A number of years ago at the World Economic Forum in Davos, Switzerland, Bank of America (NYSE:BAC) CEO Brian Moynihan explained the bank's challenges by saying that it was like climbing a mountain with an excessively heavy backpack.
"As we look left and right, we're right with the other climbers [i.e., banks], in terms of competitiveness and how we approach the mark," Moynihan told Bloomberg Television's Erik Schatzker. "But they have a CamelBak and a water and we have a 250 pound backpack."
Fortunately, with the passage of time, Bank of America's load has lightened, which is freeing it up to climb at a much more rapid pace.
A backpack full of bricks
When Moynihan said this in January 2013, he was referring to the legal burden Bank of America was buried under as a result of strategic missteps made in the lead-up to the financial crisis, the biggest one being the ill-timed acquisition of Countrywide Financial.
In that month alone, the North Carolina-based bank entered into two legal settlements amounting to $14 billion. It wasn't until two years later that it had finally turned the corner from the 2008 crisis, putting all of these issue behind it.
Few things illustrate how much clearer Bank of America's path today is than two important trends in its loan portfolio. As you can see in the chart below, the size of this portfolio reached a critical inflection point in the first quarter of last year, at which point it stopped contracting and began expanding.
Over the six quarters since that inflection point, Bank of America's loan portfolio has grown by $34 billion, or 3.9%. That might not seem like a ridiculously fast rate of growth, and it isn't, but what's important to appreciate is that it came despite considerable headwinds.
Decline in noncore loans
The headwinds relate to the fact that Bank of America was simultaneously allowing roughly $60 billion worth of loans to run-off its balance sheet. These were the type of loans the bank no longer wanted to make and was thus either selling off, charging off, or allowing to mature.
After accounting for these headwinds, Bank of America's loan portfolio has the ability to grow roughly three times faster than it is today. This will happen naturally as the portfolio of noncore loans continues to shrink, eventually disappearing altogether.
Suffice it to say that this augurs well for Bank of America's future, given that loans are the most important product banks sell and are an extremely lucrative way to generate high-margin interest income.