Bank of America's share price is likely to take a hit from intensified government regulations and the company's exposure to foreign markets, analyst Dick Bove said in lowering his target for the company.
Bove cut BofA from $27.50 to $22.80 and lowered his projections on earnings per share from 93 cents per share to 91 cents.
While he still rates the stock a "buy," Bove, of Rochdale Securities, said investors will need to stomach some near-term problems.
"Bank of America is currently facing serious challenges from multiple sources both governmental and market driven," he wrote in a note to clients. "The government issues touch upon every aspect of the business. There is a demand for new and tougher capital and liquidity standards. These will lower the bank's profitability and return on equity."
Government clampdowns on derivatives trading are expected to impact BofA, as the company is one of the most active in the world in using the instruments as hedges for client portfolios. Bove says the notional value of the derivatives for BofA is $70 trillion, with $1.5 trillion the gross amount at risk and $78 billion of adjusted risk.
Moreover, the company's acquisition of Merrill Lynch exposed it to $53.3 billion in cross-border exposure to foreign banks, with $2.3 billion in Europe.
And the company faces issues closer to home.
"Its domestic businesses are not doing well at the moment either," Bove said. "The pressures in residential real estate have not been alleviated. Investment banking is believed to be weak and trading is expected to fall dramatically this quarter. Questions are also being raised about the sustainability of the economic recovery."
Yet he said the stock remains a buy despite its looming difficulties.
"I believe the company will continue to grow and this means lower loss provisions. Plus, the company's price to book continues to be quite low particularly given the expected growth in book value," Bove said. "For these reasons, I have decided to accept near-term poor performance."