The masters of integration
It’s a typical Lewis moment. Since he became chairman and CEO of Bank of America in 2001, Lewis has transformed the bank. It is now the largest domestic financial institution in the US. It is one of the world’s largest companies by market capitalization. Last year it generated profits of more than $21 billion, making it the fifth most profitable company in the world.
Lewis could be known as Mr Banking in America. The latest targets hardly do anything to contradict the impression.
But Bank of America is at a tipping point. It has built an enormously powerful base from its core markets in US consumer and corporate banking. Now, as that platform nears completion, Lewis and his management must go down a new path – to maintain the firm’s domestic hegemony, but at the same time build out businesses where it has lagged terribly behind its rivals: investment banking and international finance.
Ken Lewis is about to face his biggest challenge yet.
Last piece of the US jigsaw
LaSalle is vital to Bank of America. It’s why, whichever way the opinion of courts in the Netherlands, or fund managers across the globe, finally fall, Lewis is likely to end up with the Chicago-based bank. It clearly means more to him and his bank than to anyone else.
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"Our sheer power, size and scale allows us to innovate in ways others cannot. Most banks say that they will use their size and scale to give back to shareholders. We say we will also give some back to the customer in order to grow our businesses and revenues in the longer term"
Ken Lewis |
The official line, repeated by Lewis and his CFO, Joe Price, is that Bank of America has a binding contract with LaSalle that it is trying to enforce. No matter whether he buys it from ABN’s Rijkman Groenink or RBS’s Fred Goodwin, you get the clear impression that Lewis won’t take no for an answer.
Here’s why: "Chicago is the final missing piece of the jigsaw in the US. When we have LaSalle, we will be in every market that we want to be in," says Lewis.
That breadth of coverage extends to 31 states in the US, with a total of 56 million corporate and individual customers.
But LaSalle completes more than just the jigsaw. It also makes it impossible to grow further through acquisition in the US. LaSalle will take BofA’s total share of deposits in the US to the very brink of the 10% limit imposed by regulators. (Bank of America already has 14% of the retail deposit base in the US.) Any future growth will have to be organic.
Or else it will have to come from overseas. Bank of America’s detractors give it another name: Bank in America. While a rival such as Citi now derives 50% of its revenues outside its home base, even the much more US-centric JPMorgan Chase has international revenues of about 25%.
Bank of America still earns 90% of its revenues from the US. That figure will rise in the short term with the acquisitions of US Trust and LaSalle, neither of which have international businesses to speak of.
It’s strange that a CEO such as Lewis, whose favourite saying is "there is beauty in diversity in all things", has a business so reliant on one market. And it seems to worry shareholders too, as Bank of America’s stock price has underperformed the S&P500 index for most of 2007. With many investors concerned about the US economy slipping into recession, exacerbated by the recent losses in the sub-prime market, which could spread to other areas of US consumer banking, is Lewis’s policy of riding the high-growth domestic wave about to come to a crashing halt?
It’s a charge that Lewis rejects. Of course there might be problems in the short term – he points to the conflicting signals in the US economy of rising food prices, high gasoline prices, slowing consumer spending and higher interest rates, balanced by low unemployment and good wage growth levels, as examples of why there is uncertainty. But he thinks it is a mistake to ignore the scale of the US market, and the level of diversity inherent in it.
Lewis is playing a long-term game, and is happy with his position. "I would say we’re not in a bad position over time if we are such a large player in such a large and diverse economy as the US," he says.
The global imperative
Lewis knows that in globalized markets where money flows across borders with little hindrance, a bank of BofA’s size cannot ignore the international markets.
Jonathan Moulds is London-based president of Bank of America’s businesses in Europe, the Middle East, Africa and Asia, and so at the forefront of the strategy. "Our clients are globalizing; we need to globalize with them, or we risk losing them," he says.
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Bank of America is the top performer |
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Total annualized shareholder return 2000–2006 |
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HOW LEWIS MAKES EPS MATTER |
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Growth in EPS, 2000–2006 |
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Source: Bank of America |
Another senior banker says: "Ken wants to be the CEO that takes Bank of America global. We are spread too thinly and it is a recipe for hiccups. If you look at Citi, they are important to a lot of people in a lot of places. We need to become important to more people."
That’s why many expect Lewis to make a transformational acquisition in Europe, Asia or on a global basis to get a foothold in other consumer banking markets. There’s much talk in London and beyond that Bank of America will seek to snap up Barclays if the UK bank fails to get ABN Amro. They might be sorely disappointed.