Why Ken Lewis should beware the gung-ho analysts
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Why Ken Lewis should beware the gung-ho analysts

Big strategic acquisitions might be an exciting diversion for banks’ senior managers. But it is shareholders that pay for them.

Ken Lewis has made Bank of America a star performer. Why change a winning formula?

It didn’t last long but it was a telling moment. At the end of November 2006, Bank of America’s market capitalization briefly surpassed that of Citigroup, which has stood unchallenged for years as the biggest bank in the world by that measure. How did Bank of America manage this?

Simply by building a national US bank, sticking to unfashionably basic businesses – cheque accounts, home equity loans, cards – while controlling costs. Fully 50% of the bank’s revenues derive from some form of payments business. And although it wants to grow its share of loans, it has got out of the subprime business, which might haunt other lenders in 2007. In 2006, its efficiency ratio fell to a new low of 48%. Investors love a bank that can control costs at a time when revenue growth is hard to come by and the stock price appreciated 18% in the first 11 months of 2006.

Bank of America has invested in future growth in a controlled way. In capital markets and investment banking it spent $600 million over the past two years, taking its North American fixed-income business from outside the top 10 to a respectable sixth rank.

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