Bank of America’s post-Lewis era has just as many problems

October 1, 2009
The Charlotte Observer

Bank analysts are reacting with temperance to the news of Ken Lewis’ resignation, with some saying that his departure won’t end Bank of America’s troubles, and others lamenting that he is leaving.

Lewis announced his impending departure last night after the markets closed, and when they opened Thursday morning, investors apparently didn’t know what to think. Bank of America’s share price dipped slightly, by less than 4 percent, during Thursday trading.

“Let’s not all start singing, ‘Ding-dong, the witch is dead’ here,” said Nancy Bush, an analyst at NAB Research.

Though Lewis’ departure frees the bank to refocus on more fundamental issues, its future is still uncertain. Bush predicts that Bank of America faces a few more difficult quarters of lackluster earnings, figuring out how to repay $45 billion in government loans, and a continued rise in consumer defaults.

Bush said she expects a “relief rally” in the share price, “but we wouldn’t be diving in.”

She and others also questioned the bank’s decision to announce Lewis’ retirement without a successor in place.

“The ascendance of a new CEO will carry its own set of risks – among them the very real possibility that a new chief may choose (with regulatory encouragement) to do a ‘clean-up’ of the balance sheet and/or the business mix,” Bush wrote in a research note Thursday morning.

Andrew Marquardt, an analyst at Fox-Pitt Kelton, said he questioned the bank’s ability to attract top talent while it is under so much government scrutiny.

Lewis has made enemies over the years as he grew Bank of America and fired or laid off thousands of employees. But he’s also highly respected as a smart and efficient bank manager. Under his watch, Bank of America became the country’s biggest bank by assets. As someone who’s spent his entire career at Bank of America or its predecessors, Lewis is viewed as incredibly loyal to the bank.

“You know what you should entitle this story? ‘Bank of America will sorely miss Ken Lewis,'” said Rochdale Securities analyst Dick Bove.

He and others have said the bank is a victim of its own capitalistic success: It became the country’s largest bank at a time when people – and their elected representatives – love to hate big banks.

“What you’ve seen is how bad the system can work, when hysteria and witch hunters can drive this guy out of his position,” Bove said.

On the other side of the aisle, other observers scoff at the premise that Bank of America is a victim. They say the bank still doesn’t fully comprehend the anger that many Americans feel toward the industry, or the pain felt by shareholders who have seen their dividend payout slashed. The bank’s admonition that the Merrill Lynch deal will pay off in the long run – a view that many analysts agree with – isn’t much comfort to shareholders who have watched the share price fall from about $50 two years ago to about $17 today.

“The problem with Bank of America is, they’ve sort of thumbed (the regulators). They’ve thumbed the investors,” said Steven Toskes, a partner at Klayman & Toskes in Boca Raton, Fla. “They’ve said, ‘Who are you to ask us to explain how we do things?’ “

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