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The world’s best bank 2022: Bank of America – prepared for stormy weather

BofA-singing-in-the-rain-illo-960.jpg
Photo: Getty

Under the leadership of Brian Moynihan, Bank of America has become the poster child for stakeholder capitalism in banking. Shareholders benefit; previous strong underwriting and ample liquidity enabled it to grow loans strongly in the pandemic recovery; and management is confident it can weather the coming downturn.


As soaring US inflation persists, bank investors’ nerves are on edge. They hope to benefit from higher net interest income while keeping a fearful eye on future non-performing loans and on rising costs – particularly headcount.

This is being felt from the top of these firms to the bottom: investors are rejecting board proposals for multi-million dollar retention grants to chief executives while remaining laser focused on costs elsewhere.

It is a moment where bank chairmen and chief executives need to show unequivocally where their priorities lie. Bank of America’s Brian Moynihan did just this in April when the bank announced off-cycle pay rises of between 3% and 7%, depending on length of service, to employees earning less than $100,000.

“We are meeting our teammates where their reality is,” he tells Euromoney.

The bank also brought forward the increase, scheduled for October, of its lowest hourly wage to $22. It has said this minimum wage will hit $25 by 2025. Those increases came into effect in June. The bank is ahead of the industry on this.

Less publicity attaches to what might be called Scope 3 pay. The bank insists its vendors pay at least $15 an hour.

All this comes after the bank spent close to half a billion dollars during Covid offering $100 a day to employees working from home to pay for childcare, reasoning that those on low pay with young children wouldn’t be terribly productive without it.

It also decided not to increase healthcare charges for lower-paid staff, keeping coverage at $100 a month for a single person or $250 for a family.

“In our healthcare system in the US, that is really low,” says Moynihan.

And it reassured worried staff that there would be no redundancies. This all sounds very nice. Why should Euromoney readers care?

Because BofA is the most prominent example of stakeholder capitalism in operation at a leading global bank. It doesn’t gouge customers, for example on overdraft fees. It doesn’t lend money at high initial fees to those who likely won’t be able to pay it back and so may have to surrender their assets. And it looks after staff.

What matters most for investors in bank equity is that this works.

BofA’s costs are not inflating.

“We’ll keep expenses flat in 2022 while many others’ will go up a lot,” says Moynihan. And from a shareholder’s perspective, the benefits of low turnover and high motivation among staff are clear.

Strong employee scores correlate with strong customer scores. Banking is a service industry after all.

“We have been outgrowing the industry in loans and deposits,” says Moynihan. “We have gained market share, for example in markets trading, while our wealth management business enjoys its highest-ever growth in customer assets, which is purely organic growth, as well as record revenues.

“In the 12 months to the first quarter of 2022, we have hit record earnings and returns. And now, as revenues grow while expenses remain stable, we are back into quarter after quarter of positive operating leverage.”

Operational excellence

How does BofA manage to improve pay and benefits for employees without raising costs or hurting its efficiency ratio? Remember that it spends between $3 billion and $3.5 billion a year on new technology initiatives out of a total technology and operations budget of $14 billion.

Revenues growing faster than costs help of course, but revenue may slow as the US Federal Reserve chokes off growth to kill inflation.

The real trick is something the bank calls operational excellence.

It is a catch all term for a programme that first began almost a decade ago, in the second period of Moynihan’s career at the top of the bank, after he and his management team had cleaned up the mess left over from the great financial crisis.

As the bank recovered, from the middle of the last decade senior management strove to knit together legacy technology from the many regional banks NationsBank had consolidated; to reduce the number and complexity of products; to cut error rates and make the bank more attractive to customers. A market-leading preferred rewards offering incentivized retail customers with several bank accounts to have their primary one at BofA and to maintain higher balances.

In more recent years, operational excellence has extended to cutting-edge digital offerings both for retail customers and corporations, such as CashPro, its market-leading payments and transaction services product for treasurers of companies ranging from US small and medium-sized enterprises to global multinationals.

Treasurers can now use multi-factor authentication to log into their systems via their mobile phones and approve billion-dollar payments while attending a business breakfast or watching their children play football.

I would say that Bank of America is not just the best digital bank in the world. We are the best digital company in the world, maybe along with Google
Brian Moynihan

The bank measures digital adoption and engagement in many ways. When it reported strong results for the first quarter of 2022, including a 15.5% return on tangible common equity, BofA disclosed that, for the first time, digital sales accounted for just over half of all sales and that these have doubled since 2019.

