Bank of America's financial recovery and strategic challenges in 2009-2010

Bank of America SWOT Analysis

Analysis of Strengths, Weaknesses, Opportunities and Threats

Bank of America (BAC: NYSE) continued to face significant challenges to overcoming the significant losses accumulated during FY2009 and 2010. Most significant was the $-48.1B loss in Cash Flow in FY2009 and the rapid increase in Sales, General and Administrative (SG&A) expense, rising to $43.7B in FY2009 from $28.4B in 2008. For a full analysis of growth profitability and financial ratios for Bank of America please see Appendix A. In the midst of these formidable challenges, Bank of America continues to have the strengths of being one of the leading financial services businesses in the world with a brand that is recognizable and brings in new customers at a steady rate, in addition to have diversified revenue streams that stabilize the company's currently challenging economic condition. The balance sheet continues to improve over time as is shown in the analysis presented in Appendix A. The weaknesses of Bank of America continue to be their Global Card division, and the difficulty of completing the Merrill Lynch merger as well. Opportunities include TARP repayments increasing profitability and wealth management business benefitting from the Merrill Lynch acquisition. In addition, investments in emerging markets show significant potential. Threats include regulatory changes that will most likely increase compliance spending and alter business plans, competition for retail deposits will increase funding costs, and increases in FDIC insurance premiums and other proposed fees will affect margins over the long-term.

Introduction

Bank of America (BAC: NYSE) is the nation's largest bank with operations in 50 states and 30 foreign countries and has continually grown through mergers and acquisitions that has led to their competing in six core businesses. These six business units include deposits, global card services, home loans & insurance, global banking, global markets, and global wealth & investment management (GWIM). Bank of America continues to invest heavily in information systems and technologies to enable greater levels of automated customer service to drive down their operating costs (Schultz, 2010). Included in these efforts are selective uses of Six Sigma business process re-engineering services to streamline and make more efficient their core business processes (McKenney, Mason, Copeland, 1997). Bank of America continues to be plagued with a very low level of customer satisfaction that were in part driven by their decision to concentrate more on internal efficiency and less on customers getting their transactions and banking done more efficiently (McKenney, Mason, Copeland, 1997) (Gonzalez, Mueller, Mack, 2008). This mindset has completely reversed in the last three years and today Bank of America is one of the leading banking institutions to invest in information technologies including secure mobile banking (Valentine, 2011). Despite these investments in advanced customer service technologies increase lifetime customer value, Bank of America continues to recover financially from the challenging times they faced during the FY2010 timeframe when Net Revenue or Sales dropped from $119B to $110B from 20098 to 2010. Net Income plunged from $6.2B in 2009 to -2.2B in 2010 and the Trailing Twelve Months (TTM) level is currently at -$3.3B with projected Sales of $105B. Operating cash flow is at $58.8B with a -$4.4B cash flow on a TTM basis.

Analysis of Strengths, Weaknesses, Opportunities and Threats

Strengths

Bank of America is recognized as one of the leading brands in financial services globally, with a market value of their brand in the hundreds of billions of dollars (Schultz, 2010). This brand equity translates into the ability to move into adjacent services including data mining and analysis with relatively high levels of agility and focus, ensuring that new ventures are quickly started and gain customer bases as a result (Schultz, 2010). The banks' brand is continually strengthened and supported by the reach of operations across 50 states and service to customers in 150 countries, with offices or operations based in 44 of these countries. As of the latest filings the company has with the U.S. Securities and Exchange Commission (SEC) the company claims to have 53 million consumer and small business accounts and operates over 18,000 ATMs in the U.S. alone. Current SEC filings also show that the company has 6,100 retail outlets and banking locations and supporting a total of nearly 29M transactions on a weekly basis for its customer base. All of these operations advantages are possible given the top-of-mind awareness the bank has as a leading financial services institution and its continual commitment to improve business processes over time (AlSagheer, 2011).

A second significant strength the company has are its ability to maintain a diverse series of revenue streams and stabilize earnings and revenues in its core business segments. Based on an analysis of the filings the bank has made with the SEC, it can be seen that global card services continues to contribute nearly one out of every four dollars in revenues the bank generates (approximately 25% of total revenue in FY 2009 and 2010). The strength of these revenue streams is also seen in how diverse they are from a percentage of revenue stand point as well. The global wealth & investment management (GWIM) sector of the business continues to stay profitable and a significant proportion of total revenues, generating 14.9% in the latest fiscal year. Additional lines of business include global banking which generated 18.9% of total revenues, global markets with 16.9%, home loans & insurance at 13.9% and deposits at 11.5%. This diversity of revenue sources is also one of the catalysts of economic stability shown in Appendix A, Growth Profitability and Financial Ratios for Bank of America Corporation (2001 -- 2010).

