BankResearch Report: The Bank of America
BankResearch Report: The Bank of America
Bankingis one of the most competitive economic sectors in the world. Thecompetitiveness of individual banks depends on the range of theproducts that they are able to offer, interest rates charged on themortgage as well as loans, and the level of convenience (Ivashina &Scharfstein, 2010). This paper will provide the analysis of the Bankof America. The Bank of America is a financial institution that wasfounded by Amadeo Giannini in 1904. The bank is headquartered inCharlotte in the state of California. The bank operates about 16,300ATMs, 5,100 centers, online banking, call centers, and a platform formobile service (Bank of America, 2015). The bank was initially knownas the Bank of Italy. The bank has three categories of clients,including institutional investors, individuals, and companies (Bankof America, 2016). The objective of its founder was to deliver thebanking services to the large number of immigrants living in the U.S.These immigrants were denied services by the formal financialinstitutions, since they were considered as high risk borrowers. TheBank of America has been growing through the establishment of newbranches, merger, and the acquisition of new financial institutions(Bank of America, 2016). Currently, the Bank of America is ranked asthe twenty first largest companies and the second largest bank in theU.S in terms of the amount of assets it owns (Bank of America, 2016).Although the Bank of America has been growing over the years, thereare several opportunities that it has not managed to exploit.
Overviewof the Bank’s Structure
TheBank of America maintains a strong organizational structure that hashelped it enhance its corporate governance. The strong corporategovernance practices observed by the organization include theengagement of the lower level staff in the processes of implementingkey decisions, provision of all tools as well as resources that eachdepartment requires to carry out its mandates, and open lines thatfacilitate effective communication (Bank of America, 2015). However,all activities that involve corporate governance are carried outthrough an established chain of command. Members of the Board ofDirectors (including the CEO) provide oversight of the bank’s workand affairs. In essence, the bank maintains a centralized type oforganizational structure. The top management (including the Board ofDirectors) makes all critical decisions that are then transferred tolower levels of management and junior staff for implementation. TheBoard of directors makes decisions in different committees (such asthe Audit, enterprise risk, credit, and management compensation) thatpass their conclusion to management units that are comprised ofexecutive officers (Bank of America, 2015). These managementcommittees pass the orders to operation managers, who guide theirjunior managers and members of staff to ensure that decisions areimplemented in all branches.
Thebank classifies its sources of revenue into six broad categories. Thefirst category is consumer banking and it includes a wide range ofrevenue generating transactions (such as lending and deposit taking)that the bank makes with its customers. For example, the Bank ofAmerica reported a total consumer income of $ 6.7 billion in 2015,which had increased by $ 303 million compared to amount made 2014(Bank of America, 2015). In addition, the bank classifies mortgage aspart of the consumer operations. It generated about $ 942 millionfrom mortgage banking in the fiscal period 2015.
Thesecond source of revenue for the financial institution is the globalmanagement of wealth. The type of revenue put in this category isgenerated through the bank’s subsidiaries, including the U.S. Trustand Merrill Lynch Global Wealth Management. It generated about 2.6billion from the management of global wealth in 2015 (Bank ofAmerica, 2015).
Thethird category of the revenue generating operations for the Bank ofAmerica is global banking. Some of the operations included in thiscategory are commercial, corporate, investment, and business banking,but all of them take place at the global level. Under the globalbanking revenue generating operations, the Bank of America offersunderwriting, integrated working capital, advisory assistance, andother services that are related to lending activities (Bank ofAmerica, 2015). In 2015, the bank made a total of $ 5.3 billionincome from the global banking operations, but this amount decreasedby $ 496 million compared to revenue generated in 2014 (Bank ofAmerica, 2015).
Thefourth category of revenue generating activities is the “globalmarkets”. Some of the major activities put in this category includecredit, equity as well as the commodity business, and currencyexchange. In addition, the bank includes derivatives and securitiesin the "global markets" category. In essence, the globalmarkets provide securities clearance, market-marketing, settlement,custody, and financing services. These activities helped the Bank ofAmerica generate about $ 2.5 billion in the financial year 2015 (Bankof America, 2015). Although the amount generated from the operationsdecreased by $ 209 million in 2015 compared to amount that wasgenerated in 2014, global market activities are still considered assignificant sources of revenue for the bank.
Thefifth category of income generating activities is referred to aslegacy assets and serving (LAS). Operations that are put in the LASinclude mortgage servicing operations that are related to home equityand loans that are held by corporations. In total, the bank generatedabout $ 12.4 billion in 2015 from LAS operations, but the revenuefrom this category of activities decreased by $ 740 million comparedto amount was earned in 2014 (Bank of America, 2015).