Also for the first time, it is processing more Zelle transactions than cheques. Volumes through Zelle and Erica, its virtual voice assistant, are running four-times higher than before the pandemic. Through its CashPro mobile app for commercial clients, the bank is starting to see many $5-billion usage days.

One key reason why BofA can meet employees where their reality is – improving their pay and conditions without inflating costs – is that it has fewer of them than in the pre-digital era. It can now credibly promise to keep costs flat because of those big annual technology investments.

Moynihan may have eschewed redundancies, but the number of full-time employees is down from 288,000 at the start of 2011 to just 208,000 at the end of 2021. Operational excellence and digital banking are at the centre of BofA’s story and they are why it is our world’s best bank for 2022.

The bank’s chief executive, normally measured and thoughtful, although capable of shafts of humour – he offers to help Euromoney offset the carbon footprint of our flight across the Atlantic to meet him if we want to invest in sustainable aviation fuel – gives in to a measure of hyperbole.

“The unique growth opportunity that defines us is the capacity to offer a continuum of services across the lifetime of a child born today, whether she works in a restaurant or founds a business and becomes the richest person in America; to offer the same continuum of services to businesses in over 100 US cities, more than any other bank, and in the largest economies around the world; and to further grow our digital competencies.

“I would say that Bank of America is not just the best digital bank in the world. We are the best digital company in the world, maybe along with Google.”

Bank Of America CEO Brian Moynihan Visits FOX Business Networks' "Barron's Roundtable"
Bank of America chief executive Brian Moynihan. Photo: Getty

Responsible growth

There is another consideration as well, which ties together the bank’s embrace of stakeholder capitalism and its vision for operational excellence with the sermon Moynihan has long preached of responsible growth.

The bank needs to grow. It has $2 trillion of deposits and $1 trillion of loans. With an excess of capital, it has been looking for places to put it to work, for example growing its markets trading business by 25% and gaining record revenues in equities trading even as financial markets tumble.

As soon as the US economy stabilized after Covid vaccines came out in 2021, BofA was back and eager to lend in the second half of last year and at the start of 2022.

“Because we weren’t struggling with old problem loans in the portfolio, we had the capacity and ability to grow loans ahead of the industry: by $50 billion in the fourth quarter of 2021 and by $20 billion in the first quarter this year,” says Moynihan. “These are huge numbers.

“And because we were clean on our prior underwriting, we just took off on credit cards from the middle of 2021.”

The bank lends within a defined risk appetite. It doesn’t pursue growth at all costs.

As the US economy slows, other economies head into recession and central banks finally withdraw liquidity and hike borrowing costs, it will soon become apparent which banks are prepared to weather the storm gathering over financial markets and the real economy.

BofA has been careful not to sound the alarm and trigger a rush for shelter. Through the first half of 2022, even as rates rose and markets sold off, its senior executives emphasized that US consumers remain resilient, have strong cash balances, low indebtedness by historical standards and continue to spend. The economy will slow, but a recession is not baked in.

That doesn’t fit the pessimists’ story, but it’s what a bank with 67 million customers has been seeing.

However, behind this optimistic commentary, the bank, which typically comes out of the Fed’s annual stress tests with one of the lowest hits to capital among large US lenders, has been characteristically careful.

Moynihan offers a few examples. First on rates markets themselves. All big banks hold large portfolios of government bonds, a substantial portion of which, by definition, must be accounted as available for sale to meet liquidity requirements if short-term funding markets close.

Banks can hold these to maturity, but as rates rise and prices fall, mark-to-market hits have to be taken through regulatory capital, even if not through reported profit and loss.

The key to good underwriting is always client selection. Avoid lending to borrowers who will likely struggle to pay you back: not because it’s bad for you but because it is bad for them
Brian Moynihan

At the end of the first quarter, Euromoney was looking for storm damage in the largest US banks’ other comprehensive income. But at BofA this amounted to just 21 basis points of common equity tier-1 capital, easily outpaced by retained income and less than the bank paid out to shareholders in dividends and buybacks.

Analysts had expected a higher figure. How did it come in so low?

“We have so much in deposits that we have to invest,” explains Moynihan. “But we hedged our fixed-rate exposure into floating rate, so as the 10-year went up from 2% to 3%, our mark was maybe half that of the rest of the industry.”

Unusually for them, analysts at Berenberg sound upbeat on rates.

