Bank of America Earnings Preview: All Eyes Are on Merrill

The results of Bank of America (BAC), the largest bank in the U.S., should be a proxy for the country's financial health. However, the bank comes with its set of unique issues because it's made up of a myriad of mergers and acquisitions over the decade, including giant broker Merrill Lynch and mortgage company Countrywide Financial.

Integration of the last two hasn't been easy because of the financial crisis, and when BofA reports earnings on Friday, investors will get a glimpse of how the acquisitions are faring.

Expectations are low. Analysts polled by Thomson Reuters are expecting the bank to report profits of a mere 9 cents per share, down from 44 cents a year earlier.

Slow Build for Loan Book

After all, BofA executives still haven't recovered from the controversy over accusations that it bought Merrill Lynch while learning -- and not disclosing to shareholders -- that the broker had lost billions from bad investments. And the bank continues to be hobbled by the bad home-mortgage loans Countrywide wrote a few years ago.

CEO Brian Moynihan explained in a recent presentation to investors that his bank sold too many products to customers that didn't want them. "This led to account closings or serial overdrafts or other problems." Now, however, Moynihan said his bankers are working on relationships and manage risk better.

That could also mean BofA 's new loan book will take a lot longer to build. It might not be a bad thing since the credit-card and small-business segments have "loss rates [that] still remain amongst the highest in the industry," says Barclays Capital analyst Jason Goldberg.

Worst Is Over?

But the pressure is on for Merrill to perform better. With competitor JPMorgan Chase (JPM) having reported stellar results on the back of its fixed income trading, Merrill will be expected to produce a similar performance.

Overall, capital markets' trading volumes are up by as much as 65% at some of the larger banks in the first quarter, according to Vivek Juneja, an analyst at JPMorgan, who expects BofA 's results to benefit.

In the home-loan business, JPMorgan's charge-offs accelerated for both prime and subprime mortgage loans, and BofA 's loan book could likely show similar pressure.

But Moynihan indicated in his presentation that the worst may be over for BofA : "The good news is that we think the credit costs peaked toward the end of last year. Almost all the measurements that we have, the credit quality improved from the third quarter to the fourth quarter. And if the economy continues to move or even bump along where it is now, which we expect, these costs should continue to decline over the course of this year and next."