Dec. 16 (Bloomberg) -- Bank of America Corp., the third- largest U.S. bank, may decline by 36 percent over the next year as it generates capital to offset rising mortgage-related losses, Friedman, Billings, Ramsey Group Inc. analyst Paul Miller said.

“We’re telling our accounts to stay away,” Miller said in an interview yesterday. “They need to fill all of these capital holes.” Miller finished first among bearish analysts in a June ranking of the world’s best stock pickers compiled by Bloomberg.

Bank of America, which will become the nation’s biggest bank when it acquires Merrill Lynch & Co. on Jan. 1, should cut its quarterly dividend to a penny from 32 cents and conserve capital, Miller wrote in a report yesterday. He rated shares of Charlotte, North Carolina-based Bank of America “underperform.”

Chief Executive Officer Kenneth Lewis is creating the biggest financial supermarket by buying Merrill Lynch, the world’s largest securities firm, after the July purchase of Countrywide Financial Corp. When the Merrill transaction closes the company will hold market-share leads in U.S. bank deposits, credit cards issued, home loans and brokerage assets under management.

Bank of America has already plunged 66 percent this year, compared with a 53 percent decline in the KBW Bank Index. The bank fell 82 cents, or 5.5 percent, to $14.11 yesterday in New York Stock Exchange trading. The company doesn’t comment on analyst reports, spokesman Scott Silvestri said.

In buying Countrywide, the biggest U.S. home lender, Bank of America assumed losses of about $14.3 billion on the mortgage company’s $92 billion in residential loans. About half of Countrywide’s loans are in California and Florida, home to some of the sharpest housing-price declines.

Losses May Grow

Miller said those mortgage-related losses may rise. Bank of America has delayed plans to sell about $50 billion of Countrywide’s loans because of market conditions, he said.

“We interpret this to mean that the market value of these loans was significantly below where Bank of America marked them,” Miller said.

While Miller said he doesn’t follow Merrill Lynch closely, he criticized the acquisition, just as he urged Lewis in May to abandon the Countrywide purchase when Bank of America shares traded at $39.

“They most likely overpaid for Merrill,” he said. “We’re not trying to pick on Bank of America, but most of the large U.S. institutions have these capital problems.”

Slashing Workforce

Bank of America said last week it plans to cut as many as 35,000 jobs over three years as it seeks annual after-tax savings of $4.5 billion from the Merrill transaction, now valued at $18.6 billion. The bank was too optimistic about the U.S. economy and doesn’t expect a recovery until the second half of 2009, Lewis said earlier this month.

The combined Countrywide, Merrill Lynch and Bank of America have $83 billion of tangible common equity supporting $2.6 trillion of tangible assets, a 3.2 percent cushion that Miller calls too small.

Bank of America earlier this year halved its quarterly dividend, its first payout cut since its 1998 merger with NationsBank Corp. The bank is likely to sell part of its stake in China Construction Bank, raising several billion dollars, Miller said.

“Anything they do to raise capital will be a positive,” he said.

Bank of America and Merrill have received a combined $25 billion from the Treasury Department’s plan to shore up U.S. banks, while the lender is also borrowing through other government-backed programs.

Estimating Value

“At some point you have to value these companies after the guarantees go away,” Miller said.

Miller’s price target is the lowest of 17 analysts, according to Bloomberg data. The average target is $25. Twelve analysts rate the bank a “buy,” two a “sell” and nine have “hold” ratings.

Bank of America is likely to post $77 billion in losses on its $943 billion in total loans over the next several years, mostly tied to residential real estate, Miller said. About $32 billion of the losses may come in 2009, offsetting an estimated $55 billion in pretax profits, according to Miller’s report.

“While Bank of America’s capital will be rebuilt over time, we expect that it will have to raise a substantial amount of new common capital to jump-start the process, which will dilute existing shareholders,” he wrote.

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net

Last Updated: December 16, 2008 00:00 EST