“Bank of America is exceptionally well placed to benefit from rising US interest rates and the reallocation of excess consumer savings into investment accounts,” they declared after a post-mortem on first-quarter results.

In part, that reflects the power of Merrill at the centre of a wealth management business that holds around $4 trillion in client assets.

“This should enable superior revenue growth versus peers, of circa 17% during the next three years,” Berenberg says, while pointing to the bank’s cost discipline and a lesser exposure to declining investment banking revenues.

In fact, BofA is once again trying to grow in global investment banking, looking to muscle into a top three that appears set between JPMorgan, Goldman Sachs and Morgan Stanley. But it is no rush to do so, targeting a steady, consistent grind of a few more basis points of market share each year to close the big gap from its position in fourth to the big three in M&A and equity capital markets.

It enjoyed record investment bank revenues during 2021, of course, and will now see the rising rates, which cool capital markets and M&A, benefit it through net interest income inside the commercial bank.

Moynihan describes these businesses as “balanced, with a natural hedge.”

When it felt the need to allocate an excess of capital in the first half of 2021 with loan growth still subdued, BofA chose to expand its trading businesses, perhaps reasoning that previous investments in its so-called Quartz technology to aggregate market and counterparty risk exposures from multiple asset classes in one system gave it an edge in risk management.

Traditionally strong in rates and credit, it grew equities trading revenue to $6.4 billion in 2021, up from $5.4 billion in 2020 and $4.5 billion in 2019.

In the turbulent first quarter of this year, it suffered trading losses on three trading days out of 60. In the second half of 2021 it had no days of losses.

Credit underwriting

That is all good. But Euromoney wants to know about credit underwriting. Because while a bank can hedge rates exposures and dynamically manage value at risk in traded markets, nothing it does today can protect against a recession in the next few quarters. The outcome will be driven by individual lending decisions taken over the past three to five years and by loan portfolio construction.

“We do a million credit cards a quarter, we have 35 million outstanding,” says Moynihan. “If you’re selecting the wrong clients, your problems are already baked in.

“The key to good underwriting is always client selection. Avoid lending to borrowers who will likely struggle to pay you back: not because it’s bad for you but because it is bad for them.”

Portfolio construction helps. The bank has more large corporate loans to borrowers outside the US than inside, partly to help with risk diversification as well as to meet its own standards for obligors.

The bank has enough data flowing through its system to pick up leading indicators for the unemployment rate – which is the key to what will follow in the next two years – and refine its models, which have oceans of historic data on bad debts and the determinants of those outcomes.

It stress-tests itself not once a year but once a quarter.

And while much does come down to individual client selection, shareholders will hope that the painful lessons of the great financial crisis have been retained and applied to credit asset allocation.

Moynihan remembers it all too well.

“We went into the financial crisis with a $600 billion loan book of which $100 billion was commercial real estate and the largest proportion was in unsecured consumer credit,” he recalls.

And while the theory is that property is an inflation hedge, it is always hit hard by rising financing costs. The recent resurgence in Covid raises doubts about occupancy of commercial office space. In the past year, mortgage loans have grown at a much slower rate than commercial and industrial loans.

“Today, we have $1 trillion of loans, of which maybe $60 billion is commercial real estate,” Moynihan says. “Loans are now split more evenly between corporate and consumer, and a lot more of the consumer exposure is now secured.”

Responsible growth is a cumbersome phrase but a good way to run a bank.

“Could we have grown faster by doing a lot more unsecured consumer, instalment loans?” asks Moynihan. The answer is obvious. “Yes, we could. And that might have boosted short-term earnings. But lenders and their shareholders aren’t going to like what comes next on those.”

Climate change

Explaining stakeholder capitalism to shareholders isn’t always easy for the chief executive of a big US bank. Moynihan can sometimes veer to the gnomic. He has spoken a lot recently about driving “the genius of the ‘and’,” while avoiding “the tyranny of the ‘or’.”

He means that businesses have a duty to deliver profits and fulfil a social purpose. The notion that they must prioritize either the interests of shareholders or the interest of customers, employees and communities is false.

The single most pressing task for banks and businesses to sustain wider society is addressing climate change. Moynihan’s point to shareholders is that not only is this the right thing to do, the bank will also make money from it.

Moynihan is co-chair of the Sustainable Markets Initiative, a group of business leaders brought together by Prince Charles before the World Economic Forum in 2020 to encourage public and private-sector collaboration on climate change.