Lastly,the bank of America puts the minor sources of revenue under thecategory known as “all other”. The key operations that areincluded in this category are equity investment, liquidatingbusinesses, consumer card business for international transactions,ALM activities, and residual expense allocation. There are severalactivities that are put under the ALM activities, including debtsecurities, foreign currency management, and residential mortgage.The bank made a loss of $ 489 million from the list of activities putunder the “all other” category in the fiscal year 2015 (Bank ofAmerica, 2015).
TheBank of America has three primary funding sources. The mostsignificant source of funding is the customer deposits. The bank is alicensed deposit taking institution that accepts the finds brought byindividuals and corporations in the form of savings. The bank takesadvantage of these savings to fund some of its revenue generatingoperations, such as the issuance of loans to corporate as well asindividual borrowers. The bank accepted about $ 544.7 billion in theform of deposits from its clients in the financial year 2015 (Bank ofAmerica, 2015). The amount of deposits increased by $ 32.8 billion in2016 compared to money that the bank received in 2014 (Bank ofAmerica, 2015).
Thesecond source of funding is shareholders’ equity, where the banksells shares in the capital market in order to raise funds to financeits operations. In most cases, the organization raise funds throughthe capital market when there is a need to finance its long-terminvestments that can help it expand in the new market segments. Thebank increased its equity by $ 12.7 billion in 2015 (Bank of America,2015). The growth in the shareholders’ equity was attributed to anincrease in the issuance of preferred shares and the companyearnings. The increase in these sources of fund was adequate tooffset the decrease in accumulated OCI associated with the unrealizedlosses, repurchased shares, and divided issued on preferred stock.
Thelast source of funding for the Bank of America is debt. The bankborrows long-term as well as short-term debts to finance itsoperations each year. Its short-term borrowings include the notespayable, the Federal Home Loan Bank short-term borrowings, and othertypes of loans that mature within a period of at most one year. Theshort-term sources of funding reduced by $ 3.1 billion in 2015compared to the financial period 2014 (Bank of America, 2015). Thelong-term debt taken by the bank in 2015 reduced by $ 6.4 billion,compared to the financial year 2014 (Bank of America, 2015). Thedecrease in the amount taken as long-term debt was attributed to theeffect of change in the worth of the debt accounted for in the fairvalue option and revaluation of Dollar debt obtained from sourcesoutside the U.S.
TheBank of America’s strengths
Thebank has four major strengths that indicate its competitiveness inthe market. The first strength is the popular brand that safeguardsthe bank from shocks in its business. The popularity of the bank`sbrand is attributed to the large number of years that it has been inexistence (since 1914) and geographical diversity (Bank of America,2016). Different states and countries have different levels of marketrisks, which implies that the Bank of America has a secure goingconcern since a decline in one segment can be offset by success inother areas.
Thesecond strength is the high level of convenience that is achievedthrough the mobile banking and ATM services. It is estimated that theBank of America has 16,300 ATMs (Bank of America, 2015). These ATMs,coupled with the mobile banking services allows customers to accessthe bank at any time of the day.
Inaddition, The Bank of America has multiple financial products thatenable it to accommodate many customers. Apart from the conventionalbanking services (including the savings, loan application, anddeposits), the bank provides mortgage products that allow itscustomers to own assets (Bank of America, 2016). The wide range ofservices as well as products help the bank attracts customers whohave different financial needs.
TheBank of America suffers from two major weaknesses. First, thefinancial institution has failed to capitalize on its globalpresence, which is an indication of its inability to take advantageof the opportunities available in the market. The bank has itsoperations in more than 150 nations, but the total revenue that isgenerated from the international sales is about 10 % (Bank ofAmerica, 2010). Most of its revenues are generated within the localmarket. Overdependence on the local (the U.S. market) subjects thebank to the risk of suffering from significant losses when thecountry’s economy underperforms.
Secondly,the lack of ability on the part of the bank to observe equality whendelivering services to its clients is a significant weakness that haslimited its capacity to reach customers from the minority groups. Aninvestigation conducted in 2011 revealed that the Hispanic and theBlack Americans were about three times more likely to be charged ahigh interest for the borrowings compared to the White clients, whichresulted in a fine of $ 335 million (Finighan, 2011). Discriminationagainst customers on the basis of color suggests that the bank doesnot give an equal consideration to the financial needs of all people.
Althoughthe Bank of America has been growing through the establishment of newbranches and acquisition of other financial institutions, there areopportunities that the management has not yet exploited. For example,the availability of many subsidiaries and the range of products implythat the bank has an opportunity to cross-sell its brands. For aninstant, customers who utilize the bank’s savings and depositservices can be introduced to other lines of products, such asmortgage (Bank of America, 2015). The cross-selling opportunity ispreferred because it allows a company to add its revenue withoutengaging in extra marketing campaigns since it sells more products toits existing customers.
