Fitch Ratings has upgraded the individual and preferred stock ratings of Bank of America, but the agency says the upgrades are tempered by the North Carolina institution’s high level of nonperforming loans and the likelihood of large volumes of mortgage repurchases from investors.

Nevertheless, Fitch says the bank’s rating outlook is “stable.” The upgrades reflect BofA’s efforts to boost common equity and liquidity combined with stable to improving asset quality trends in some areas of its portfolio, according to Fitch. But the ratings agency says the bank has “remaining challenges.”

Looking at the second half of 2010, Fitch anticipates that Bank of America’s total loan loss provisions have the potential to decline further given encouraging asset quality trends, but this improved quality is not related to residential mortgages, according to the agency. Other negative factors include weak loan demand and the bank’s higher risk/higher spread loans – a large share of which were inherited from subprime lender Countrywide.

Countrywide is also the culprit behind BofA’s exposure to representation and warranties issues that could force mortgage buybacks. Fitch said it anticipates “a large inflow of new repurchase requests as the GSEs and other

institutions work through large amounts of troubled mortgages.”

“Among the major U.S. banks, Fitch believes Bank of America is the most susceptible to this risk given the scrutiny being placed on the legacy Countrywide mortgages,” the agency said.

The bank’s costs associated with reps and warranties increased to $1.2 billion in the second quarter of this year from approximately a $500 million run rate over the past few quarters, Fitch explained in its ratings report.

Beyond the rep and warranty issue, another area of concern is exposure to home equity loans, especially BofA’s portfolio of loans with a combined loan-to-value (LTV) ratio greater than 100 percent. Legal risk also remains a significant concern, particularly related to the bank’s acquisitions of Countrywide and Merrill Lynch, Fitch said.

“These combined challenges are considerable yet are considered by Fitch to be well below the various asset quality challenges that [BofA] successfully worked through during the last few years,” the ratings agency noted.

Over time, Fitch says ratings could be positively affected if BofA attains a solid track record of core profitability and continues to improve its asset quality. If loan quality deteriorates, however, the agency says look for ratings to head in the opposite direction. The agency says, though, that this “is not expected at least in the near term.”

Bank of America is one of the largest U.S. banks in terms of total deposits, loans, branches, and mortgage originations and servicing, Fitch says. Following its January 2009 merger with Merrill Lynch & Co., BofA also became one of the top financial institutions in wealth management and investment banking.