He has taken a lead role in mobilizing the banking industry to finance the transition to net zero, having seen his own bank achieve carbon neutrality on its Scope 1 and 2 emissions in 2019.

We may quite easily reduce and offset our own operational emissions from travel and from our buildings. But the just transition will be our clients’ transition. It will not be ours
Brian Moynihan

BofA has recently committed to achieve net zero all across its financing activities and supply chain before 2045, ahead of a first commitment to do so by 2050. It has established a goal to lend $1 trillion to low-carbon initiatives by 2030 as part of a $1.5 trillion commitment to finance the United Nations’ Sustainable Development Goals. It lent $150 billion last year alone.

“There is no scarcity of credit capacity. We can provide the credit,” Moynihan says. “We would like to work with multilateral development banks providing political risk cover on certain projects, though.”

Moynihan talks regularly about the topic to other bank chief executives as well as to governments. He asked governments at the G7 meeting in Rome last year to enable markets that private finance will then support.

“My message to governments is please use your purchasing power, for example with hydrogen power, as well as mandates,” he says. "A mandate requiring airlines to move quickly to 10% sustainable aviation fuel might help create a market in that fuel that might not otherwise emerge but which, if it does, the private sector could then grow."

Banks have been cast at the centre of the action on climate change, criticized for financing greenhouse-gas emitters, urged to support new renewable energy and carbon-capture and storage technology. But Moynihan says we should not overstate their role.

“We may quite easily reduce and offset our own operational emissions from travel and from our buildings. But the just transition will be our clients’ transition. It will not be ours. Our largest clients are way ahead of us on the transition to net zero. But you have to remember it goes right through their supply chains and we may have a big role working with mid-size companies, for example distributors that may need to finance the move to electric fleets or risk being replaced in the supply chains of big public companies whose products they deliver.”

The question always comes back to oil and gas in the end.

“Our policy with the energy companies and other hard-to-abate industries is to continue to work with them, to help them, ask them to develop their transition plans and commitments and stick to them. We are saying: ‘Put your plans on the table and let’s go.’”

He also suggests that the intense debates on reporting and disclosure may be distracting from the development of new technologies to reduce emissions and capture and store carbon.

“Disclosure is a second-order issue. We actually have to do the work. That’s more important.”

It sometimes gets lost that for banks generating capital that want to lend, financing the transition is a promising source of earning assets and other revenue. As well as direct lending, BofA arranged $250 billion in green bonds and structured deals last year. It took a leading share of around 18% of so-called tax-equity financing for solar and wind renewable energy projects in the US last year.

“My first point is that it’s the private sector that will make the transition happen; second, it is a great business opportunity.”

Meeting America in the middle


When Euromoney catches up with Wendy Stewart, president of global commercial banking at Bank of America, she has been travelling almost non-stop ever since being promoted to the position in September 2021. She heads the bank’s renowned middle-market business that serves public and private companies with annual revenues of anywhere from $50 million to over $2 billion.

The business operates in 113 cities across the US, more than any other bank, as well as in 15 other countries, mostly serving the international subsidiaries of these US borrowers.

Wendy Stewart

“We are operating from a position of strength and growing ahead of the market,” says Stewart. “Commercial banking typically grows in line with GDP at a recent annualized average of 3% in the US. But we have been growing at 5.5%, doing more business with existing clients and attracting many new ones.”

Partly that reflects the sheer number of bankers BofA has hired in recent years, knowing that its great rival JPMorgan is targeting the exact same opportunity to capture more mid-size firms in markets beyond the largest cities and ride the growth of some of them into large-scale corporations.

It also competes with local and regional banks now going through a new consolidation wave, which might leave some of them distracted and focused internally on systems integration.

Digital capabilities such as CashPro may be a differentiator, while digitally enabled ease of onboarding is essential. But commercial banking remains a relationship business.

“I was in Indianapolis recently,” says Stewart. "We have 10 bankers there. We don’t have to send people in from Chicago. We are there on the ground and we have great opportunities to grow."

She has learned two things from her travels: “Clients require consistent coverage. They want to see our bankers and see them often. And they want them to come with high-quality advice, especially at times of such economic uncertainty.”

People are more important than products, which are fairly standard. Stewart says the bank offers 22 solutions, of which five are core: lending; deposits and liquidity; payments; cards; and receipts. Over half of customer relationships start with credit.

Professional development

And just as the bank invests in paying its lower-level employees well, so in the global commercial bank, it invests in training or as Stewart prefers to call it, professional development.

