability to handle losses, and said a 50 percent dividend cut could conserve $4.3 billion of capital a year.

REASONS FOR OPTIMISM

Some analysts see reasons for optimism.

Independent research firm CreditSights Inc said Bank of America's cost savings from Merrill "should address most of its capital adequacy concerns."

Bank of America also has capital resources, such as a 16.7 percent stake in China Construction Bank Corp, after selling part of its holdings this month, and nearly 50 percent of money manager BlackRock Inc, which it acquired when it bought Merrill.

Horowitz, the Citigroup analyst, has set a $22 price target for the bank's shares, despite his loss forecast.

Analysts also cite the deep experience of top management. Lewis, for example, has been with the bank since 1969, and been a driving force behind its big acquisitions.

Executives such as Lewis "have been through a lot of cycles and are better trained to deal with what's happening now," said Peter Boockvar, an equity strategist at Miller Tabak & Co.

Above all is the thinking on Wall Street that Bank of America, with an estimated $2.7 trillion in assets and 308,000 employees, cannot be allowed to fail.

Lehman, which was smaller, did, pushing the global economy into convulsions.

Bank of America may enjoy "good growth" in deposits and commercial loans "due to its structure as a survivor bank," JPMorgan analyst Vivek Juneja wrote Tuesday. "But, similar to peers, the stock could remain volatile near term due to sharply rising credit losses and concerns about capital.."