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WIKI ANALYSIS
Bank of America Corporation (NYSE:BAC) is the world's largest holding bank company in terms of 2009 assets and total revenue. Through its numerous subsidiaries, the Charlotte, North Carolina-based bank offers a full range of financial and non-financial services in three principal divisions: Global Consumer and Small Business Banking, Global Corporate and Investment Banking, and Global Wealth and Investment Management. The firm has a strong geographical presence in all 50 U.S. states and the District of Columbia, as well as in 44 foreign countries, and serves over 55 million consumer and small business clients.
The 2007 collapse of the subprime lending industry, as well as the subsequent contraction in credit markets, put negative pressures on the company's core banking and mortgage businesses. BAC received $45 billion in government loans under the Troubled Assets Relief Program (TARP), which it has used to back loans and mortgages.[1] In early December 2009, Bank of America was approved to and repaid all of its $45b TARP loans. This repayment removes the bank from TARP regulation and also expensive dividend payments that had to be paid to the US Treasury. In total, TARP cost BofA $2.7B in cash dividends but places the bank ahead of rivals such as Citigroup which have yet to repay the loans.[2]
On September 15, 2008, Bank of America agreed to acquire Merrill Lynch after Merrill Lynch suffered large losses from subprime lending. [3] However, Bank of America's total size and the risky assets it acquired from Merrill Lynch put the bank at significant risk.
Business Overview
Headquartered in Charlotte, North Carolina, Bank of America Corporation was incorporated in 1998 as part of the merger of BankAmerica Corporation with NationsBank Corporation. Through its three business segments--Global Consumer and Small Business Banking, Global Corporate and Investment Banking, and Global Wealth and Investment Management--the company provides a diversified range of banking and non-banking financial services in 50 states, the District of Columbia, and 44 foreign countries. Through a long history of mergers and acquisitions and aggressive expansion, Bank of America's reach covers more than 75% of the U.S. population and 44% of the country’s wealthy households for a total of over 55 million consumer and small business relationships. The company services many of these accounts through its 700 retail banking offices, more than 17,000 ATMs and its growing online channel (over 21 million active on-line users). Bank of America reported a $1B loss for the third quarter ended 2009 and a $5.2B loss for the forth quarter ended 2009. The large losses were caused by continued high default rates on loans and Bank of America's repayment of the US Treasury TARP loans. These large writedowns came as other banks began to record strong profits again as the financial sector began to recover from the financial crisis.[4][5]
On December 31, 2008, Bank of America acquired Merrill Lynch (MER) for $1.6 billion in BAC common stock. The deal came after Merrill became insolvent due to the 2007 Credit Crunch and losses in Subprime lending. Bank of America's stock has suffered since the acquisition from fears of Merrill's possibly toxic assets. The combination of the two firms pushes Bank of America's assets past $2 trillion.[6]
Business Segments
Global Consumer and Small Business Banking (80% of 2008 Revenue; 105% of 2008 Net Income)
Consumer and Small Business banking has been Bank of America's perennial strong point, accounting for 80% of total 2008 revenue.[7] With more than 5,700 retail banking offices, more than 17,000 ATMs and more than 21 million active on-line users, the company is able to attract, retain and deepen customer relationships through a wide range of banking products and services. Within Global Consumer and Small Business Banking, there are four primary businesses: Deposits, Card Services, Consumer Real Estate, and ALM/Other.
- Deposits: In 2008, the Deposits divison brought in $6.2 billion in net income.[8] Deposits products include traditional savings accounts, money market savings accounts, CDs and IRAs, checking accounts, and debit cards. The bank's ubiquitous geographic presence and key mergers like the MBNA merger have consistently ranked Bank of America as the largest holder of deposits in the nation. Deposits provides a relatively stable source of funding and liquidity, allowing the company to earn net interest spread revenues from investing this liquidity in earning assets through lending and Asset Liability Management (ALM) activities. Through deposits, the bank also receives various account fees such as non-sufficient fund fees, overdraft charges and account service fees, and interchange fees from debit cards.
- Card Services: In 2008, Card Services generated $521 million in net income. This is $3.1 billion lower than in 2007. This sharp decrease of 85% is largely due to significantly increased default rates on credit card payments.[9] Card Services offers a wide range of products, including U.S. Consumer and Business Card, Unsecured Lending, Merchant Services and International Card Businesses. The recent MBNA merger added a variety of co-branded and affinity credit cards to the corporation's product line and made Bank of America the leading issuer of credit cards through endorsed marketing. Card Services generates revenue through a variety of means, including servicing fees, cash advance fees, late fees, interchange income, and interest income.
- Mortgage, Home Equity and Insurance Services: In 2008, Mortgage, Home Equity and Insurance Services generated $2.6 billion in net income.[10] Bank of America provides mortgage services to its clients via its over 6,139 banking centers, sales account executives in nearly 1000 locations, telephone and online access, and a partnership with more than 6,500 mortgage brokers in all 50 states. The mortgage business includes the origination, fulfillment, sale and servicing of first mortgage loan products. Servicing activities primarily include collecting cash for principal, interest and escrow payments from borrowers, and accounting for and remitting principal and interest payments to investors and escrow payments to third parties. Servicing income includes ancillary income derived in connection with these activities such as late fees. The Mortgage, Home Equity and Insurance Services product offerings for home purchase and refinancing needs include fixed and adjustable rate loans.
