Here Are 3 Things Bank of America Must Fix to Be Competitive

It's time for Bank of America's executives to get back under the hood. Image source: Thinkstock.

Bank of America (BAC 3.45%) recently entered a new stage in its recovery from the financial crisis, shifting its focus from expense control to revenue generation, but this doesn't mean that the $2.15 trillion bank has slayed all of its crisis-related problems. There are three in particular that must still be addressed before Bank of America can compete on a level playing field against the likes of JPMorgan Chase (JPM 1.59%) and Wells Fargo (WFC 3.23%).

1. Customer service
On J.D. Power's latest customer sentiment survey, Bank of America scored last in three out of the four geographic regions that span the United States. It scored in the middle of the pack in the fourth region, the Midwest.

This is unacceptable when you consider that Bank of America's closest rivals, JPMorgan Chase and Wells Fargo, generally came in on the opposite end of the spectrum. JPMorgan Chase ranked first or second among big banks in all four regions. And although Wells Fargo scored last in the Midwest region, it was second in its traditional stronghold, the West, and third in the Northeast.

Data source: J.D. Power's 2015 U.S. Small Business Banking Satisfaction Study. Chart by author.

It's hard to say for sure if Bank of America's customer service issue is one of perception or reality. In other words, is the customer service at Bank of America really that much worse than its big bank counterparts, or do customers still have a negative perception of the bank left over from the crisis of 2008-09?

This matters because it affects the response. If the issue is one of perception, then an appropriately tailored marketing campaign that addresses the unfair or outdated perception would yield the desired result. Alternatively, if Bank of America really does have bad customer service, then it needs to raise its service expectations, train its people to meet the heightened standards, and then implement a system that monitors whether or not they do.

Whatever the problem is, Bank of America needs to identify it and address it with the same fervor that it attacked expenses and legal costs over the past five years.

2. Shareholder relations
It's to be expected that longtime shareholders aren't thrilled with the Charlotte, North Carolina-based bank. Thanks to the size of Bank of America's crisis-related costs and its need to issue more stock when its shares traded for a fraction of book value at the nadir of the crisis, the book value of each share is still 30% below its 2007 peak.

To add insult to injury, Bank of America's executives and directors have a tin ear when it comes to shareholder concerns. Six years ago, a majority of shareholders voted to separate the roles of chairman and CEO. The board nevertheless recombined the roles last year under Brian Moynihan without seeking input from shareholders. The unilateral move was put to a shareholder vote this past September, with shareholders affirming the dual roles, but the damage had already been done.

"They have flaunted the will of the shareholders," Anne Sheehan, corporate governance director at the California State Teachers' Retirement System, told The Wall Street Journal. "It's like the board poking their finger in the eye of investors," added Michael Garland, director of corporate governance to New York City Comptroller Scott Stringer.

The impact of this is clear when you look at governance risk. This assesses the system of rules, practices, and processes by which a company is managed and controlled. Shareholder advisory firm Institutional Shareholder Services tracks governance risk with its QuickScore 3.0, which scores banks on a scale of 1-10 based on board structure, executive compensation, shareholder rights, and audit and risk oversight -- lower is better.

Data source: Institutional Shareholder Services.

Bank of America's overall performance on ISS's survey left a lot to be desired -- receiving a combined score of 7 compared to Wells Fargo's 2 -- but it earned the worst possible score for both board structure and audit and risk oversight. There may be little that Bank of America can do about the latter, as it likely stems from the bank's unwieldy trading operations, but there's no excuse for it not to take steps to address the former.

3. Debt rating
The third problem Bank of America needs to fix before it will be able to compete on a level playing field against JPMorgan Chase and Wells Fargo, among others, is its debt rating.

It can't be emphasized enough how important this is. Generally speaking, banks with high debt ratings face lower borrowing costs than banks with low debt ratings. This may not be a huge differentiator when it comes to other types of companies, but it is with banks. That's because banks borrow boatloads of money at low interest rates and then reinvest the proceeds into higher-yielding interest-earning assets, such as loans and government bonds. The cheaper a bank can borrow, the more it can make from lending.

Data source: Wells Fargo, U.S. Bancorp, JPMorgan Chase, Goldman Sachs, BB&T, Bank of America, Citigroup, and Morgan Stanley.

In the third quarter of this year, Bank of America paid 2.22% to borrow $241 billion worth of long-term debt. Its counterpart, Wells Fargo, paid only 1.45%. Why the difference? As you probably guessed, at least some of it can be explained by the fact that Wells Fargo has a higher debt rating (Standard & Poor's gives it an "A+") than Bank of America (an "A-").

The good news on this front is that Bank of America was upgraded in the second quarter. But the bad news, as you can see from its comparison to Wells Fargo, is that Bank of America still lags one of its staunchest competitors.