The Bank of America-Financial and Competitive Analysis
Background of the Bank of America
The Bank of America Corporation (BAC) is a Public Company that provides multinational banking services and other specified financial services. The bank was conceptualized in 1998, with its headquarters in North Carolina; U.S.A. according to asset valuation, the company comes second in the States, and serves over 100 states. The corporation also has many relations and partners with other multinational and local companies in the U.S. The international company was ranked fifth in the United States, after total revenue assessment for big corporations in the U.S. It is also the third largest organization in the entire globe. With tough competition from Wells Fargo and Citigroup, Bank of America still Manages to hold 12% of the bank accounts in America. For BAC, the main services and products include consumer banking services, credit cards, corporate banking and financial advisory services. The Company has kept and maintained good results in the last decade, with over 150 hired executives working for the organization, and very few cases of terminations experienced (Goldsmith & Carter, 2009).
Life- cycle Analysis of Bank of America
The issue of life cycle in many organizations specializes in the determination of the growth of the organization, from conceptualization to present positions. For the bank of America, the organization is in the maturity stage, given its current performance and ranking in the banking industry. Since its humble beginning in 1998, the company has undergone several stages until the attainment of maturity level. The stages the bank has been involved in include the creation, growth stages and maturity (Current situation). In most cases, studies have shown that organizations will experience turnaround and decline stages after the maturity stage. The organization's leadership has the obligation to safety from the last two stages (Ward, 2003). Figure 1.1 demonstrates the life cycle position of the Bank of America Corporation.
Figure 1.1: Life Cycle of the Bank of America Corporation
Maturity of the Organization (Current position of BAC)
Bank's Growth and Development
Creation of the Bank of America
Decline of Organization
Turnaround of organization
Analysis of Return on Equity for BAC
The Bank has experienced a declining trend of Return on Equity in recent times. In 2008, the corporation recorded and realized Return on Equity (RoE) of close to 12%. This was linked to the effective management of the organization at that time. In 2009, the company's assets return dropped to 3.73%, a drastic difference of about 9% of the returns when compared to the preceding year (2008). The dropping rates have been consistent with a return of -1.23% in 2010 and -3.25% in 2011. Fortunately, the company managed to report a slight improvement in terms of the RoE as at March, 2012 (-0.62%). The purpose of the RoE analysis is to analyze and determine the generated profit of Bank of America from its shareholder's equity. If there has to be a conclusion, then it would definitely indicate that BAC is hardly generating income from investment of funds and that if it does, then the investments are exposing diminishing characteristics (Bank of America Corporation, 2012).
Projected future growth of Earnings (BAC)
An interview with the stock analyst of the organization, Rathnam Ganesh revealed the company's intentions and strategies to overcome a decreasing trend in earnings. When asked how the organization was going to increase and make more money, Ganesh explained the many available options. These include the deposits from customers, borrowing funds from capital markets and Federal Reserve and other ways. However, the focus of this paper is to access the chances in terms of RoE. Ganesh recognized that the RoE of the Bank was not as good as expected, but insisted that there was still opportunity to earn from the tangible assets which had a return averaging to 27.7% since 2002. The organization also had financial strengths in intangible assets, with a goodwill valuation of about $65 billion, which is a higher position compared to the company's competitors (Larson & Ganesh, 2007).
Required RoE for Bank of America
To get the exact value that the organization is supposed to be getting from the investments, there has to be specific mathematical approaches. Usually, the RoE value is in percentage, and could be realized using the following mathematical formula:
RoE for any organization= Company's Net Profit*100/Equity value.
In the case of the Bank of America, if the net profit is six billion, and the organization had invested 4 billion dollars, then the RoE would be 66% (Just an illustration). The performance of the organization would, therefore, be derived from the RoE analysis.
When using the discounted valuation technique, companies have to predict the future trends and performance using present and available data in the cash flows of the company. When the organization estimates future trends, then the value obtained is the intrinsic value of the organization. For instance, when the discounted cash flow technique is adopted by Bank of America, the model will assist in determining future cash flows because the present worth of the organization is assumed to remain equal in future. The intrinsic value is, therefore, the valuation of the organization. However, the easier way to get the intrinsic value of BAC is by using the Grahams formulae, which is simply written as follows;
Intrinsic Value (IV) = EPS*(8.5+2g)*4.4/Y
Where; EPS=trailing 12 months EPS.
8.5= the PE ratio of any stock without any growth (0%).
g= the growth rate for the next seven to ten years.
For instance, if the EPS of BAC is 0.03, with a g value of 7.8 and Y value of 4.5, then the IV of the organization in let's say 2011 would be $0.71. If the vales are maintained until 2012, and the EPS value of 2012 is 0.98, then the IV for 2012 would be $23.1. This would actually mean growth in valuation for Bank of America.
Competitive advantage of BAC compared to other banks
Bank of America Company has a significant edge against the incumbent corporations in the banking industry. The first fundamental advantage the company has is its position as the market leader, in terms of stock valuation, including reports for highest levels of Return on Equity. High RoE means the company has a better chance for more income generation because of the number of shareholders. Other strengths of the organization range from acquisition of subsidiary companies like Merrill Lynch hence better market positioning, and also reduction of capital at risk. However, the company would be challenged by losses in loans department and investments towards Merrill Lynch. BAC has the opportunity of allowing more flexible mortgage loans country wide due to an international market position (Bank of America Corporation, 2012). There is also the effect of the demographic trends, where the company benefits due to many clients. The United States has had an increase of the trends of late, due to increased birth rates, reduced incidences of death and increase in the number of immigrants in the United States (Shrestha & Heisler, 2011). As at the end of May, 2012, the organization had a reduction of stock, from its initial position of $7.3498, to a lower of $7.230. This was a reduction of 1.63%. The annual stock was a low of $4.92 and an annual high of $11.74. Market Capitalization for BAC is valued at $79.210 (International Business Times, 2012). The organization's performance is related to the strong market position it dominates, and also acquisition of subsidiary companies that increase the stock valuation.
The firm is not supposed to sell any of its assets or stock valuations, due to the tight competition from the incumbent organizations such as Citibank, which would take advantage if stock valuation of the Bank of America went down.…