NEW YORK (AP) -- Shares of Bank of America fell Wednesday, after Credit Suisse analysts downgraded the bank.
THE SPARK: Analysts led by Moshe Orenbuch cut Bank of America shares to "hold" from "sell," saying they're not sure if the bank can grow revenue or cut expenses as fast as the current stock price might assume.
Orenbuch cut his estimate for 2013 per-share earnings to $1.08 from $1.15, and his estimate for 2014 to $1.40 from $1.55. The high cost of working through problem mortgages, and paying to settle or defend itself against mortgage-related lawsuits, will continue to be a drag on the bank, Orenbuch posits.
THE BIG PICTURE: It's already been a tumultuous week for Bank of America and its mortgage division. On Monday, the bank announced not one but two major mortgage settlements.
It and nine other banks agreed to spend a combined $8.5 billion to settle the government's charges that the banks had wrongfully foreclosed on some homeowners and engaged in other abusive mortgage practices.
It also announced it would pay to settle a dispute with Fannie Mae, the government-sponsored mortgage lender. In the run-up to the financial crisis, Bank of America and other banks sold mortgages to Fannie Mae that have since soured, and Fannie Mae has been demanding that the banks buy them back. Bank of America agreed to pay $3.6 billion in cash to Fannie Mae and to buy back $6.75 billion in loans.
Bank of America reports fourth-quarter earnings next week, and the mortgage settlements will be keenly felt. The bank predicts that the national mortgage settlement and related matters will slash earnings by $2.5 billion. The Fannie Mae settlement should cut another $2.7 billion. The bank says it expects fourth-quarter earnings to be "modestly positive."
THE ANALYSIS: Orenbuch called the Fannie Mae settlement "an important step" in the bank's efforts to put problem mortgages in the past. Other analysts have said that the settlements, even though they essentially wipe out earnings for a quarter, bring certainty to one of the bank's legal problems and are a positive for the long term.
But that doesn't mean the bank's mortgage problems are all solved. Analysts, including Orenbuch at Credit Suisse, Glenn Schorr at Nomura and Eric Wasserstrom at SunTrust, have already pointed out that the bank still faces similar mortgage-repurchase demands from other investors. Such costs are also difficult to predict, and Orenbuch said in his note Wednesday that he expected legal costs to stay high in the near term.
That all raises questions about what other litigation and regulatory fines might be waiting for the bank.
"If you believe the bull market thesis for (Bank of America), you must assume that the bank is going to prevail in the massive litigation it faces with respect to legacy mortgage securities," Chris Whalen, an analyst at Carrington Investment Services, wrote before the settlement. "This is a considerable assumption."
SHARE ACTION: Bank of America shares fell 21 cents to $11.77 in midday trading. The stock has ranged from $6.41 to $12.20 in the past 52 weeks.