With its major legal settlements seemingly in the rearview mirror, Bank of America (BAC -0.13%) now has some incredible opportunities to grow its revenue and bottom line (and maybe even juice its dividend, which is currently 1.2% per S&P Capital IQ). We asked three of our top analysts to share what they think Bank of America should do right now to grow.
John Maxfield: Bank of America has two systemic problems that it needs to fix. First, its expense base is too high. Over the last few years, operating costs have consumed 80% or more of its revenue and much of the remainder has been used to pay corporate income taxes and interest on preferred stock.
Fortunately, getting costs under control is at the top of Bank of America's priority list and it's made considerable progress on this front. As a result, while this is very important, it'd be redundant to say it's something the Charlotte, N.C.-based bank should "do right now."
But the same cannot be said for the second systemic problem that has intermittently plagued Bank of America since the 1970s -- that is, an overly lax credit culture that fosters imprudent lending in good times and unconscionable losses when the economy falters. In fact, aside from its strategy of growth by acquisition, the one unifying theme that characterizes Bank of America since the Giannini family relinquished control of it in the decades after World War II, this would be it.
Analysts and commentators are likely to point out that Bank of America's credit losses are at a decade low. However, given where we are in the credit cycle, that's exactly what one would expect right now. The real test is how the bank's asset portfolio fares the next few times the cycle turns against it. And the only way to reduce future problems in this regard is to implement a credit culture that prioritizes prudence over short-term growth.
Jordan Wathen: Bank of America needs to turn banking customers into asset management customers. It won't be easy, but the bank is one of the best positioned to do it.
Only recently has Bank of America invested heavily in its building out Merrill Lynch's retail business. The company laid out plans to insert 2,000 advisors into its largest and most-trafficked of its 5,000-plus Bank of America branches. In doing so, Bank of America hopes it can court the nearly 9 million customers which it has identified as having a household net worth in excess of $250,000. This is a prime well to tap for retirement assets, which create a predictable and long-lasting income stream.
Speaking of income, each new dollar in sales for Merrill Lynch is gravy. The company already boasts some of the highest pre-tax margins (above 25%), and it frequently tops in revenue per advisor (more than $1 million per year). And whereas bank earnings receive low earnings multiples from Wall Street, asset managers earn some of the highest in the financial industry, which would be a boon for the bank's shareholder base.
Patrick Morris: There is no denying Bank of America has navigated a steady path of recovery over the last few years. But if there is one thing I would like to see more of, it would be the bank continuing to push its mobile banking platform.
While it may not grab headlines, mobile banking is not only a way to appease customers, but also a critical way for banks to reduce costs. At the Goldman Sachs Financial Services Conference last year, Bank of America noted a deposit transaction in one of its branches was nearly 14 times more expensive than one made over a smartphone.
There has been incredible growth in the number of active mobile banking accounts at Bank of America, rising from 8.5 million in 2011 to 16.1 million at the end of the most recent quarter. And over the last two years, the percent of deposits made on mobile devices has grown from 1% to 11%.
As a result, the bank has been able to reduce its branch count, allowing its Consumer & Business Banking segment to operate much more efficiently -- with its expenses falling by $375 million through the first nine months of the year -- to the benefit of shareholders.
Research firm Nielsen estimates 65% of Americans have smartphones. However, those 16.1 million mobile banking accounts represent just over half of the 31 million Bank of America customers who are active users of its online banking platform, meaning more growth for the bank in this area is still possible.
There is much to like about Bank of America, but I suspect if it is able to continue its rapid growth in its mobile baking customers, the cost saving initiatives and benefit to shareholders will be even more pronounced.