Global Corporate and Investment Banking (18% of 2008 Revenue; -1% of 2008 Net Income)
Corporate and Investment Banking has traditionally been one of Bank of America's weakest divisions. In 2008, this business accounted for 18% of total revenue (or $13.4 billion). The segments Net Income fell from $510 million in 2007 to -$14 million in 2008. These continuing poor results are due to the tough market conditions in 2007 and 2008.[11] In October 2007, the company announced layoffs of approximately 3000, with the majority coming from Global Corporate and Investment Banking. Investments into subprime lending and the housing crisis as a whole have largely increased the pressure on this segment. Bank of America in particular has experienced negative results in the Investment Banking industry.
Global Corporate and Investment Banking’s products and services are delivered from three primary businesses: Business Lending, Capital Markets and Advisory Services, and Treasury Services, and are provided to clients through a global team of client relationship managers and product partners.
The investment bank has historically revolved around loan syndication, a legacy of Bank of America's commercial lending business. BAC made a big push into the top tier of U.S. investment banks with its September 2008 acquisition of Merrill Lynch (MER), the third-largest after Goldman Sachs Group (GS) and Morgan Stanley (MS).
- Business Lending: Products include commercial and corporate bank loans and commitment facilities which cover business banking clients, middle market commercial clients and large multinational corporate clients. Real estate lending products are issued primarily to public and private developers, homebuilders and commercial real estate firms. The corporation also issues indirect consumer loans which offer financing through automotive, marine, motorcycle and recreational vehicle dealerships across the U.S. The bank offers leasing and asset-based lending products.
- Capital Markets and Advisory Services: This division provides support to institutional investor clients in their investing and trading activities. Commercial and corporate issuer clients receive debt and equity underwriting and distribution capabilities, merger-related advisory services and risk management solutions via interest rate, equity, credit and commodity derivatives, foreign exchange, fixed income and mortgage-related products.
- Treasury Services: Products and services include treasury management, trade finance, foreign exchange, short-term credit facilities and short-term investing options for multinationals, middle-market companies, correspondent banks, commercial real estate firms and governments.
Global Wealth and Investment Management (10% of 2008 Revenue; 35% of 2008 Net Income)
Although Global Wealth and Investment Management is Bank of America's smallest segment, accounting for a little more than $7.8 billion (10%) of 2008 revenues, it could be the corporation's biggest growth driver in the future.[12] Only 10% of Bank of America's estimated 8 million affluent customers currently use its wealth-management products, suggesting a possibility of cross-selling or up-selling opportunities. However, the worsening economic conditions in 2008 have prevented this segment from expanding as compared to past years.
Within Global Wealth and Investment Management, the corporation manages the wealth of high net-worth individuals and institutional customers through three primary businesses: The Private Bank, Columbia Management (Columbia), and Premier Banking and Investments (PB&I). Collectively, this division had total assets under management of over $523 billion as of the end of 2008. This is lower than the $644 billion under management in the previous year, and is largely due to a drop in the value of the assets.
Trends & Forces
Exposure to lending/credit risks
A number of Bank of America's products expose it to credit risk, including loans, leases and lending commitments, derivatives, trading account assets and assets held-for-sale. As one of the nation’s largest lenders, Bank of America relies heavily on accurately predicting how well its customers will repay their loans. The corporation must constantly weigh ongoing economic factors and should they overestimate its customers' ability to repay loans, the bank's overall performance will suffer.
Exposure to market conditions
Bank of America is affected by directly and indirectly by market conditions. For example, changes in interest rates could adversely affect net interest margin — the difference between the yield the bank earns on assets and the interest rate it pays for deposits and other sources of funding — which could in turn affect earnings. Market risks include fluctuations in interest and currency exchange rates, and equity and futures prices. Such risks affect loans, deposits, securities, short-term borrowings, long-term debt, trading account assets and liabilities, and derivatives.
Bank of America, Wachovia, Citigroup and Washington Mutual derive a large percentage of their income from net interest margin and are hurt by increasing interest rates. As interest rates rise, banks are forced to pay higher rates on deposits and other interest bearing accounts. Meanwhile consumer demand for mortgages and other loan products diminishes as borrowing becomes more expensive. The combination of these two effects reduces both the volume of loans and the profitability of each loan. Rising interest rates also have the potential to increase a bank's defaults as holders of adjustable rate mortgages find themselves unable to meet their obligations. This is especially true of subprime borrowers. Bank of America was involved in the subprime lending collapse in 2007; however, a fairly diverse business model and growing investment banking activity propelled the company to sizable growth through the second quarter of 2007 and somewhat limited the negative effects of the subprime collapse.
