Oct. 5 (Bloomberg) -- Merrill Lynch & Co., which helped bring down Kenneth D. Lewis, may end up saving his bank.

The decision by the 62-year-old Bank of America Corp. chief executive officer to purchase Merrill in January for $29 billion already is generating more than 25 percent of the bank’s profits -- along with charges by government officials that he misled investors about the extent of losses and bonuses.

When he announced last week that he would step down by the end of the year, Lewis could take some comfort from making the Charlotte, North Carolina-based bank, the largest in the U.S. by assets, less reliant on consumer spending, poised to benefit from overseas growth and better able to compete with rival JPMorgan Chase & Co., according to David Stowell, a professor of finance at Northwestern University in Evanston, Illinois, and a former managing director at JPMorgan.

“While the purchase brought massive mortgage-related losses, it also bought 15,000 stockbrokers who link up nicely with the bank’s deposit base,” Stowell said. “It’s hard to see how they could keep up with JPMorgan without a big, significant acquisition like Merrill.”

Merrill’s businesses contributed $1.8 billion to Bank of America’s first-half net profit of $7.5 billion, or 28 percent, even after the bank posted $27 billion in loan charge-offs and higher loan-loss reserves, according to company filings. Those businesses are likely to account for 25 percent to 30 percent of the bank’s profits over the next three years, said John McDonald, an analyst at Sanford C. Bernstein & Co. in New York.

Market Share

The share of the bank’s revenue that came from investment banking and wealth management rose to 47 percent in the first half, after the Merrill acquisition, from 29 percent last year, according to the bank.

While more than three dozen senior traders and bankers have left since the merger, Bank of America Merrill Lynch, the investment-banking unit, captured “some very real market-share gains from fallen competitors that should likely prove sustainable going forward,” McDonald wrote in an Oct. 1 report.

The bank this year has won 6.4 percent of advisory roles in global mergers and acquisitions by dollar value, compared with a 7.8 percent share for the two firms in 2008 and 7.2 percent in 2007, according to Bloomberg data. It ranks fifth behind Morgan Stanley, Goldman Sachs Group Inc., Citigroup Inc. and JPMorgan, Bloomberg data show. By reported advisory fees, it’s in fourth place, behind Goldman Sachs, Morgan Stanley and JPMorgan.

In global equity and equity-linked transactions, Bank of America Merrill Lynch ranks fourth, the same position Merrill held in 2008. In U.S. bond issuance, the bank ranks third, compared with Bank of America’s fourth-place position last year.

‘A Steal’

“They have lost some people on the one hand, but on the other hand Merrill did have some really good franchise players, and at least part of that franchise is still intact,” said Michael F. Holland, chairman of Holland & Co. in New York, which oversees more than $4 billion including JPMorgan shares.

Bank of America’s challenge is to avoid stifling Merrill’s culture, said Charles Geisst, a finance professor at Manhattan College in Riverdale, New York. “Merrill Lynch has always been one of the top three investment banks, and that will continue.”

Shares of Bank of America have risen 19 percent this year, compared with Citigroup, which have fallen 31 percent. The KBW Bank Index, which measures the performance of 24 large U.S. banks, is up 3.1 percent in the same period.

Goldman Recommendation

Bank of America gained 52 cents, or 3.2 percent, to $16.86 in composite trading on the New York Stock Exchange at 2:07 p.m. Goldman Sachs raised its view on Bank of America and the nation’s biggest banks to “attractive” from “neutral,” saying their share prices don’t reflect prospects for earnings growth.

“This merger made sense from just about every angle one could look at,” Richard Bove, an analyst at Rochdale Securities Inc. in Lutz, Florida, wrote in a Sept. 21 report. “In hindsight this deal was a steal because it now appears that the bank can pay for Merrill’s price with one year’s worth of Merrill revenues.”

The bank, which received $45 billion under the government’s rescue plan, needs brokerage and investment-banking fees to overcome higher losses in its credit-card and home-loan businesses, which make up 36 percent of revenue. Charge-offs for credit-card loans deemed uncollectible climbed to 14.5 percent in August at the bank, the highest rate among the largest U.S. lenders. The unemployment rate rose to 9.8 percent last month, the highest level since 1983, signaling a recovery in consumer- related businesses will be slow to develop.

Real Estate

With real-estate values down by 20 percent from their 2006 peak, Bank of America also faces higher losses from its $401 billion in residential loans and $75 billion in commercial- property loans, said Allen Greer, a Los Angeles real estate consultant who left the bank in January after a 17-year career.

“The outlook for the bank has gotten uglier,” Greer said.

The bank plans to make a decision on the appointment of an “emergency” chief executive officer this week should Lewis step down before the end of the year, the Wall Street Journal said today, citing unidentified people familiar with the situation.

Lewis, who said in his Sept. 30 resignation announcement that the Merrill deal “is returning value already,” has warned that second-half results will be marred by higher losses from consumer and commercial real-estate loans. Global card services lost $3.5 billion in the first half, and home lending and insurance had a $1.2 billion deficit.

Earnings Schedule

Third-quarter earnings are scheduled to be reported on Oct. 16. A loss of 9 cents per share is expected, the average of 24 analysts surveyed by Bloomberg.

