Edit Metric
|
||||||||||||||||||||
Details
|
||||||||||||||
Bank of America (BAC)Stock (Financial Services Industry, Investment Banks Industry)
 On September 15, 2008, Bank of America agreed to a deal with Merrill Lynch in which BAC swapped 0.8595 share of its stock for each share of Merrill Lynch. This price was 1.8 times Merrill's stated tangible book value.[1] As its name suggests, most of Bank of America's business is based in the U.S. The company counts about half of all the wealthy households in the U.S. as customers, and it holds the leading share of the market for small business banking. As of mid-2007, Bank of America is both the leading issuer of credit cards through endorsed marketing and the largest holder of deposits in the country. In fact, the company cannot grow its share of domestic deposits much further without hitting the 10% limit imposed by anti-trust legislation. As a result, Bank of America may have to further diversify beyond the consumer and small business segments or strengthen its international presence in order to maintain growth. It was to this end that Bank of America announced a plan to acquire Merrill Lynch (MER), the U.S.'s third-largest investment bank, on September 14, 2008.[2] Its focus on domestic banking also leaves Bank of America exposed to trends affecting the U.S. economy. Changes in interest rates can impact Bank of America's earnings, as it both pays interest on customer accounts and collects interest on customer loans. Additionally, the 2007 collapse of the subprime lending industry, as well as the subsequent contraction in credit markets, have put negative pressures on the company's core banking and mortgage businesses. Since Bank of America holds both mortgages and asset-backed securities, the decline in residential real estate prices could lead to further write-downs on the value of these holdings, further pressuring income.
[edit] Business OverviewHeadquartered 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 30 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). In 2007, the bank earned $66.3 billion in revenue and $14.98 billion in net income, and it also ranked as the nation's largest small business bank. In 2004, the company acquired Boston, Massachusetts-based FleetBoston Financial for $47 billion to solidify Bank of America's position as the bank with the largest FDIC-rated deposit market share in the United States. As of mid-2007, Bank of America holds over 9.5% of the nation's deposits, with 10% considered to be an illegal monopoly. On January 1, 2006, Bank of America completed its merger with credit card giant MBNA for $35 billion in cash and stock. This merger helped the bank assert itself as one of the top credit card organizations in the country with more than 40 million U.S. accounts and nearly $140 billion in outstanding balances.
[edit] Business Segments [edit] Global Consumer and Small Business BankingConsumer and Small Business banking has been Bank of America's perennial strong point, accounting for 70% of total 2007 revenue. 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.
[edit] Global Corporate and Investment BankingCorporate and Investment Banking has traditionally been one of Bank of America's weakest divisions. In 2007, this business accounted for 20% of total revenue (or $13.4 billion), $538 million of which was profit; this was down from net income of $6 billion in 2006, largely due to the tough market conditions in 2007. In October 2007, the company announced layoffs of approximately 3000, with the majority coming from Global Corporate and Investment Banking. This was the result of $1.45 billion in trading losses for the third quarter of 2007. 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).
[edit] Global Wealth and Investment ManagementAlthough Global Wealth and Investment Management is Bank of America's smallest segment, accounting for a little more than $7.9 billion (11%) of 2007 revenues, it could be the corporation's biggest growth driver in the future. 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. 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 $643 billion as of the end of 2007. [edit] Trends & Forces[edit] Government regulation riskNational banks such as Bank of America are subject to many regulations, especially since the failure of a national bank could jeopardize the livelihood of millions of people. A host of federal agencies regulate Bank of America and its competitors, including the Office of the Comptroller of the Currency (the “Comptroller” or “OCC”), the Federal Deposit Insurance Corporation (the “FDIC”), the Federal Reserve Board, other federal and state regulatory agencies, and with respect to Bank of America’s operations in the United Kingdom, the Financial Services Authority (the “FSA”). Regulations can often impede the flow of funds from the bank's subsidiaries to the Corporation and between the bank and its customers and can limit the products and services the bank is able to offer. Historically, a Democrat-led national or state government has signaled increased regulations, or greater impedance on the bank's earnings. As Bank of America works to broaden its products and services and expand into new activities, it must gain approval from the Federal Reserve Board and other government agencies, as described in the Gramm-Leach-Bliley Act, which regulates national banks like Bank of America. A host of other laws require that the bank receive approval for mergers and acquisitions, and any government impedance in these endeavors can impact growth. [edit] Exposure to lending/credit risksA 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. [edit] 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. [edit] Reliance on mergers & acquisitionsBank 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. [edit] General economic/political environment sensitivityGiven 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. [edit] CompetitionBank 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.
Bank of America is the largest deposit holder in the U.S. by market share, a position that the firm has held for years.
 Bank of America2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] References
|
The Shelf
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Edit
History
Bookmark