Reliance on mergers & acquisitions
Bank of America Corporation has relied heavily on mergers and acquisitions to become the behemoth it is today: the leading issuer of credit cards through endorsed marketing and largest holder of deposits nationwide. Mergers and acquisitions such as FleetBoston and MBNA are designed to cut costs and increase market share, but can sometimes eliminate key employees or departments and fail to predict new found costs or risks.
Since the bank has maximized its legal market share of U.S. deposits, the company may turn to other means of growing its business, such as expanding its credit card services through acquisitions like MBNA and drawing more customers to its Global Wealth and Investment Management division.
BAC plans to acquire Merrill Lynch (MER) for approximately $20B. Until the offer, Merrill Lynch neared bankruptcy after owning over $40B in sub-prime tainted bonds. In December 2008, Merrill Lynch hired John A. Thain to head the company - a man termed "Mr. Fixit" after saving the New York Stock Exchange. The success of this acquisition and its future, will heavily impact Bank of America's future. [13]
General economic/political environment sensitivity
Given the company's concentration of business in the U.S., its earnings are particularly affected by downturns and upswings in the U.S. economy. For example, in an economic downturn, it is likely that more customers will fail to fulfill their loans and other obligations to the bank. Short-term and long-term interest rates, inflation, variations in monetary supply, fluctuations in both debt and equity capital markets, and the strength of the United States economy and the local economies in which the corporation operates would also affect its earnings.
Rising geopolitical conflict, such as acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, could also affect business and economic conditions in the United States and abroad. Economic booms increase earnings for Bank of America as people have more money to deposit, purchase credit cards, invest, and repay loans.
Government regulation risk
While Bank of America has repaid its TARP loans and thus will avoid regulations going along with such funding, BAC may still face future regulation. In particular, President Obama announced that he plans to put into place regulation which would prevent commercial holding banks from undertaking proprietary trades. This regulation would prevent Bank of America from making trades to offset losses from defaults.[14]
Competition
Bank of America competes across each of its three main business segments, and is the largest company in the U.S.-focused Global Consumer and Small Business Banking segment. The company continues to be the leading issuer of credit cards through endorsed marketing and largest holder of deposits nationwide. Internationally, Bank of America has significant room for improvement, with its US market share being 6 times greater than its non-US market share.
Bank of America also ranks second among the big US banks in terms of assets and third in terms of revenue.
| 2009 data | Assets ($B)[15] | Revenue ($B) |
|---|---|---|
| Bank of America | $2,300 | $113 |
| J P Morgan Chase (JPM) | $2,000 | $101 |
| Citigroup (C) | $1,800 | $106 |
| Wells Fargo (WFC) | $1,200 | $51.7 |
Bank of America is the largest deposit holder in the U.S. by market share, a position that the firm has held for years. Its merger with Countrywide Financial (CFC) has allowed it maintain its dominance over the Wells Fargo - Wachovia (WB) merger.
| Domestic Deposit Market Share (%) | |||||
| 2004 | 2005 | 2006 | 2007 | 2008[16] | |
|---|---|---|---|---|---|
| Bank of America (BAC) | 10.07 | 10.36 | 9.54 | 10 | 11.33 |
| Wells Fargo (WFC) | 4.90 | 4.64 | 5.20 | 4.2 | 10.33 |
| J P Morgan Chase (JPM) | 4.18 | 7.07 | 7.47 | 7.4 | 9.85 |
References
- ↑ PR Newswire "Bank of America Makes $402 Million TARP Dividend Payment to U.S. Government" 17 Feb 2009
- ↑ CNN Money "Bank Of America Repays $45 Billion in TARP Funds" 9 Dec 2009
- ↑ Marketwatch.com
- ↑ BAC 8-K 3Q 2009 "Results of Operations and Financial Condition"
- ↑ Orlando Sentinel "Bank of America's $5.2 billion loss part of market drag, despite Wells Fargo's gain" 20 Jan 2009
- ↑ Yahoo Finance "2 big banking sector acquisitions completed" 1 Jan 2009
- ↑ BAC 10-K 2008 "Business Segment Total Revenue and Net Income" p.18
- ↑ BAC 10-K 2008 "Deposits and Student Lending" p.28
- ↑ BAC 10-K 2008 "Credit Services" p.29
- ↑ BAC 10-K 2008 "Mortgage, Home Equity and Insurance Services" p.30
- ↑ BAC 10-K 2008 "Business Segment Total Revenue and Net Income" p.18
- ↑ BAC 10-K 200* "Business Segment Total Revenue and Net Income" p.18
- ↑ [Bloomberg "Thain Failure to Rescue Merrill Shareholders Messes Mr. Fixit" 22 Dec 2008
- ↑ Wall Street Journal "Financial News: Bankers Count Cost Of Obama's Bank Plan" 22 Jan 2010
- ↑ Herald Tribune "Bank of America claims top spot in assets" 15 June 2009
- ↑ FDIC Quarterly 2008, Volume 2, No. 4 "Highlights from the 2008 Summary of Deposits Data"
- ↑ FDIC "Summary of Deposits" June 2008
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