Becoming The Right Size To Succeed

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It's rare when a company can get smaller and that be a good thing. Usually companies that close stores and try to rein in costs are in serious trouble. However, in banking those rules don't always apply. The best case in point is Bank of America (NYSE: BAC). The bank made famous for its expansion to new territories is trying to get back to its roots and become right sized enough to succeed instead of too big to fail.

All Of The Bank's Major Competition Is Growing Faster:

I'll admit I've been an unabashed critic of Bank of America. The bank made two acquisitions at seemingly the worst time in Merrill Lynch and Countrywide. Both purchases have caused the company constant headaches, whether it's Merrill brokers fleeing for the competition, or scrutiny over how Countrywide made its loans, it's hard to argue that either acquisition has been terribly positive. The good news is, the company is making progress with its business customers worldwide. The bad news is, its retail franchise still is struggling mightily. Overall Bank of America won't win any awards for revenue growth with just a 0.19% increase in the recent quarter. When you consider that other competitors like Citigroup (NYSE: C) had 3% revenue growth, J.P. Morgan Chase (NYSE: JPM) up 6%, and US Bank (NYSE: USB) reporting revenue growth of 8%, Bank of America lags each of its large group peers. Another way to measure Bank of America's results is by comparing the company's loan and deposit growth versus its peer group:

<table> <tbody> <tr> <td> <p><strong>Name</strong></p> </td> <td> <p><strong>Loan Growth</strong></p> </td> <td> <p><strong>Deposit Growth</strong></p> </td> </tr> <tr> <td> <p>Bank of America</p> </td> <td> <p>Down 4.24%</p> </td> <td> <p>Up 2.11%</p> </td> </tr> <tr> <td> <p>Citigroup</p> </td> <td> <p>Up 2%</p> </td> <td> <p>Up 9%</p> </td> </tr> <tr> <td> <p>J.P. Morgan & Chase</p> </td> <td> <p>Up 4%</p> </td> <td> <p>Up 4%</p> </td> </tr> <tr> <td> <p>US Bank</p> </td> <td> <p>Up 7.3%</p> </td> <td> <p>Up 11.1% </p> </td> </tr> </tbody> </table>

You can see without question that Bank of America has some serious work to do. From top to bottom, each of its peers is producing more loan and deposit growth than Bank of America. The primary reason the company lags its peers is because of its retail franchise. Let's look at its two main retail divisions to see what's going on.

Bank Of America Needs To Take Better Care Of Its Stateside Retail Business:

Bank of America's Consumer & Business Banking division is the traditional face of the organization. To say this unit is struggling is a big understatement. In fact, revenue declined 13% and net income was down almost 23%. The biggest reason for this decline in this division is significant run-off in loans with an over 11% decrease year-over-year. The lone bright spot was deposits were up 3.46%. The company's retail loan portfolio is called Consumer Real Estate Services. This division showed a mixed bag of results. While revenue increased 9.71%, the unit's net loss was still $877 million. In addition, while residential home and home equity loans increased 18%, overall loans at the end of the period were still down 16.64% year-over-year. When it comes to the retail client, Bank of America needs to refocus on client service and classic banking relationships.

The Bank's Global Operations Are Doing Well:

Bank of America's Global Wealth & Investment Management showed revenue up 0.94%, but net income jumped 49.72%. While average loan growth of 3.22%, and average deposits decreasing by 0.76%, overall client balances were up 9.39%. The company's Global Banking segment showed similar results with average loans and deposits both up less than 2.5%, but revenue increased almost 5%, and net income increased by over 7%. Probably the most impressive results were turned in by Bank of America's Global Markets division. Global Markets showed revenue adjusted for one-time items up 132.68%. This unit also showed net income of $789 million versus an $856 million loss last year.

3 Steps To Make The “New BAC” More Valuable:

As you can see, Bank of America has about half of its business performing the way it should be. There are three steps the bank can take to make itself more attractive to investors. First, the bank must continue to get smaller. Over the last year, the bank has been taking these steps with total branches decreasing from 5,715 in September 2011 to 5,540 in September 2012. The hard fact is, most banks can live more cheaply with less branches that are more profitable. As long as the bank can continue its relationships and not lose depositors, continuing to consolidate branches just makes sense. Second, the bank must look to improve its net interest yield. In the most recent quarter, Bank of America's net interest yield was 2.32%. This result compares unfavorably to J.P. Morgan & Chase at 2.56%, Citigroup at about 2.36%, and companies like USB at closer to 4%. The bank needs to concentrate on growing its loan portfolio which will help the company's interest yield on loans. In addition, Bank of America needs to continue to pare its long-term debt as this borrowing has a higher carrying cost than customer deposits. Third, and maybe most importantly, Bank of America needs to realize that its retail franchise needs some serious work when it comes to dealing with customers. I used to work for a major competitor to Bank of America, and the bank routinely ranked among the bottom in customer satisfaction among peers like M&T Bank, PNC, BB&T, Wells Fargo and others. Retail customers may feel like they are being treated like a number and not a person, and this could be part of the reason for the significant run-off in the retail and real estate portfolio.


If Bank of America can improve its relationships with retail customers, this will slow down the runoff in these two significant divisions. We've already seen the bank is executing better with its overseas units. The bank still has significant work to do to continue cleaning up its balance sheet and working its way through layoffs and continued branch closures attached to the “New BAC” initiative. However, no matter how the bank makes cuts to its expenses, the core issue is the bank must lend more and attract more deposits. Until investors see a change in the direction of the company's loan and deposit growth, there are better opportunities elsewhere.


MHenage owns shares of JPMorgan Chase & Co. The Motley Fool owns shares of Bank of America, Citigroup Inc , and JPMorgan Chase & Co. 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.

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