A third core strength of the company is its continuing balance sheet strength and the support it has received from the federal government. The strengths the company has based on its diverse revenue streams is also reflected in its diverse asset base within business units as well (Segev, Porra, Roldan, 1998). In addition, Bank of America has continually strengthened its capital through a series of funding strategies in FY2009 and 2010 that has increased capital by $57 billion. Despite the challenging condition of Net Income and above the lien expenses including SG&A, the Bank of America continues to stay financially viable based on a strong mix of lending and funding sources globally.

Another major strength of the Bank of America continues to be its commitment to continually improve the customer service experience for its customers through the use of investment in technology and the latest generation of database and data mining technologies (Orr, 2005). This includes the leading investments the bank is making in the area of mobile commerce and banking on smartphones, tablet PCs, Apple iPhones and Google Android devices (Valentine, 2011). The Bank of America invests in these technologies to gain greater business process improvements with the goal being to increase customer satisfaction and responsiveness over time (AlSagheer, 2011).

Weaknesses

The acquisition of Countrywide and Merrill Lynch in FY2008 and 2009 respectively have cost Bank of America more than their capital; it has also cost them their focus as well. The takeover of Countrywide brings a very high debt load and liability to the bank, with a very high dependence on the domestic U.S. economy, where Countrywide had written 92% of their loans. In addition the lack of record keeping and accounting accuracy on the part of Countrywide has led to many lawsuits for Bank of America, including several with the U.S. Government showing that the bank willingly allowed fraud to continue despite internal audits knowing that the action from the acquired company were unethical and illegal (Gonzalez, Mueller, Mack, 2008). The impact on Bank of America's customer service reputation based on the unorganized and often completely inaccurate records that Countrywide kept led eventually to a federal investigation of Countrywide lending practices (Kapner, Baer, 2011). All of the activity around the Countrywide acquisition led eventually to the development of U.S. Senate hearings to track down just exactly how Countrywide would mislead consumers to take loans, often getting refinancing they did not need or could not afford. Bank of America has since moved beyond these challenges and has been able to get the U.S. Senate investigations of Countrywide completed. In addition, the acquisition of Merrill Lynch turned out to be a major distraction to the company as well. The markets for the services that Merrill Lynch sells require intensive expertise in tailoring asset-backed securities and investment vehicles to companies and high net worth individuals over the long-term. This area of the Merrill Lynch business turned out to be the most profitable however and will take years for the bank to realize any of the financial gains from this acquisition. Today it is a significant drain in the company's resources, as can be seen from an analysis of the financial statements and SEC filings the company has provided in the investor relations area of their website.

Threats

The greatest potential threat to the Bank of America are the regulatory changes that the U.S. And foreign governments continue to evaluate and pass into law. These regulatory requirements are costly to comply with, requiring millions of dollars' in IT investments over time (McKenney, Mason, Copeland, 1997). The costs of compliance and reporting will continue to increase however, creating an even greater strain on the bank's profitability over time.

Another significant threat is that of Federal Deposit Insurance Corporation (FDIC) insurance premiums increasing over time, becoming more costly to pay. The many bank failures during the 2008 and 2009 timeframe have raised the costs of premiums for the banks that are still solvent. This has led to higher costs for not only insurance, but also for the systems internally for managing them (AlSagheer, 2011).

The Bank of America has been able to successfully navigate very difficult economic conditions globally and stay solvent, while also completing two major acquisitions during the same time. The bank continues to recover from both the economic downturn and the transactions with reduced cash flow as shown in the analysis in Appendix A. The strengths and opportunities that the Bank of America has combined have the potential to transform the company and make it profitable again by the FY2012 timeframe. Based on an analysis of their financials and from analyzing the assessment by their senior management team.

The recommendations for Bank of America center on increasing the lifetime customer value of existing base and attracting new, high net worth customers for the future. Increasing the investments in mobile-based technologies will significantly increase the level of convenience for both existing and new potential clients, as will the support for paperless transactions using Android and iOS-based camera phones (Valentine, 2011). Second, the bank needs to concentrate on trimming its asset base of unprofitable operations. There are, according to the SEC document that the bank has filed, nearly 2,000 branches that cost more to operate vs. The revenue they produce. The bank needs to continually use the concepts of Six Sigma and quality management top trim back all operations that are not profitable today, just as they have done on an isolated basis at just the strategy level in the past (AlSagheer, 2011). The continued growth of the bank's global reach needs to also continually be accentuated and strengthened over time as well. An area where the bank could expand significantly on a global level in addition to becoming more multichannel based in terms of business and personal banking. The Bank of America must also continue to trim its SG&A expenses through the use of profitability analysis and continued pruning of unprofitable operations.

Appendix A:

Growth Profitability and Financial Ratios for Bank of America Corporation

(2001 -- 2010)