Countrywide, BofA may be in talks

Countrywide Financial Corp. shares rocketed higher early Friday on news of a possible alliance with Bank of America Corp., but the gains eroded as analysts discounted prospects that a deal would lead to a takeover of the Calabasas-based mortgage company.

“They may be discussing some sort of joint venture, but it seems to me unlikely that you will see Bank of America announcing an acquisition of Countrywide,” said David Hilder, financial services analyst at Bear, Stearns & Co. “I am convinced that BofA is not interested.”

At the close of trading, Countrywide shares rose $1.71, or 4.2%, to $42, after rising more than 12% earlier in the session. Bank of America shares dropped 36 cents to $52.04.

Countrywide’s run-up was triggered by a report on the Financial Times’ website that said it was weighing an alliance with Bank of America that could lead to an eventual buyout.

Spokesmen for both BofA and Countrywide declined to comment on the report.

Bank of America, the nation’s second-largest bank, behind Citigroup Inc., has said that it wants to expand its mortgage lending business, which already accounts for about one-third of its consumer loan portfolio, Hilder said.

But executives at the Charlotte, N.C.-based bank have been reluctant to deal with the volatility of the mortgage-servicing business, which is Countrywide’s forte, analysts say.

It would make sense for Bank of America to contract with Countrywide to do some mortgage loan processing for the bank, said Michael McMahon, financial services analyst with Sandler O’Neill, a San Francisco-based investment bank. That would allow Countrywide to collect fees for processing mortgage loan requests that come into BofA branches, he said.

“An outsourcing arrangement would be a win-win for them both,” McMahon said. But a merger probably would spell trouble for BofA’s share price.

“One way for a commercial bank to destroy market value is to buy a big mortgage company. Mortgage companies have always traded at deep discounts to the commercial banks,” he said.

Bank of America already is “the Rodney Dangerfield” of commercial bank stocks, trading at about 11 times earnings compared with other banks’ stock that sell for 12 to 15 times their per-share profit, said Joe Morford, a financial services analyst at RBC Capital Markets.

Morford, who owns stock in Countrywide, agreed that BofA could further damage its stock value by buying Countrywide, which trades at about eight times earnings.

“If it was an acquisition, it would make BofA a dominant player in a key consumer business, and it would fit their strategy of being a consumer banking powerhouse,” Morford said. “But if they bought a company with a price-earnings ratio lower than theirs, it wouldn’t necessarily help.”

However, Bank of America has a long history of buying market share. From 1982 to 1998, the company acquired 100 banks, establishing itself as one of the nation’s biggest banks.

Since Chief Executive Kenneth D. Lewis took the helm in 2001, however, the bank has purchased only three companies: Fleet Boston, MBNA and U.S. Trust.

“Ken Lewis has shown a willingness to buy valuable, premium franchises that were offered to him on a silver platter,” Hilder said.

“But it starts with the kind of business that you want to be in, and they’ve said they are not wild about the mortgage banking business,” Hilder added. “I think it would be highly unlikely for BofA to step up and pay a big premium to buy a big mortgage bank, regardless of the quality of Countrywide’s franchise.”

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