Merrill Sees Countrywide Losses Up to $12 Billion

Countrywide Financial's cumulative losses are likely to rise to between $10 billion and $12 billion, causing mark-to-market writedowns for the same amount for buyer Bank of America, Merrill Lynch said in an analyst's research note Wednesday.


"Declining home prices should continue to push CFC's credit losses higher," the note said.

Merrill Lynch analyst Edward Najarian also cut Bank of America's earnings outlook and price target, saying the second-largest U.S. bank had broad exposure to consumers and this would be a "big EPS drag."

Merrill kept its rating of Bank of America's stock at "underperform" and cut the price target to $27 from $28 and said the acquisition of Countrywide increased the bank's exposure to writedowns.

"We estimate cumulative losses on CFC's pay option ARM, first lien mortgage, and home equity portfolios could be in the 13 percent range, which could produce about a $10 billion - $12 billion purchase accounting mark-to-market," the note said.

Bank of America agreed in January to buy Countrywide in an all-share transaction worth $4 billion, but because its shares dropped, the value of the transaction is now around $3.5 billion. It plans to complete the transaction in the third quarter this year.

Merrill Lynch reduced its earnings per share estimates for Bank of America by 20 cents for each year until 2010, forecasting that the bank would have a profit of $2.25 a share this year, $3.05 next year and $4.00 in 2010.

"BAC's substantial home equity and other loan exposures in troubled geographies such as California and Florida should result in continued credit quality degradation," the note said. "There is a risk of a dividend cut and extra earnings risk to the BAC's acquisition of Countrywide Financial."

-- Reuters contributed to this report