During the depths of the financial crisis in September 2008, the Bank of America agreed to purchase troubled investment bank Merrill Lynch. The deal, valued at $50 billion, created a bank that rivaled Citigroup as one of the largest in the United States by assets (AP, 2008). The deal created a combination retail/investment bank that had multiple revenue streams and expanded Bank of America's international presence as well. The deal capped off a run of acquisitions made by Bank of America. Previously, it has acquired MNBA in 2006, that company being one of the largest issuers of credit cards in the world (AP, 2006). In January of 2008, BoA purchased struggling mortgage banker Countrywide Bank in a deal that now ranks as one of the worst ever in the banking industry, costing Bank of America nearly $31 billion on top of the $4 billion acquisition cost (Ovide, 2011). In addition to the debacle that is Countrywide, the Bank now faces the prospect of having to spinoff Merrill in order to generate the capital needed to staunch the flow of red ink at Bank of America (Touryalai, 2011).
These different acquisitions dramatically broadened the scope of Bank of America, adding three different business groups to the company. At this point in 2011, these acquisitions remain central to the strategic decisions that Bank of America must make. This paper will analyze the strategy of Bank of America in the context of these different acquisitions. A SWOT analysis will be conducted to guide future strategy and then recommendations will be made. BoA will also be benchmarked against Citigroup, which is probably its closest rival.
Despite its recent troubles, Bank of America still has some strengths upon which it can draw to improve its competitive position. Despite the gloom surrounding the company, Bank of America still has considerable brand recognition, and this helps it when it wants to expand into new territory and in dealing with external stakeholders. Bank of America's size and brand power also put it into the luxurious "too big too fail" category of banks that can effectively borrow at government rates because of the implicit backing of the federal government.
Merrill Lynch is another key source of strength for Bank of America. While the bank lost money in fiscal 2010 and its breaking even (at best) thus far in fiscal 2011 (MSN Moneycentral, 2011), Merrill Lynch is the main profit center for the bank at present, propping up its other struggling businesses (Touryalai, 2011). Another source of strength is the bank's considerable branch network and asset base. The economies of scale that can be gained from having such a large size helps Bank of America competitively, as it can offer lower spreads in order to attract key business.
There are many weaknesses within BoA, however. The first such weakness is that the Bank is losing money. It is losing a lot of money on its Countrywide acquisition (Ovide, 2011). Its retail banking business is also losing money (Touryalai, 2011). Losses in FY 2010 were $2.238 billion, the bank is struggling in FY 2011 and as of yet it has not written off anything of Countrywide, although it will probably have to do so in the future. Countryside in particular has been a disaster for the company, with costs associated with that acquisition over $30 billion and counting. That business is not saleable, which further increases the likelihood of a writedown on the acquisition cost of that asset. Lastly, Bank of America has begun to earn a lousy reputation among consumers for its service and its business practices. The bank has been a target of both protests (Dolan, 2011) and various boycotts as well.
No matter how much it struggles, a bank the size of Bank of America is going to have a few opportunities for improvement. The discussion of the sale of either Merrill Lynch or at least an ML tracking stock has come up in response to questions from regulators about the Bank's ability to raise capital. Bank of America has a strong asset in Merrill and the value of that asset can be either leveraged through its ongoing profits or it can be leveraged in a sale. The second opportunity is to pump more money into Merrill. If this is the single most important profit source, then it makes sense that Merrill becomes the focus of BoA's growth efforts. More emphasis on building the global investment banking business would help BoA's long-run returns. The third opportunity for Bank of America is to embark on an ambitious turnaround strategy. To an extent the bank has not focused on a major turnaround strategy in part because its business is highly correlated with the general state of the economy, but it is worth bearing in mind that other companies have focused on taking advantage of the economic slowdown to make internal improvements that help them to remain profitable. Bank of America has not necessarily done this to an adequate extent.
There are many external threats to the Bank of America at present. The first is competition. Both retail and investment banking are highly competitive industries. Players that have weaknesses are going to struggle to maintain positive growth and momentum. Right now, Bank of America's declining competitive position will only serve to strengthen its competitors. Another external threat comes from regulators. The Federal Reserve, for example, asked Bank of America for a contingency plan in case the bank's internal situation deteriorated. Regulators from the lower levels right to the White House are concerned about the healthy of the banking system and the major banks in particular. The Federal Housing Finance Agency is now seeking to recoup of some its $30 billion investment into the banking system. The FDIC is involved in a lawsuit over mortgage-backed securities in which BoA is a defendant, and the bank is also having trouble with the New York Attorney General as well (Touryalai, 2011). These myriad regulatory problems may lead to large settlements, and hinder BoA's ability to compete in the future.
Lastly, the general state of the economy is a threat for Bank of America. While its investment banking business is performing well, the Bank's retail business is struggling. Retail banks rely on lending to consumers and to small businesses. The housing market in particular is key to driving the retail business and the new housing market is still in rough shape, with low demand conditions. With the economy predicted to struggle in the long run, the Bank is going to face difficult economic operating conditions for the coming few years and this is a major challenge for the Bank of America.
Comparison with Citigroup
Citigroup is at present outperforming the Bank of America. While Citi is more focused on retail banking, a struggling industry, it also does not have any disaster on the scale of Countrywide to deal with. It has an investment banking business in Smith Barney, similar to what BoA has with Merrill Lynch, except that Citi is a minority shareholder with 49% of the company, which is instead run by Morgan Stanley. Citigroup struggled during the worst of the downturn, posting a $27.6 billion loss in FY2008, but has bounced back with a profit of $10.6 billion in FY 2010 and has posted over $10 billion in net income through the first three quarters of FY 2011 (MSN Moneycentral, 2011). It appears that while Citigroup struggled at least as much during the depths of the recession as did Bank of America, it has done a better job of recovering, and is a much stronger company today than its rival is.
Recommendations and Conclusion
Bank of America must do three things in order to restore its business going forward. The first is to take the writedown on Countrywide and get rid of this toxic asset to the best of its ability. This mortgage company has been a disaster for BoA and cannot possibly pay back in the future what it has cost the company thus far. Despite the struggles in retail banking, the fact that Citigroup is consistently profitable while Bank of America continues to struggle is a red flag that BoA could make money too if it did not have such a toxic asset in its portfolio.
The second recommendation for BoA is to focus on its investment banking business. The signs in the macroeconomic environment are not encouraging with respect to growth in the coming years. Therefore, Bank of America needs to focus on this business for the next few years. Although the retail business is mature and should be a cash cow for Bank of America, any good business plan should involve focusing on the strongest business and the biggest growth business in which the company operates. For Bank of America right now, this is Merrill Lynch. It is also worth noting that the option to sell off ML or part of it would be a desperate move, forced upon the Bank by regulators. Such a…