A pandemic year with households and corporations under unprecedented stress ought to be a vindication of Bank of America chief executive Brian Moynihan’s oft-repeated mantra of “responsible growth”.
The bank’s management says it doesn’t run the business to make the most money possible in the good times but rather to deliver through the bad times. Is it delivering?
Its pandemic efforts are undeniable. At the end of the third quarter, it had 343,000 loans outstanding in the US government’s Paycheck Protection Program – more than any other firm.
As the head of the biggest consumer bank in the country, Moynihan sees responsible growth through a lens of not just credit risk but also operational risk. He argues that the firm needs to be able to respond to client needs even when conditions turn sour, as they did in 2020.
“Responsible growth allowed us to have the operational discipline, as well as the credit,” he told the bank’s Future of Financials conference in November.
Paul Donofrio, BofA’s chief financial officer, argues that the pandemic year of 2020 provides an illustration of exactly why the bank is run as it is.
Its cautious attitude and the way in which it has spent 10 years jettisoning unneeded activities and simplifying products and processes, all contributed to its ability to serve clients when it mattered most.
“We did not feel the stress ourselves, even in the worst week,” says Donofrio.
The bank’s trading book and balance sheet ballooned during March. Risk-weighted assets increased by as much as $300 billion at their peak.
Heading into the crisis, revolver utilization was running at about half, according to Donofrio. That went up as clients drew down and the bank created new facilities, but it was always well within its capacity.
“Every undrawn revolver could have been drawn 100% and we would have been fine,” he says.
Missing the point
Some areas of 2020’s financial results also highlight an apparent cost to BofA’s strategy. Its markets business underperformed some rival franchises, meaning that group revenues have not had the kind of boost seen elsewhere. Fixed income revenues rose just 22% in the 12 months to the end of September, compared with 40% to 75% at other big US banks.
But Donofrio argues that such comparisons miss the point.
“The bottom line is that our markets business has a purpose – it is there to deliver for Bank of America’s customers across consumer, global banking and global wealth and investment management,” he says.
“Our philosophy is that it has to be big enough so that it can serve its customers and generate a return, but not so big that it will ever overwhelm the rest of the company. It’s doing exactly what it’s supposed to do.”
We are focused on building a business that is sustainable and will work, no matter the economic environment
Paul Donofrio
He notes that BofA is clocking up a 17% return on allocated capital in its markets business. And it’s carrying a lot less risk than some.
The bank’s value at risk four years ago was at $120 million; JPMorgan’s was $264 million. In the second quarter of 2020 BofA’s had risen to $194 million, but JPM’s had leapt to $679 million. There are banks that are bigger than BofA in markets, but they are also riskier.
A few years ago, a more conservative approach was seen as restricting BofA in other areas, however. One was advisory, which was perceived by outsiders to be suffering from the bank’s unwillingness to support the business with enough credit.
Advisory might be a smaller revenue line than some think it ought to be at BofA, but it has been stable, at about $1.5 billion a year. Donofrio concedes that it’s an area where more can be done, particularly in client segments that the firm has historically not served as holistically as it might.
“We changed our strategy a few years ago to invest a little more in the investment banking business and in particular in the US middle-market business,” he says. “We have relationships there that sometimes went back 100 years, but we were neglecting them from an investment banking perspective, and that didn’t make any sense.”
He reckons the bank’s share of US middle-market investment banking fees has gone from below 7% in 2018 to about 9% now.
Revenue growth
Banks have few options when rates are low and can’t go up. In the current environment, the only way to create revenue growth is to add new customers or deepen the servicing of existing customers – what BofA is doing in the mid-market is the deepening part.
“Typically, we have lent them money and they do their transaction banking with us, and then when the time comes to sell a business or go to the capital markets, they haven’t used us,” says Donofrio. “So, it’s about getting a better return on that relationship by bringing more products and services to them.”
Selectively building out deeper relationships is a much better way of achieving growth than simply buying loan books that were built with another firm’s underwriting, says Donofrio.
And it’s notable that while return on tangible equity had climbed to about 15% in the last two years, the 9% posted so far in 2020 is about the same as for the three years before that – a mark of how BofA is better positioned now for worsening conditions.
“What we are focused on is building a business that is sustainable and will work no matter what the economic environment is,” he adds. “If we do that well, we will get an adequate return.”
