Bank of America (NYSE:BAC) has performed quite well in 2014, with shares up by about 15% for the year, outperforming both the financial sector and S&P 500. The bank has come a long way since the financial crisis, but there is still a ways to go.
Let's take a step back and see what worked for the bank in 2014 and what didn't, and where things might be headed in 2015.
2014 was a pretty good year
Bank of America produced pretty impressive year-over-year growth in 2014, with the most recent earnings showing improvement in every business segment except for consumer real estate.
Consumer and Business Banking net income was up by about 4%, while Global Wealth and Investment Management profit popped 13% and Global Banking soared by an impressive 24%.
In addition to the growth, the bank has been able to put a lot of the crisis-related issues behind it, such as its record-setting $17 billion settlement with the Justice Department. Additionally, the costs to service these legacy mortgages have fallen significantly over the past few years.
Asset quality has also shown very strong improvement and continues to get even better. During the third quarter, Bank of America's net charge-offs fell by 38% and its 0.46% charge off rate is the lowest the company has seen in a decade.
Growth in the right ways
As I mentioned, Bank of America grew pretty much every area of its business. However, a few facts really stood out to me.
For one thing, the brokerage business is growing in the right way. Sure, client assets are up by 21% year over year, but when the market has a great year, assets are worth more. It doesn't necessarily mean the business is doing well.
In Bank of America's case, Merrill Lynch saw positive inflows of money, which means that the gains weren't just due to strong market performance, but by customers depositing more money than they withdrew.
Bank of America's 1.2 million new credit cards issued during the last quarter is impressive enough, but the fact that 64% of the new cards went to existing customers is the big news here. Since about half of U.S. households already have a relationship with B of A, the company's potential for attracting new clients is rather limited.
So, the bank is really starting to master the art of "cross-selling," or selling more products to those customers it already has. Not only does this cost the bank a lot less than finding brand-new customers, but it signifies that its customers are happy with the bank and are willing to expand their relationship.
And speaking of happiness
Perhaps the best reason to believe Bank of America's future is getting brighter is the increased satisfaction of their customers. This was confirmed in two ways this year.
First, Bank of America's Net Promoter Score, which measures how many more customers think highly of the bank's brand than think of it unfavorably, grew substantially over the past couple of years. In fact, in the 2012 rankings, Bank of America was dead last out of the 14 banks measured. This year, the bank was sixth, and above rival Wells Fargo. Some areas in which Bank of America scored higher than Wells were "ease of doing business" and "buying/sign up experience."
And this was also apparent in the results of the J.D. Power 2014 U.S. Primary Mortgage Origination Satisfaction Study, which has Bank of America ranked second (only to Quicken Loans) in terms of customer satisfaction. That means it beat out competitors like U.S. Bank and JPMorgan Chase. It even beat Wells, the number one mortgage originator in the U.S. (by volume).
What could get in the way?
As long as the U.S. economy keeps improving like it has, it's tough to make the case that Bank of America will have a bad year in 2015.
Of course, if the market declines, the value of Merrill Lynch's client accounts will likely fall, and people could get more conservative when it comes to taking out loans and opening new credit card accounts. And if mortgage rates rise significantly like many experts are predicting, mortgage volumes could fall again in 2015, and Bank of America's Consumer Real Estate segment could see revenues decline.
However, if the economy continues to strengthen, and Bank of America keeps doing what it's been doing, I think 2015 could be a very good year for the company and its shareholders.