Bank of America's 'serious challenges'

A well-known banking analyst lowers his price target for the nation's largest bank.

By Kim Peterson Jun 7, 2010 2:48PM
Secrets to better banking © Nick Koudis / Photodisc Red / Getty Images Not all is well at Bank of America (BAC), the nation's largest bank.

Richard Bove, a well-known banking analyst, has lowered his price target for the stock, staying it faces "serious challenges" from multiple sources, according to The New York Times.

And it was a pretty steep drop. Bove's target price is now $22.80, down from his earlier target of $27.50. The stock is trading at about $15.

Here are some of the reasons Bove is concerned, according to the Times:

Regulatory changes: Bank of America isn't alone here. Sweeping changes still being hammered out in Congress could have a significant impact on the banking and securities industries.

Holding more cash: In an attempt to keep more banks from failing, lawmakers will likely insist that banks hold on to more money (instead of lending out or investing that cash). That will eat into Bank of America's ability to make money.

Consumer protection: Also, there are consumer protection proposals afoot that would hurt profits at Bank of America's credit-card and business-banking units, the Times reports.

Trading units: The bank may also have to spin off some of its trading units -- although this is certainly very much up in the air at this point. The Times reports that Bank of America made $5.2 billion from trading (about 16% of its revenue) in just the first quarter.

Derivatives: And the bank's notional derivatives portfolio is around $70 trillion, of which $1.5 trillion is at risk, the Times reports. The bank would have to stop trading derivatives for its own gain and for clients if some proposals in the financial reform bill make it into law.

Investment banking: Setting aside all the proposed changes, Bove took a look at Bank of America's investment banking unit and pronounced it "weak."

Bove was able to dig up something positive, although it's not something the bank can take credit for. The economy will continue to recover, he notes, and that will help cut losses in Bank of America's massive home loan department.

For what it's worth, Bove still has a buy rating on the stock (largely because there's a $8 difference between its current value and his target price.)

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