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It is now coming up to eight years since Brian Moynihan succeeded Ken Lewis as chairman and chief executive of Bank of America and set about simplifying the company, strengthening its balance sheet and, backed then by a new senior management team, creating a new culture for the bank as it fought back from the global financial crisis.
In the years since, the bank has never quite enjoyed the stature of JPMorgan, which has a bigger balance sheet and earns more money, or the cachet of Citigroup with its international network of consumer banks. The senior management team has ground away at its task, driven by a rather uninspiring two-word catchphrase. Bank of America is in the business of “responsible growth”.
It sounds just a little bit lacklustre.
But during the first nine months of 2017, responsible growth produced improved operating results, higher returns, record market capitalization and lower risk.
Relative to the first nine months of 2016, revenue was up 5%, so well ahead of nominal GDP growth. Profit was up 19%, with net charge-offs down 7% and operating costs also continuing to fall. The third quarter of last year marked the 12th consecutive quarter of positive operating leverage, with revenues growing faster than costs.
This solid financial performance translates to improved returns for shareholders. For the first nine months of 2017, return on assets was 0.93% and return on average tangible common equity was 11%, moving both metrics closer to the bank’s stated goals of 1% and 12% respectively.
“What we’re seeing now is the result of years of hard work – when we changed the banks’ underwriting standards, its target clients, the whole way the company is organized and also made massive investments in improving the design and delivery of products and services – just starting to come through as rates now begin to rise and the global economy starts to normalize,” Paul Donofrio, chief financial officer of Bank of America, tells Euromoney.
The bank now generates so much capital through retained earnings, it must plan carefully how to return it each year.
Its high home-market share precludes acquisitions in the US, the one country where it serves retail customers.
It has built impressive global markets and investment banking businesses but shown no appetite for wholesale business acquisitions abroad. It is so careful in its risk appetite that it refuses to pursue loan growth that would risk a short-term boost to profits from foisting loans on its customers that they could not service in a recession.
The mantra of responsible growth does not always chime with short-term investors calling for fast returns.
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| Brian Moynihan |
“We actually have fewer customer checking accounts now than at the start of the decade, so at first sight it looks like we are shrinking,” explains Moynihan. “But, in fact our account balances have doubled and our customer approval ratings are way up.
“We do not pay staff bonuses based on unit sales and have not for several years. We are not interested in just selling more checking accounts or more credit cards. We want to be the core checking account from which our retail customers and our business customers operate their household and corporate finances.
“We want to be the main card they habitually use. So, in retail for example, we have loyalty programmes that bring discounts and benefits across the relationship in cards, mortgages and so on. And we reward our customers for maintaining higher balances with us. That means the bank contributes $1.1 trillion of deposit funding that has no incentive to switch to another competitor. On nearly half those deposits, we pay no interest.”
If rates continue to rise, the bank will benefit on the asset side without having to pay more for a giant slug of its liabilities. This is something to look out for this year.
Investors that were sceptical two or three years ago have come round to the Bank of America story. At the end of November, the stock price was up 33% for 2017, comparing favourably to the Bank Index and the S&P500 index, both of which had risen 20%.
It will be worth keeping an eye on the bank’s investment spending this year on digital innovation. The bank is also pursuing what it calls a local markets strategy in various US cities, recruiting local bankers with a closer feel for the local business community.
Charge-offs have hit what may come to look like an all-time low of around 40 basis points. At some stage, they must rise again. The bank increased average loans in the consumer bank by 8% in the first nine months of 2017, picking up in auto and credit cards as well as mortgages. Time will tell if this growth really has been responsible.