“That is a differentiator for us,” she says.

Stewart describes professional development for three types of people, starting with junior bankers who may come in with roughly seven years of work experience and then go through a three-year programme of classroom based and on-the-job training, by which time they are apprenticed to senior bankers.

“After a couple of years co-covering clients with senior bankers and getting more experience, these bankers can take the next step up to become senior bankers themselves,” Stewart says. “We see many junior bankers coming through that development programme, and now they’re crushing it.”

Then there are mid-career people who come to BofA from other industries.

“You may not believe it, but there are lots of professional people with 10 to 15 years of work experience who want to become bankers,” Stewart says. “They’re not going to need the same kind of EQ [emotional intelligence] training and development and will likely have all the soft skills. But they don’t know capital structure or credit underwriting. We can teach them all that, along with the other solutions we provide to clients.”

Net zero

Finally, there are senior bankers.

“We find that even the most experienced still want new skills, such as learning about net zero,” she says.

From the top of the bank on down, this is a key topic. But in America’s politically divided heartlands, bankers need to approach it carefully and keep it apolitical.

“We are training our team to have straightforward business conversations,” says Stewart. “I have travelled the country every week since last October, and every single CEO I have met is thinking about net zero.

“De-carbonizing the economy is real. It has implications for every private company in the supply chain of a larger company with a public net-zero commitment. We simply have to stick to facts and the business opportunities, and discuss what the choices for a client are, what the unintended consequences of those choices might be and what are the opportunities.”

The bank wants to grow and, as well as local knowledge, also boasts expertise in certain industries: healthcare, education, commercial real estate, non-profits and car dealerships.

Following the Moynihan model of responsible growth, client selection is key. How are the bank’s mid-market corporate clients likely to fare if the storm clouds give way to a full-blown hurricane?

“We work with companies that are resilient and well led,” says Stewart. "Some were hit hard by Covid – travel, entertainment, hospitality, restaurants – and some had to raise capital or restructure. But many had plans that got them through and have had record years for revenue and profit. Many of these businesses have been able to navigate well through supply-chain issues and inflation because they have focused on attracting great people."

There are lessons BofA can share, she suggests, both around diversity and inclusion, which is essential for any company hoping to win the war for talent and professional development. “Clients ask us about it all the time,” says Stewart. “‘You are a big bank. How do you manage and develop your people?’”



The drive to digitalize


Following management changes last year that saw Tom Montag, former chief operating officer and head of global banking and markets, retire, as well as former vice-chair Anne Finucane, four of Bank of America’s eight business lines now report to Dean Athanasia. Having long headed regional banking including retail banking, he now also oversees small-business banking and global commercial banking.

It has been quite a journey.

Dean Athanasia

“We have been on several journeys,” Athanasia tells Euromoney, “first to make our company easy for clients to use by simplifying products and processes, then next to digitalize everything, with the aim of being the best consumer bank and the best digital bank.”

And is it?

He offers a string of numbers. Fully 53% of sales to clients are digital, 75% of clients are paperless and 85% of service to clients is digitized. The bank has $1.4 trillion of retail deposits, more than any of its US rivals, and for 92% of those retail clients, BofA is their prime bank.

It operates in more markets around the US than any rival. In the largest 30 markets in the US, BofA has the top market share in 16 of them, which is more than twice the nearest competitor. In many of the new markets the bank recently entered, it has broken into the top seven in market share in just a few years.

Athanasia was the driver of the bank’s famed preferred rewards programme for retail that offers customers all manner of incentives, including lower interest rates on mortgages, auto loans and credit cards, the more they use the bank and the higher the balances they maintain. The bank constantly refines the offering.

It is classic stakeholder capitalism applied to customers.

“Clients love that programme,” says Athanasia. "Once they are past year two, attrition just drops, and by year five it collapses. Retention is at 99.4%.

“Internal and external metrics show client satisfaction at an all-time high for us. We wouldn’t have all those deposits and loans if customers didn’t trust us and if we didn’t have the capabilities we have developed.”

100% digital

The key now is to increase client usage of proven digital capabilities. Athanasia says that 95% of credit card business is now digital, 80% of auto loans and 70% of mortgages: “We want to get that to 100%. It’s so easy to use, once a customer takes out a digital auto loan or mortgage, they never go back to paper.”