Inaddition, the projected growth in mortgage in the U.S. marketpresents the bank with an opportunity to make more revenue and investadditional resources in this sector. It is projected that themortgage industry will continue to grow as a result of an increase inthe sale of the existing homes by 4.7 % and 23 % of the new homes(O’Connell, 2016). A mortgage is one of the most common methodsthat new home buyers use to finance their transaction.
Consolidationis currently one of the common practices in the banking sector(Yakubu, 2013). The Bank of America can enhance its geographicalcoverage in the domestic market by consolidating with other financialinstitutions.
Moreover,the bank has an opportunity to expand its global presence throughmerger, partnership, acquisition, or joint venture. These processescan help it reach more customers and increase its revenue generationfrom foreign market to more than the current rate of 10 % (Bank ofAmerica, 2015).
Anincrease in the regulatory pressure that will affect the interchangerates presents a significant investment risk for the bank. Thegovernment intervention in the interchange rates will reduce thecapacity of the bank to generate revenue (Jeremiah & Swami,2014).
Inaddition, the U.S. as well as the global market has recovered fromthe 2008 financial crisis, but the market is still highly volatile(Ivashina & Scharfstein, 2010). The banking sector can experienceanother financial crisis any moment.
Thepossible government intervention in the stock market will result in anegative effect in the bank’s share price. Government is asignificant player and customer, which implies that any negativedecisions might affect the profitability of the bank in an adverseway.
Thebank’s investment in subprime loans subjects it to the risk ofdefault, which could force it into a significant financial crisis.The financial crisis that took place in the year 2008 was partlyassociated with an increase in the number of defaulters of subprimeloans (Ivashina & Scharfstein, 2010).
Thebank of American has a well known brand because it has been in themarket for more than one century. The bank has achieved a significantgrowth through a combination of strategies, such as acquisition, theestablishment of new branches, and the use of technology to reachmore clients. The bank’s major sources of revenue include consumerbanking, wealth management, legacy assets and services, globalbanking, and global markets, among others. Its funding sourcesinclude the deposits, equity capital, and debt. This paper recommendsfour strategies that the Bank of America can adopt in order toincrease its financial health in the long-run
Increaseinvestment in the mortgage:The projected growth in the number of Americans who wish to ownhouses for the first time by 23 % provides an opportunity that theBank of America should exploit (Bank of America, 2015). The bankshould intervene by providing these potential customers with mortgageservices at affordable rates.
Globalcapitalization: TheBank of American has managed to penetrate about 150 countries, but itgenerates only 10 % of its revenue from the foreign market (Bank ofAmerica, 2015). The bank can reverse this situation by capitalizingits global market. For example, the management can acquire morefinancial institutions in 150 countries in order to reach morecustomers. This recommendation will help the bank increase theproportion of revenue that is generated outside the U.S. market.
Aneffective equality policy:The bank needs to develop a policy that will ensure that all branchestreat customers equally, irrespective of their race. In the past, theimage of the bank has been damaged by a fine of $ 335 million imposedon it for discriminating against the people of color (Finighan,2011). By developing a policy that will enable the bank toaccommodate the people of color, the management will increase thenumber of customers, even without opening new branches.
Increasecross-selling:The Bank of America is among the financial institutions with thewidest range of products. The company will tap this potential byinforming customers about other types of products, whenever theyvisit the bank. This strategy will be achieved by issuing brochuresinforming customers about all types of services and products offeredby the bank anytime they visit its facilities. This strategy willprovide a cheap way of marketing the bank’s products.
Bankof America (2010). Bankof America: 2010 annual report.Charlotte: Bank of America.
Bankof America (2015). Bankof America Corporate 2015 Annual Report.Charlotte: Bank of America.
Bankof America (2016). $ 100 online bonus offer. BoA.Retrieved August 21, 2016, from https://www.bankofamerica.com/
Finighan,G. (2011, December 22). Bank of America pays $ 335 million damagesfor charging minorities higher interest rates. AssociatedNewspapers Ltd.Retrieved August 21, 2016, fromhttp://www.dailymail.co.uk/news/article-2077485/Bank-America-pays-335m-damages-charging-minorities-higher-rates.html
Ivashina,V. & Scharfstein, D. (2010). Bank lending during the financialcrisis of 2008. Journalof Financial Economics,97, 319-338.
Jeremiah,T. & Swami, B. (2014). The impact of liberalization ofregulations in banking sector: Case study of Botswana banking sector.OpenJournal of Finance,1 (1), 15-25.
O’Connell,B. (2016, January 10). Housing boom time? U.S. mortgage marketoutlook for 2016. TheStreet Incorporation.Retrieved August 21, 2016, fromhttps://www.thestreet.com/story/13416024/1/housing-boom-time-u-s-mortgage-market-outlook-for-2016.html
Yakubu,Y. (2013). Banking consolidation and economic growth in Nigeria:Dynamic chain transmission evidence. Journalof Humanities and Social Science,20 (5), 27-33.