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A whistle-blower that brought to light Countrywide Financial's illegal property appraisal practices was recently awarded $14.5 million in illegal dismissal damages as part of an historic $25 billion settlement between U.S. State and Federal Officials and five U.S. Banks: Bank of America (BAC), JPMorgan (JPM), Wells Fargo (WFC), Citigroup (C) and Ally Financial (ALLY-PB).

Bank of America acquired Countrywide in 2008 as part of its efforts to dominate the then-booming mortgage market. As Countrywide's successor-in-interest, Bank of America became liable for its various mortgage-related suits.

The settlement serves to draw a line on the aftermath of the 2008 Financial Crisis. With this, I believe that we can now look at Bank of America solely as a financial institution, rather than as a plaintiff to the homeowner lawsuits - and that might not be such a good thing.

To begin with, Bank of America is no longer a simple "main street" American bank content to take deposits, lend against homes, and finance personal spending. Its 2009 acquisition of Merrill Lynch gives it a strong presence on the investment banking front. For instance, in the first quarter, Bank of America ranked second in global net investment banking fees. It was also first in syndicated loans, which is not surprising, given the size of its balance sheet and its traditional niche as a lender in the corporate market.

League table rankings notwithstanding, Bank of America is actually reducing its Investment Banking and Capital Markets group head count by 300 as part of its efforts to reduce costs in a business segment that saw a 22% contraction in the first quarter of 2012 - that's 83% more than Citigroup lost from its competing segment from the same period a year earlier.

Despite this, Bank of America continues to hold onto $279 billion of investible securities open to market risk - a level that its CEO, Brian Moynihan, is reported to be comfortable with, despite the continued turmoil in Europe and JPMorgan's recent trading troubles.

Could that nonchalance come back to haunt Moynihan?

Bank of America's net Credit Default exposure is at $19 billion and much of that - around 85% - is to Investment Grade credit or higher (i.e. BBB and above). With easy access to liquidity brought on by the Federal Reserve's accommodating policy stance, it isn't a huge concern for now.

What's more, Bank of America's Tier 1 Common Capital Ratio is 10.78% - quite a bit more than the Basel III guidelines' required level of between 7% and 9.5%. That said, it isn't likely that Bank of America will be able to return a significant amount of capital to shareholders soon - in fact, its current dividend yield is only 0.60% - well below the banking industry's 2.20% level.

Bank of America's decision to trim its Investment Banking headcount is the second part of its larger effort to reduce costs across its enterprise - dubbed "Project New BAC." The first phase of the project was expected to save Bank of America $5 billion - equivalent to 46 cents per share - and eliminated 30,000 jobs across its retail banking operations.

That was a prudent move - Bank of America's personnel costs alone were equivalent to 46% of its first quarter revenues. In fact, these high costs compounded its lack of revenue growth in Bank of America's Consumer and Business Banking segment, which it contracted by nearly 10% in the first quarter of 2012 from a year earlier.

Contrast that performance with Citigroup's in the first quarter, when its Global Consumer Banking unit expanded by 5% overall - it witnessed a contraction only in its much smaller EMEA operations.

While Bank of America's move to right size its operations at the retail level is entirely logical, it could leave it ill-equipped to take advantage of the recovery at the retail banking level. After all, business re-engineering takes time bear fruit and comes with growing pains. By then, Bank of America may have ceded market share to more fleet-footed rivals. As it is, the credit card market has recovered considerably, with Bank of America's rivals JPMorgan and Citigroup seeing improvements in that area.

Given this, I don't see Bank of America taking advantage of this round of the recovery in the American market, which really could have helped it, given the continued weakness in its Global Markets unit.

In fact, Bank of America's traditional strength in syndicated lending is muted by the fact that U.S. corporates continue to hold record levels of cash - it's one thing to be a leader in an expanding market, but quite another to be one in a market that isn't. This being the situation, it may be tempting for Bank of America to expand its lending in the European corporate market, which is where demand for financing (understandably) remains buoyant. That wouldn't be wise - JPMorgan's $2 billion derivatives loss came as a result of widening corporate credit spreads in the European market.

The one "bright" spot for Bank of America is in its Global Wealth and Investment Management unit, which managed not to contract (on a net income basis) in the first quarter. Asset Management is expected to pick-up in emerging markets like India, where strong growth is expected. At the same time, the relatively sprightly performance of emerging equity markets in the first trimester of 2012 should also provide a boost to Bank of America's brokerage profits.

Conclusion

It's a bit too early to say where Bank of America will land after Project New BAC. Clearly, it realized that its cost structure was untenable, but regrettably, even after clearing the last of its obligations from its Countrywide Financial acquisition and reducing its operating leverage, headwinds persist in the form of contracting revenues from its Retail and Global Banking arms. It just isn't nimble enough.

As such, it's difficult to make the case that Bank of America's shares warrant an investment and I expect Bank of America to underperform the broad market. Specifically, while I see the broad market picking up 5% to 15%, I see a downside of 30% for Bank of America from its current levels through the end of the year.

Source: Bank Of America Could Tumble 30% This Year