The Move Toward Greater Profitability
Karen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Sometimes you have to prune the branches to save the tree. This recent Bank of America (NYSE: BAC) announcement regarding the Merrill Lynch sale demonstrates that CEO Brian Moynihan is committed to restoring the banks stature and profitability.
Bank of America bought Merrill at the height of the financial crisis for $50 billion and prevented the brokerage firm from following in Bear Stearns and Lehman Brothers footsteps. Since then, Merrill Lynch has reemerged as a profit powerhouse and has pumped over $5 billion in profits back to Bank of America. The brokerage firm’s net income grew to $506 million in 2011 from $329 million in 2010, and the total client base came in at $2.2 trillion in 2011, up from 2010’s $2 trillion.
So if Merrill Lynch is so profitable, why is Mr. Moynihan selling?
Hidden deep inside Merrill’s financial basement is a collection of toxic asset related problems Bank of America doesn’t need. Just this past May, Korean Woori Bank filed a $143 million lawsuit for losses incurred from the CDOs Merrill sold them during 2005 – 2006. This isn’t the first such lawsuit filed against Merrill over CDO losses, nor is it likely to be the last.
Tipping the scale in favor of the sale is Bank of America’s being up against the wall in complying with the new Basal III capital requirements. The bank is fast running out of time and currently doesn’t have the money federal regulations demand. Wall Street analysts are estimating the sale price between $1.5 to $2 billion dollars which would more than meet Fed requirements, and also provide much needed funds to help with the Countrywide debacle.
Bank of America isn’t alone in selling assets. Citibank (NYSE: C) announced this month it was selling its Diners Club credit card division in the United Kingdom and Ireland to the privately-owned Affiniture Cards. Citibank is selling off the non-core assets currently held by Citi Holdings to focus more on its primary profitability centers.
In June this year, Goldman Sachs (NYSE: GS) sold its profitable hedge fund administration division to State Street Bank based on the lack of synergy between the hedge fund administration division and Goldman’s prime brokerage business. The transaction price is $550 million and the deal should close 4th quarter this year.
Looking to cut their losses, Morgan Stanley (NYSE: MS) is currently in talks to sell a stake in its multi-billion dollar commodities trading division to Qatar Investment Authority. Morgan Stanley trades physical and financial commodity contracts through its subsidiaries and has seen profits decline while incurring higher risk due to falling volume and greater illiquidity. It’s also a move that will allow Morgan Stanley to focus more on its core business.
And HSBC (NYSE: HBC) is looking for a buyer for its unprofitable U.S. credit card division. It’s just one of the many cost-cutting measures, including employee firings, the bank is undertaking to restore profitability.
New federal regulations are forcing Bank of America’s hand to sell Merrill Lynch to comply with enacted mandates. But whether forced or voluntary, banks are looking to cut away divisions that are outright losing money or facing substantial declines in profit. For Bank of America, selling Merrill is the first step toward renewed profitability and a stock price that remains above $10 a share.
Now if only they’d get rid of Countrywide!
kprogers has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America and Citigroup Inc. Motley Fool newsletter services recommend Goldman Sachs Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.