(Adds background, updates share movement) By Tenzin Pema
BANGALORE, June 4 (Reuters) - Bank of America Corp (BAC.N) will face earnings pressure through 2010 due to its broad exposure to the U.S. consumer and to mortgage-related loans, said an analyst at Merrill Lynch, who also cut his earnings outlook and price target for the second-largest U.S. bank.
Bank of America shares, which earlier fell more than 3 percent to a new five-year low of $32.16, pared some losses and were down about 1 percent at $32.47 in late morning trade on the New York Stock Exchange. The bank's shares have fallen about 22 percent since the start of the year.
Analyst Edward Najarian also said losses on Countrywide Financial Corp's CFC.N pay option adjustable-rate mortgages, first lien mortgage and home equity portfolios may be in the 13 percent range.
This could result in mark-to-market write-downs of $10 billion to $12 billion on Countrywide's portfolio, he added.
The Charlotte, North Carolina-based Bank of America agreed in January to buy Countrywide, the ailing mortgage lender, for $4 billion, swapping 0.1822 of a share for each Countrywide share.
That valued Countrywide at the time at about $7.16 per share. The value of the all-stock transaction has now fallen to about $3.5 billion because Bank of America's stock has fallen.
"Combined with the $3.5 billion purchase price and a $1.2 billion after tax restructuring charge, this could lead to an aggregate deal price of about $16 billion, equal to about 1.5 times CFC's stated tangible equity at March 31," Najarian said.
"Thus, we foresee the potential of up to $5 billion of goodwill when the deal closes," he added.
The analyst cut his price target on the stock by $1 to $28, but still rates the stock "underperform."
He cuts his earnings estimates by 20 cents a share to $2.25 a share in 2008, and to $3.05 a share in 2009. The estimates do not include potential gains on the sale of China Construction Bank (601939.SS) (0939.HK) shares, he added.
Among 24 analysts covering Bank of America, Merrill's Najarian ranks seventh in the accuracy of his earnings forecasts, according to data compiled by Thomson Reuters.
On Monday, Merrill revised its ratings on the stocks it covers, as part of a broad retooling of its ratings system, with its analysts rating at least 20 percent of the stocks in their sector "underperform" to better match historical returns for stocks.
Merrill's North American Economist David Rosenberg expects the U.S. consumer to face ongoing financial strain from rapidly falling housing prices, an economic recession, and a decline in the stock market, Najarian said.
At the end of the first quarter, Bank of America had a broad consumer exposure in the form of a $266 billion residential mortgage portfolio, a $184 billion managed consumer credit card portfolio, a $118 billion home equity portfolio and a $20 billion small business portfolio, Najarian said.
"Longer-term we think BAC's collection of businesses have considerable value, but the sheer magnitude of credit losses that we expect BAC to absorb (especially in 2008 and 2009) should continue to weigh on the stock this year," Najarian wrote in a note to clients.
Shares of Countrywide were down about 1.3 percent at $5.43 on the New York stock Exchange. (Editing by Jarshad Kakkrakandy)