He says that of the bank’s 67 million customers, fully 27 million use Erica, the virtual voice assistant, every day. Erica is not just a way to check accounts and make payments, it offers personalized updates on spending patterns, reminders of bills coming due and notifies on FICO credit score changes.

“Erica is getting smarter,” says Athanasia. “Clients can find 95% of the information they need through Erica.”

It can also connect wealthier retail customers to Merrill Lynch advisers. The result is efficiency.

“All my businesses are at under 50% cost-to-income ratios,” says Athanasia. “And savings can be re-invested in people and capabilities.”

His new oversight responsibilities may help spread this efficiency.

“If we develop a capability on the retail side, we can take that to the rest of the bank. For example, we can reuse the technology for digital mortgages on document collection on the corporate loan side.”

Digitalization also offers the bank’s underwriters valuable information at the point of any credit decision.

“Anyone can lend money, but we lend money and manage credit extremely well,” says Athanasia. “And it’s also not just using FICO scores, that’s just one piece of data for underwriting clients. More and more we use our own proprietary data to let us know which clients we can lend to responsibly.”

With JPMorgan Chase building a digital retail bank outside the US and Goldman Sachs developing Marcus, would BofA ever take its US retail banking prowess international?

“We look at that question from time to time,” says Athanasia. “We considered it three or four years ago and decided not to. We have a strong physical presence in many countries with the global corporate and commercial bank. We have not made a decision to do so on the consumer side and that would be CEO Brian Moynihan’s decision to do so.

“But never say never.”



Wealth advisory pays off


The thundering herd of Merrill Lynch financial advisers kicked up a storm over the past 12 months, bringing in record revenues and client balances, improving customer satisfaction with a new business model that better aligns customer and adviser interests.

It is now five years since chief executive Brian Moynihan insisted that the firm’s financial advisers should stop just grazing on existing clients by trying to do more with them and prioritize winning new ones.

The result over the last 12 months has been strong growth in revenues and client assets from a re-energized culture. But businesses this big don’t shift in 12 months. Andy Sieg, president of Merrill Wealth Management, has overseen the resurgence and compares Merrill today with what it was in 2017 and 2018.

Andy Sieg

“Five years ago, the average financial adviser brought in just over two new clients a year but also lost two. Our net progress was limited to bringing in roughly 2,000 new households a year,” he tells Euromoney.

In the first quarter of 2022 alone, advisers brought in 7,000 new households and are now averaging around 24,000 per year. And these are not small accounts. The average size of new client balances has risen from just under $1 million to $1.7 million. Some 93% of clients score Merrill advisers at nine out of 10 or 10 out of 10, up from 89% five years ago. So focusing on growth has not come at the cost of less attention to existing clients or by bringing in less-affluent ones.

“Five years ago, we had net new client flows of roughly $15 billion to $20 billion. Last year it was $122 billion for Merrill out of $171 billion for the whole of wealth management,” says Sieg. “The growth trajectory and energy of the business has been transformed, and we’re now just starting to see what is possible.”

Holy Grail

The entire business model of US financial advisory has been made over. This is no longer the brokerage business that BofA acquired back in the depth of the financial crisis in 2008 and that lived off commissions from buying and selling stocks and bonds. This is now an advisory business based on financial planning and fiduciary portfolio management.

Last year, 86% of its revenues came from advisory fees and from net interest income from banking $315 billion of deposits and $140 billion of loans. Commissions are an increasingly narrow component of revenues.

“The Holy Grail in this business is the single unified account, where a client pays one fee for financial planning and portfolio construction, with investments including stocks, bonds, ETFs [exchange-traded funds] and alternatives largely overseen and rebalanced by our chief investment office, but which can also be adviser or client managed,” says Sieg.

“No other firm has done a better job of building such a platform.”

This is not a business that sells the prospect of extraordinary alpha and profits from over-trading.

“Our advisers work with clients for decades to get them to and through retirement and enjoy later life with peace of mind. Good outcomes do not come from investment strategies with high volatility – the prospect of high alpha but also the risk of steep drawdowns,” explains Sieg.

He offers a qualification. “It is not passive investment. We build diversified portfolios, rebalance with rigour, but we do not chase hot areas like crypto for example. We are the opposite of that: anchored to capital asset pricing models and long-term strategies.”

And in the present volatility there are a lot more portfolio reviews and rebalancing than turnover. “Clients get a review every year, but the firm sees their allocations every day. And when these are drifting or concentrations have built up, if the FAs don’t action those situations, the firm taps them on the shoulder,” adds Sieg.

