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Bank of America Growth Challenges Go Beyond $17 Billion for Feds

NEW YORK ( TheStreet) -- Even as Bank of America  (BAC - Get Report) sees the cost of a potential mortgage settlement balloon to $17 billion, the bank is still struggling to prove it can grow revenue at the same time it is selling off branches and reducing its footprint in other business units, analysts say.

"All these things that Wells Fargo (WFC - Get Report) claims they're number one in -- mortgage origination, auto [loan] sales, middle market lending -- Bank of America was number one in all of those places. They got to get back the market share that they lost and they're going to do it on a smaller base," says Rafferty Capital Markets analyst Dick Bove.

Nonetheless, Bove believes regulatory troubles remain the biggest issue that should concern investors. The New York Times reported Wednesday that the U.S. Department of Justice is unhappy with a proposed $12 billion settlement offer from the Bank of America, and is instead looking for $17 billion. That number would put Bank of America's penalty well above that of JPMorgan Chase (JPM), which seems appropriate, given that Bank of America had significantly more problem mortgage exposure than JPMorgan.

Even after the mortgage problems are resolved, Bove expects Bank of America to face similarly large penalties for alleged manipulation of LIBOR and foreign exchange products.

"If they can't come up with something on those two they'll go looking for something else. The government believes 'Too Big to Fail' is unacceptable, so they'll do anything they can to weaken these large institutions," Bove says.

But even if it can get past those regulatory issues, Bank of America will have to prove it can grow revenue at the same time it is cutting costs. 

Bank of America claimed at its annual investor meeting last month that revenue remained flat at about $90 billion per year from 2011 through 2013 while expenses declined by 14% over the same time period. But FBR Capital Markets analyst Paul Miller argues says those numbers include litigation expenses. In the core businesses little progress has been made reducing costs, he says.

One area where Bank of America has made real cuts is in its branch network. The company has reduced its branch footprint to 5,000 from 6,000 at the end of 2007.

CEO Brian Moynihan regularly cites that figure while noting growth in deposits, but the prospect of higher interest rates limits the bank's ability to put those deposits to work through loans or longer-dated securities the way it would like to do.

Bank of America is not alone in trying to do more with less, but it is more challenged than its peers in this regard, Miller argues.

"The revenues that are coming in from these banks do not really match their cost structures. Their cost structures are too high. In other words, if I'm cutting my cost by 10%, hopefully I don't cut my revenue by 10%," Miller says.

Mortgage servicing is another area where investors are looking for Bank of America to reduce costs. By selling off the responsibility for collecting problem loans, the bank can reduce the number of workers it employs in that area. However, sales of mortgage servicing portfolios have temporarily been halted over regulatory concerns.

As a result, even this "low hanging fruit" -- costs that can be cut without much of an impact on revenue -- has become more challenging to pick, Miller says. 

Banks Face Serious Threat in Second Half

Moynihan Mum On Dividend Makes Bank of America Shareholders Angry

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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