Merrill’s prospects remain clouded by about $32 billion of assets listed as Level 3 as of June 30, an accounting term for securities and loans whose value is unclear, said Mike Williams, research director at Gradient Analytics Inc. in Scottsdale, Arizona. The bank reported $122 billion in total Level 3 assets, a 4 percent decline from March 31.

“I can’t get a grasp on how many bad assets Bank of America has inherited and what kind of losses are going to flow through,” Williams said. “If the market for these assets does recover, it will prove to be the right move for the bank.”

Bank of America also acquired Countrywide Financial Corp. in July 2008 for $2.5 billion. The deal, concluded in the midst of the worst housing slump since the 1930s, made the bank the second-largest U.S. home lender with a 21 percent share of home loans in the second quarter of 2009, according to National Mortgage News. The U.S. economy shrank for four quarters after the acquisition, including a 6.4 percent contraction of gross domestic product in the first three months of this year.

Home Loans

While low interest rates spurred home lending during the first half, with revenue up 275 percent from the same period a year earlier without Countrywide, more borrowers defaulted.

“In the long run they’ll get the bad assets from Countrywide off their books, but they would have been better off without them for the next few years,” said Gradient’s Williams.

Buying Countrywide will look wise as U.S. housing prices stabilize, said William Isaac, former chairman of the Federal Deposit Insurance Corp. The S&P/Case-Shiller home-price index rose 1.2 percent in July from the prior month, the biggest gain since October 2005. The index was down 13.3 percent from a year earlier, the smallest decrease in 17 months.

Attorney General

The Merrill transaction is being scrutinized by attorneys general in New York, North Carolina and Ohio. Richard Cordray, attorney general of Ohio, is leading a class-action suit on behalf of investors seeking billions of dollars from Bank of America over the Merrill transaction, and New York Attorney General Andrew Cuomo is weighing whether to bring charges against executives for misleading investors. At least three shareholder lawsuits have been filed to protest the acquisition.

Lewis’s attempt to cancel the transaction last December as fourth-quarter losses at the brokerage spiraled past $15 billion triggered a clash with regulators, including then-Treasury Secretary Hank Paulson, who told Lewis management might be ousted if the deal wasn’t concluded, according to Paulson’s congressional testimony. It also led to probes by Congress and the Securities and Exchange Commission tied to $3.6 billion in bonuses Merrill awarded before the purchase was completed.

U.S. District Judge Jed Rakoff in September rejected a $33 million settlement between the bank and the SEC, asking whether the bank had lied to shareholders.

The bank “can likely digest the most probable financial penalties,” McDonald said in his report.

Profit Estimates

Analysts project the company will bounce back with a profit of $12.6 billion next year and $23 billion in 2011, topping JPMorgan’s expected net income of $13.1 billion and $20.7 billion, according to estimates compiled by Bloomberg. Citigroup is likely to earn $2.8 billion in 2010 and $8.5 billion in 2011, the average of 12 analysts compiled by Bloomberg.

To absorb more writedowns, Bank of America has $95 billion more in Tier 1 capital than the minimum required to maintain its “well-capitalized” status. The bank had a cash balance of $140 billion as of June 30, giving it the ability to meet repayment demands for 33 months without issuing new debt, Chief Financial Officer Joe Price said on Sept. 15.

The investment bank has hired more than 200 people in Asia since March, joining about 15,000 Merrill employees who worked outside the U.S. before the merger. Additions include Bing Wang, who left Bank of America in 2008 and rejoined in July as head of corporate finance for China.

Asia Revenue

Revenue from non-North American business increased 160 percent to $7.2 billion in the first half of this year compared with the same period in 2008, spurred by an almost threefold increase in Asia. The figure excludes a $7.3 billion gain from the sale of China Construction Bank Corp. shares. The combined companies reported revenue of $4.3 billion in Europe, the Middle East and Africa and $2.2 billion in Asia.

Bank of America advised Suntory Holdings Ltd. on its proposed takeover of Orangina Schweppes and Noble Group Ltd. on its sale of a 15 percent stake to China Investment Corp., marking the biggest investment to date in the agricultural sector by China’s sovereign wealth fund. The bank is a joint manager of the pending initial public offerings of Wynn Macau, the Asian assets of U.S. casino operator Wynn Resorts Ltd., and Korea’s Posco Engineering & Construction.

Merrill’s 15,000 brokers, termed the firm’s “crown jewel” by Lewis at the merger, “is the competitor that really no one can match,” wealth-management head Sallie Krawcheck said in an August video message to employees. Global wealth and investment management reported a 15 percent gain in first-half profit to $951 million, as revenue more than doubled to $8.6 billion.

Lewis Successors

Krawcheck, 44, a former chairman of Citigroup’s global wealth-management unit, was hired by Bank of America in August. Executives at the firm say she is among at least five inside candidates in line to succeed Lewis.

Hiring Krawcheck “was a fantastic move that shows they are building a great leadership team,” said Mark Yusko, president of Morgan Creek Capital Inc., a $9 billion hedge fund in Chapel Hill, North Carolina, that has invested in ventures with Merrill.

“Bank of America still has the capacity, once it works its way through the present TARP crisis and loan losses, to be the national financial Walmart,” said David Kotok, chairman of Vineland, New Jersey-based Cumberland Advisors, which oversees $1.2 billion and didn’t own any Bank of America shares as of June 30. “If you want to credit Lewis with something, credit him with this vision.”

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

Last Updated: October 5, 2009 14:09 EDT