The dispersion of outcomes for different clients has narrowed and so have the expenses of first building and then rebalancing portfolios.

“One reason clients will pay advisers 100 basis points is that advisers will then manage down other expenses, so that clients’ after-fee returns are as high as possible.”

He offers an example. “Five years ago, Merrill clients had $165 billion in exchange-traded funds. Today, it is closer to $440 billion.”

That is a fair chunk out of the close to $4 trillion of client assets across the whole wealth management business. That includes the more than 15,000 Merrill advisers, the bank’s zero commission discount brokerage, Merrill Edge, and the private bank. Those businesses offer a continuum for BofA clients, from mass-affluent users of Merrill Edge through to high net-worth clients of Merrill Wealth Management, up to ultra-high net-worth clients of the private bank.

“Merrill Lynch on its own would have been hard pressed to match the scale of investment of Bank of America, which can spend $3.5 billion a year on new technology,” says Sieg. “What we have now is one interconnected platform that is great for clients and highly efficient for advisers. Tasks that used to take hours can now be done in minutes, allowing advisers to spend more time developing client relationships.”

Recruitment

The recent growth has come not from hiring teams from other firms. Merrill loses advisers to competitors at an average rate of 4% or so year. Last year it was 3.6%.

It recruits from college and trains approximately 1,000 people a year, putting them to work at Merrill Edge while they earn their licences. It hires some 200 with more experience and apprentices them to advisers on teams. It picks approximately 500 young, licensed brokers who may have come to the business as their second job, found they loved it but realized they are on a lesser platform. Very selectively it will hire small numbers of experienced advisers from competitors, recently for example picking up a team from Citi’s private bank in New York with $8 billion of client balances.

“When they looked at Merrill today, they realized they would lose none of the credit extension capability they had leveraged at a private bank and would have access to the market’s leading investment platform,” Sieg says.

As Sieg speaks to Euromoney, the US Federal Reserve has just hiked rates by 75bp and the markets have been selling off. With rates rising to combat unanchored inflation expectations and valuations being hit, it seems reasonable to ask what the firm may do if investment over the next decade is very different from recent years.

“Our clients don’t own alternative investments, such as private equity, hedge funds, hard assets, to quite the extent our CIO thinks they should. If you look across $4 trillion of clients’ assets all across wealth management, there is slightly over $70 billion in alternatives. You will likely see us do more to diversify client portfolios beyond stocks, bonds and cash.”


Bold ambition in investment banking


Although it earned record revenues and profits in 2021, like all investment banks, Bank of America shed some market share. That marks a slight setback in the steady effort to build its position that Matthew Koder has been on since being appointed president of global corporate and investment banking (GCIB) in 2018.

Back then, the business, which had grown to prominence in the period up to 2014 under the leadership of Christian Meissner and above him Tom Montag, had been losing market share and people for some time.

Matthew Koder

Koder first analyzed the business in great detail to understand the gaps and then set out a new vision and strategy for the investment bankers in 35 countries.

Koder rarely speaks to the media. But don’t mistake reserve for lack of ambition.

“Our intention is to be top three overall and top three in every product, sector and region, with a relentless drive to number one,” he tells Euromoney.

Always strong in debt capital markets and bonds, BofA had lost ground in M&A and equity capital markets prior to 2018. But Koder is intent on fixing this.

“We asked the leaders of businesses already in the top three to set out plans to reach number one and asked those outside the top three to lay out their plans to get there.”

There are only two ways to achieve this: win new clients instead of losing them or do more business with existing ones. Koder aims to do both.

“We should aim to cover around 80% of the fee pool in the US, where we have an intense focus on the middle market with investment bankers in 22 cities, and working closely with Wendy Stewart’s GCB [global commercial banking] team,” says Koder. "And we should cover around 70% of the global fee pool, compared to around 60% now.

“The fee pool is constantly evolving, new fee-payers are constantly emerging, and we need to be systematic about adding new clients across all sectors and regions.”

It needs to address something else. BofA’s fee take per client is lower than the big three investment banks – Goldman Sachs, JPMorgan and Morgan Stanley – and the step up from fourth place in global investment banking to third will be tough. The best route is to become the lead bank for as many clients as possible, in the same way as it aims to be the prime bank for retail customers.

BofA needs to keep hiring more good investment bankers with valuable ideas, retain them for longer and encourage greater cross-selling and integration of businesses inside the global corporate and investment bank, as well as between GCIB and the rest of the bank.

