NEW YORK ( TheStreet) -- FBR Capital Markets analyst Paul Miller on Thursday downgraded Bank of America ( BAC - Get Report) to a neutral rating of "market perform" from "outperform," following the Federal Reserve's objection to the company's initial plan to begin returning capital to shareholders.

Miller's action followed the bank said in a filing after the Fed completed its stress tests on Friday that it would submit another capital plan and could still wind up increasing its dividend or buying back shares in the second half of 2011.

FBR believes that the "$20B-$25B of additional capital needed to be compliant with the Basel III requirements, along with outstanding mortgage repurchase claims and lawsuits," has caused the Fed to be concerned about whether the company can earn enough to comply with new capital requirements. Miller estimates the company "may recognize an additional $6B-$8B of charges on top of current reserves for repurchase-related losses."

According to Miller, other unknowns that could affect Bank of America's shares include "a possible lawsuit from the National Credit Union Association (NCUA) related to legacy MBS credit losses and the potential foreclosure settlement with state attorneys general."

The FBR report also had several items providing hope for Bank of America's shareholders. With the Street estimating "close to $32B of earnings" through 2012 and the company estimating it will need $20 billion to $25 billion in additional capital to comply with Basel III, "that leaves $7B-$12B of earnings remaining for shareholders." While Miller described this as a "considerable buffer," he added that the company "could incur additional legal costs from coming claims and lawsuits.

Finally, Miller said that "If the company can effectively compete for investment banking business and the housing market begins to recover, Bank of America could earn closer to $2.00 per share" in 2012, and the Fed might approve the company's second capital plan, in which case "the sell-off in shares creates an oversold situation as the stock is trading at a discount to peers on earnings."


-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.