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US consumer banking: Fixing the retail bank

Can Bank of America run a domestic consumer businesses profitably enough to generate a decent return on equity above its own cost of capital?

The US consumer banking industry on which Bank of America derived most of its revenues throughout its history up until 2009 is saturated. Even aside from the fact that population growth is slowing in the US, Bank of America cannot grow its retail business much more. With a 13% market share of US deposits, Bank of America is over the Federal limit by three percentage points. Changes to overdraft conditions enforced by the firm are costing it $160 million a quarter.

Customers can no longer go overdrawn on their checking accounts for purchases, and therefore avoid the high fees that would be incurred. Even at ATMs customers now have to pay a $35 fee if they want to go overdrawn.

The 2009 Credit Card Accountability Responsibility and Disclosure Act has also taken a chunk out of potential profits for that segment of the business. That is expected to cost the firm $900 million in revenues this year. And the mortgage business? Well, that is now the biggest loss-maker. The housing loans and insurance business lost the firm more than $2 billion in the first quarter and the bank continues to modify mortgages, accepting reduced principal repayments from some struggling customers.

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