Global transaction services

Inside big organizations, investment bankers can become narrowly focused on niche areas. An M&A banker may know everything about one sub-sector. A global transaction services banker may be an expert in working capital but not trade finance. But the bank’s strength in global transaction services is becoming more important.

“We have seized the chance to build from working capital and trade finance a supply-chain finance product that meets an increasingly strategic need of many companies,” says Koder. “And by providing value and earning their trust, we earn the chance to do more investment banking business.”

The bank undertook 6,000 investment banking transactions last year. People are still busy, even as the pace now slows. Koder wants them to lift their heads up.

“We don’t ask too much of our people, but we do ask that they should know every product and service the bank can offer, which runs to maybe 25 key products; understand their clients well enough to spot opportunities across that product set; then have the common sense and partnership behaviour to make the right introduction to the person best placed to serve that client in a particular area.

“If everyone does that and we grind up just 20 to 30 basis points of additional market share a year, this will be a great business. It is already a great business, but we will make it even better.”

While it is number one or two across debt markets, BofA ranks four in global M&A and equity capital markets. Koder knows well that the gap from number four up to number three is much bigger than the gap that separates numbers one to three. But he feels the bank is making progress again.

“Last year, we were top three in six out of seven sectors in the US and in five out of seven globally,” he says.

He points to the example of Asia: “Back in 2019, we were barely in the top 10 in Asia. But we set a plan, gave the team the resources, management and attention they needed, and we reached number four in 2020 and 2021, and are now third in 2022.

“We have not got it right yet. But we are getting it right. We are on the right track. In Latin America, we are number two this year.”

Koder says that the bank currently leads in investment grade debt capital markets and ranks second in leveraged finance. That belies the bank’s reputation for caution.

“We are responsible on risk. We don’t avoid risk,” Koder tells Euromoney. “We are in the business of supporting our clients and our leadership in leveraged buy-outs, and leveraged finance comes from doing more deals than our competitors but always through the lens of our responsible growth strategy.”

That means it earns smaller fees per transaction than banks like JPMorgan and Credit Suisse that take on bigger underwriting positions. If it can stay rigorous on client and deal selection, maybe it could do the same.

BofA is now one of the top intermediaries in block trades in equity capital markets – another risky principal business – helped by a greater commitment of capital to and a growing market share in secondary equity trading inside global markets.

There are some businesses the bank does avoid. It does less margin lending than most big rivals, being more cautious both on client selection and collateral financed. It barely broke the top 10 in arranging special purpose acquisition companies, spending more time setting up governance rules around client selection and who could approve transactions when that boom first emerged than winning mandates.

That now looks smart.

Flawless and steady

Koder has two more points to make. All investment bankers talk about flawless execution to the point the words lose meaning. But it matters.

“I learned that from GTS in Asia," he says. "So many times, we won mandates from other banks because of their lack of commitment to after-market service and care when clients found they couldn’t open accounts, track their money or get answers. It is exactly the same thing in investment banking. We are intensely focused on differentiating ourselves through the execution process.”

Koder’s see no short cuts. Steady work is key.

“Our market share in 2019 was better than in 2018, and it was better again in 2020. It dropped slightly in 2021 because we didn’t participate in all the ‘high beta’ upside. But investment bankers shouldn’t get too excited when times are good or too depressed when times are tough. The goal is just to keep our heads down and execute consistently. Our share is up again in 2022.”

The outlook now is daunting.

“One of the biggest mistakes investment banks make is that the volatility of their commitment to the business correlates with current market conditions,” says Koder. “We have a strategy and a plan, and confidence in our ability to execute on that, as long as we are consistent. We have to see through the volatility.

“We also have to be honest with clients and with ourselves. Markets are likely to be difficult for many months ahead. IPOs aren’t coming back before 2023. Fee pools won’t hit 2021 levels again for a very long time. So in this environment, we just need to stay focused on doing the right things for clients. Providing the right advice. Those are the inputs. If we get those right, then the outputs – league table position and financial returns – will take care of themselves. We are engaged in more strategic conversations than ever before and have confidence activity levels will return when markets stabilize.”

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Peter Lee head.jpg
Editorial director
Peter Lee is editorial director. He joined Euromoney straight from Oxford University in 1985, and has written about banking and capital markets ever since, being appointed editor in 1999. He became editorial director of Euromoney in May 2005.
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