Of the many moving parts at Bank of America, there's a standout student: Global Wealth and Investment Management (GWIM).
GWIM encompasses the very best of the Bank of America brand -- it's obscenely profitable, capital light, and on a path to create tremendous value for shareholders.
What makes GWIM great
Let's start at the top, and work our way through. Last year, GWIM earned about 30% on its allocated capital. Said another way, for every dollar Bank of America allocated to GWIM, it earned Bank of America $0.30 in a single year.
I'll wait while that digests. A 30% return on capital is exceptional -- I'd kill for returns like that.
This is what investors should expect from asset managers, which rely on other people's money, not their own, to drive profitability.
A star in its industry
Bank of America's GWIM unit has consistently been at the top in its industry for pre-tax margins (25.6% in the first quarter of 2014), client assets under management, and employee productivity. In the first quarter, its advisors were generating an average of $1.06 million in annual productivity to the company.
This revenue is largely driven by assets under management, the company's brokerage business, and net interest income.
You see, GWIM isn't a pure-play asset manager. It's more like an asset manager with a private bank hanging on for the ride. The first quarter of 2014 revealed assets were split into the following categories:
Assets under management: $842 billion
The very best of the business is right here. These assets generate royalty-like fee income in the form of management fees paid to the company every single day, year after year.
Brokerage assets: $1.09 trillion
Brokerage assets are derived through the company's Merrill Lynch brokerage service. These assets generate transaction fees, but more importantly, they're easy pickings for GWIM's many private bankers and wealth advisors to turn these balances into fee-generating assets under management.
Deposits: $244 billion & Loans and leases: $120 billion
I'm combining these two, because they're an important part of the company's banking operation. Do note the very big difference in size between the loan book ($120 billion) and the deposits ($244 billion). The bank has plenty of room for loan growth to drive net interest margin by deploying more of its deposit base into loans to its high-net worth customers. As of February, only 12% of Merrill Lynch customers had a mortgage with the bank.
Assets in custody: $136 billion
These are sticky assets, but not a particularly important driver of revenue for the company. Rather, they serve as glue that holds U.S. Trust's wealthiest clientele to the company.
The bull case
GWIM is a natural beneficiary of an aging American population.
GWIM's funnel starts at Bank of America's core banking branches. There, Merrill Lynch will have as many as 2,000 advisors at the bank's roughly 5,000 branches. This acts as a very important marketing channel to bring in new business, and introduce Bank of America's millions of customers to highly profitable advisory products.
Andy Seig, head of Global Wealth and Retirement Solutions, explained that the bank had 5 million customers in other plans, from 401(k) programs to health care savings accounts. Servicing these plans creates a potential conversion every time they leave their employer, or seek out full-service retirement advice.
Additionally, with deposits exceeding loans and leases by $124 billion, the company has the capacity to generate substantial net interest margin going forward. Importantly, the company's loans to its clients are usually based on LIBOR, which means rate increases provide an instantaneous increase in net interest margin.
The final word
Bank of America's GWIM unit is firing on all cylinders, but there's still room for improvement. Rising asset valuations should help grow assets under management over time, while the bank's branches serve as a valuable lead-generating machine for its advisors.
Some 48% of Merrill Lynch customers use Bank of America's classic banking services. Nine million of its consumer banking customers have a household net worth exceeding $250,000. That's a prime well to tap for future revenue.
As a stand-alone business, I can't see why the company wouldn't be valued at multiples up there with some of the best asset managers in the business. T. Rowe Price (NASDAQ:TROW) trades at roughly 20 times last year's earnings, and 16 times forward earnings. I think that's reasonable for Bank of America's GWIM, which is, in my view, a substantially better business because it can ride the coattails of the bank's core unit.
At 16 times 2013 profits of roughly $3 billion, GWIM would earn a $48 billion valuation or about 30% of the whole bank's current valuation. While that valuation, and its accuracy, will largely hinge on the ups and downs of the market, it's quite clear to me that GWIM is a hidden gem in a bank investors love to hate.
For Jordan's full Bank of America analysis and total valuation number, click here.