Bank of America Not Backing Out of Countrywide

Meredith Whitney, top analyst at Oppenheimer, said she and her squad met with Ken Lewis, chief executive of Bank of America (BAC).

Whitney says Lewis "reiterated his belief" in the "economics of the Countrywide acquisition."

Specifically, Whitney says Lewis "noted that the deterioration in the economy does not allow" Bank of America "to renegotiate" the $4 bn deal for Countrywide (CFC). She goes on to quote Lewis in her research report as saying that only "events specific" to Countrywide "permit renegotiation of deal terms." It's unclear what those events are, according to the report.

The news comes after a shareholder revolt earlier this year against the $4 bn deal at a Bank of America investor meeting, due to Countrywide's regulatory probes and shareholder class action suits alleging it sold and approved inappropriate loans to borrowers who could not afford them, adding to the housing crisis.

Whitney goes on to say that Lewis emphasized that Bank of America "has made significant writedown assumptions across" Countrywide's portfolio, and "that even if writedowns exceed expectations, the transaction is still attractively priced, just to a slightly lower degree."

Whitney adds that Lewis "is cautiously optimistic on the economic environment, as recent 30-day delinquency data across the board has slowed its acceleration and credit losses are remaining concentrated in high risk states," such as California, Florida and Nevada.

Whitney adds that "Lewis continues to see a distinct divide between the troubles on Wall Street and the state of affairs on Main Street."

Specifically, "the hierarchy of payments for consumers remains cards, autos, and homes, and that customers are still generally paying their auto and credit card bills." Whitney says Bank of America has cut "its undrawn credit card and home equity lines where possible, but is still originating home equity loans at significantly tighter credit standards and attractive pricing."

However, Lewis evidently noted "that the rate of increase for 30-day delinquencies from April to May declined fairly substantially," but that it was "just one month of data."

That's a positive sign, because if the growth in these delinquencies continues to slow, Bank of America "could see lower reserve builds, as lower delinquencies will likely lead to lower charge-offs," Whitney says.

Also, for now Bank of America says its dividend is "safe," and Bank of America "does not have a problem operating below its stated tier one ratio target of 8% as it acquires Countrywide, which now has a pro forma tier one below 8%."

Whitney says the bank "will steadily earn its way back to targeted levels over the next several quarters," and is keeping her perform rating on the stock as well as her fiscal year 2008 and 2009 estimates of $2.50 and $3.00 respectively.

On other topics of interest:

*Whitney says Lewis told her he "believes that the worst of the CDO [collateralized debt obligation] writedowns are in the past," but added that "further significant deterioration in home prices would have to occur for writedowns to reach levels seen in prior quarters."

*For home prices, Bank of America "sees one potential scenario with prices continuing to decline into 1Q09, leveling off, but not necessarily increasing in 2009."

*Bank of America "stated that investment banking revenues are strong on both the debt and equity side, and that pipelines are strong."

*Whitney reports that Lewis agrees with her view that the proposed new federal credit card legislation, called the "Unfair and Deceptive Practices proposal" could result in "unintended and potentially negative consequences to the U.S. consumer" because it "will decrease consumer liquidity as it reduces the profitability of the credit card business model through major aspects including reduced late fees, eliminated repricing of risk, and eliminated teaser programs."

Translation: consumer credit costs will go up due to the new legislation, for "both good and bad credit, and that incremental fees will be added to recoup lost fee income from the new rules."