Bank of America SWOT Analysis: Merrill Lynch & Strategy

Introduction and Acquisition Overview

During the depths of the financial crisis in September 2008, 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 combined retail and investment bank with multiple revenue streams and expanded Bank of America's international presence as well. The acquisition capped off a run of purchases made by Bank of America. Previously, the bank had acquired MBNA in 2006, one of the largest issuers of credit cards in the world (AP, 2006). In January 2008, Bank of America purchased struggling mortgage banker Countrywide Bank in a deal that now ranks as one of the worst in banking industry history, ultimately costing Bank of America nearly $31 billion on top of the $4 billion acquisition cost (Ovide, 2011). In addition to the Countrywide debacle, the bank also faces the prospect of having to spin off Merrill Lynch in order to generate the capital needed to staunch its flow of red ink (Touryalai, 2011).

These different acquisitions dramatically broadened the scope of Bank of America, adding three distinct business groups to the company. As of 2011, these acquisitions remain central to the strategic decisions the bank must make. This paper analyzes the strategy of Bank of America in the context of these acquisitions. A SWOT analysis is conducted to guide future strategy, followed by strategic recommendations. Bank of America is also benchmarked against Citigroup, its closest rival.

SWOT Analysis

Despite its recent troubles, Bank of America still has some strengths upon which it can draw to improve its competitive position. The bank retains considerable brand recognition, which helps it when expanding into new territory and in dealing with external stakeholders. Bank of America's size and brand power also place it in the "too big to fail" category — 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 was breaking even at best through fiscal 2011 (MSN Moneycentral, 2011), Merrill Lynch remained the primary profit center, propping up its other struggling businesses (Touryalai, 2011). The bank's considerable branch network and asset base are also strengths. The economies of scale that come with such a large size allow Bank of America to offer lower spreads in order to attract key business.

There are, however, many weaknesses within Bank of America. Most critically, the bank is losing money — a great deal of it tied to the Countrywide acquisition (Ovide, 2011). Its retail banking business is also losing money (Touryalai, 2011). Losses in fiscal year 2010 were $2.238 billion, and the bank has not yet written off any of the Countrywide acquisition cost, though it will likely be forced to do so in the future. Countrywide in particular has been a disaster, with associated costs exceeding $30 billion and still rising. That business is not saleable, which further increases the likelihood of a writedown. Finally, Bank of America has developed a poor reputation among consumers for its service and business practices. The bank has been the target of protests (Dolan, 2011) and boycotts.

No matter how much it struggles, a bank of Bank of America's size will still find opportunities for improvement. The discussion of the sale of either Merrill Lynch or a Merrill Lynch tracking stock has arisen in response to questions from regulators about the bank's ability to raise capital. Merrill Lynch is a strong asset whose value can be leveraged either through its ongoing profits or through a sale. A second opportunity is to invest more heavily in Merrill. If it is the single most important profit source, it makes sense to make Merrill the focus of growth efforts. Greater emphasis on building the global investment banking business would improve Bank of America's long-run returns. A third opportunity is for the bank to embark on an ambitious turnaround strategy. To some extent, the bank has not focused on a major turnaround because its business is highly correlated with the general state of the economy — but other companies have used the economic slowdown to make internal improvements that sustain profitability. Bank of America has not necessarily done this to an adequate degree.

There are also many external threats facing Bank of America. Competition is the first: both retail and investment banking are highly competitive industries, and players with weaknesses will struggle to maintain positive growth and momentum. Bank of America's declining competitive position only serves to strengthen its rivals. Regulatory pressure represents another major threat. The Federal Reserve, for example, asked Bank of America for a contingency plan in case its internal situation deteriorated. The Federal Housing Finance Agency sought to recoup some of its $30 billion investment in the banking system. The FDIC was involved in a lawsuit over mortgage-backed securities in which Bank of America is a defendant, and the bank also faced difficulties with the New York Attorney General (Touryalai, 2011). These regulatory problems may result in large settlements and hinder the bank's ability to compete going forward.

The general state of the economy is also a significant threat. While the investment banking business was performing well, the retail business was struggling. Retail banks rely on lending to consumers and small businesses, and the housing market — a key driver of retail business — remained depressed, with persistently low demand. With the economy expected to continue struggling, Bank of America would face difficult operating conditions for several more years.