Diversity reveals its benefits
When Euromoney sat down with Brian Moynihan, chief executive of Bank of America, in the middle of 2019 as part of our 50th anniversary coverage, he was at pains to point out the benefits of diversity and scale in his overall business.
The ballast of a domestic consumer business as well as thriving middle-market banking operation allowed BofA to house big markets businesses comfortably, he said.
“Having a big markets trading business attached to a large, stable company with low-cost funding and deep client relationships is safer for the markets and for society,” he told Euromoney. “By operating in the way we do, there is diminished volatility.”
The proof in the pudding of his claim was evident in three consecutive quarterly earnings statements across 2019.
For the first quarter, in April, BofA beat analyst forecasts as strong retail banking performance offset weaker results in its corporate and investment bank. Although revenues were flat, an expansion in net interest income driven by rising margins and moderate loan growth, combined with strong cost discipline, drove net income 6% higher.
It was a similar story in July when BofA reported its second-quarter earnings. Although net interest revenue fell from the first quarter, net income was up 10% compared with the same period in 2018.
How? Again the bank’s consumer business was at the heart of the good news. BofA holds over $700 billion in US customer deposits – more than any other bank in the country. An expanding economy helped the retail division increase revenue by 5% on the back of more mortgage and credit card lending.
Moynihan and his CFO, Paul Donofrio, did warn the markets of the potential negative impact of US interest rate cuts and sure enough, in July, September and October the Federal Reserve did indeed cut. That should have hit BofA, with its large base of low-cost retail deposits, in the third quarter.
And so it did but only up to a point. BofA managed to maintain its net interest income on the back of good loan growth. Trading businesses were flat in fixed income and up slightly in equities.
But all the attention was focused on the performance of Bank of America’s investment bank, which surged 27% compared with the previous year. The results marked the end of the first year of leadership of BofA’s corporate and investment bank by Matthew Koder, the bank’s former president of Asia. That 27% growth contrasted favourably with a fee increase of just 8% at JPMorgan and a fall of 15% at Goldman Sachs.
The investment bank’s performance not only offset any weakness in BofA’s other business, it made the investment banking industry as a whole sit up and take notice.
Koder – a hard-driving former equity capital markets specialist – talks about a “relentless drive” to become the number one global investment bank. He has some way to go, but he has things pointing in the right direction.
For the first 10 months of the year, investment banking fees at BofA were up 2.1% – a modest increase but impressive set against a market-wide fall of 8.3%. Market shares have risen in M&A, ECM and leveraged finance, although they dropped slightly in investment-grade debt.
BofA has also increased market shares in all regions, although in Koder’s former fiefdom, Asia, the firm only just makes it into the top 10.
BofA is firmly one of the top four global investment banks today alongside JPMorgan, Morgan Stanley and Goldman Sachs. The goal to become number one looks some way off. JPMorgan, the clear leader today, has actually increased its market shares at the same rate as BofA – and from a considerably higher base.
Koder will hope that Bank of America’s own corporate base, in US consumer and middle-market banking, will provide a platform to best Goldman and Morgan Stanley in the medium term.
A sore point is that while BofA ranks highly in almost all sectors, it is not the leader in any of them to date. It will need to rely on the consistent support of Moynihan, often viewed externally as being sceptical about the merits of being a leading global investment bank, to achieve that and then set its sights on JPMorgan.
Koder’s own mantra to his senior management team is “stay the course”. JPMorgan’s leadership is the result of long-term investment and strategic thinking. Koder’s course has a long way to run.