Bank of America Corp. could face a public enforcement action if federal regulators aren't satisfied with recent steps to strengthen the bank, the Wall Street Journal reported Tuesday, citing sources familiar with the situation.
But analysts told the Observer that while the Charlotte-based bank remains under regulatory pressure - and has a long way to go to correct its missteps - a formal reprimand from its key regulator, the Federal Reserve, is unlikely.
The Journal reported that regulators met with Bank of America's board in recent months and said they wanted to see more progress on the bank's compliance with a May 2009 memorandum of understanding. That document, which isn't public, identified governance, risk and liquidity management as problems that needed to be fixed, the newspaper reported.
Bank of America's directors believe the bank has met those informal orders and were surprised by the warning, sources told the Journal.
Spokesmen from the bank and the Federal Reserve declined to comment.
Analysts said that while regulators are talking regularly with the nation's second-largest bank by assets and other lenders, concerns about Bank of America probably have waned the second half of this year as it has sold assets and taken other steps to bolster capital.
Last week, for example, the bank announced it was selling most of its remaining shares in China Construction Bank Corp., a move expected to result in a $1.8 billion after-tax gain, as part of its ongoing plan to shed noncore assets.
"I don't know whether they have complied with everything in the memorandum, because I haven't read the memorandum," analyst Dick Bove of Rochdale Securities said. "But I think as an analyst ... when I look at a balance sheet I can see whether it has deteriorated or whether it has improved. All of this is public data, and none of it is showing a negative trend."
Bove said he doesn't believe federal regulators demanded faster improvement anytime recently and that the Journal report misleads investors.
"The bank deals with the regulators on a daily basis," he said. "That's true of any major bank in the United States. The point is, it would be improbable to believe the bank is in a knockdown fight with these regulators every day over what it is doing."
Analysts from Keefe, Bruyette & Woods said in a research note that they couldn't confirm regulators were unhappy with the bank's progress at some point but said the bank has made "significant and accelerated" capital progress since the second quarter.
"We believe that any regulatory pressure is most likely lessening ...," the note said.
Despite the improvement, some of the bank's other recent moves, including continued turnover in its top ranks, could be fueling regulators' concerns, analyst Nancy Bush of SNL Financial said.
In September, for instance, a management reorganization promoted Thomas Montag and Charlotte-based David Darnell to co-chief operating officers and jettisoned Sallie Krawcheck and Charlotte-based Joe Price.
Bush said regulators also are increasingly incorporating the markets' view into their own view of how strong a company is, adding that they're probably not happy about Bank of America's stock price, which has fallen 60 percent this year.
"The Fed is incorporating much more of what analysts and stock prices are saying about the bank," she said. "The problem is, it becomes sort of a self-fulfilling prophecy: People find out that they're looking at the bank, so the stock goes down, so the Fed gives it another look."
It wouldn't be the bank's first clash with regulators: Early this year, the Fed rejected the bank's request for a dividend increase in the second half of 2011, for instance.
Bush said some tension "is always part of a relationship between a bank and a regulator" and that a warning about the bank's progress might have occurred over the summer, before the bank took its latest steps to improve. But she doubts a formal action is looming.
"I think it would scare the heck out of everybody," she said. "Not only about Bank of America, but about Citigroup, JPMorgan ... all the large banks. Investors never look at one bank in isolation."
It's unclear when regulators will decide whether more severe measures - which would likely result in greater oversight and restrictions - are necessary, the Journal's story said. The bank could also still have the existing penalty lifted, the paper said.
Meanwhile, Bank of America needs to work on being "a regular bank," Motley Fool analyst James Early said.
"The bank is probably doing the right things," he said, "at about a fourth of the pace they need to be moving."
Bank of America shares closed at $5.37 Tuesday, down 2 percent from the previous day. That was the lowest close since March 2009.
