Mike Mayo of brokerage CLSA is probably the best-known bank analyst in America -- and for good reason, in my opinion. While I don't agree with Mayo on everything -- particularly his buy recommendation on Citigroup -- it's hard not to respect one of the few Wall Street analysts who's willing to publicly challenge the executives of underperforming banks.
Mayo's independence has been most notable when it comes to the nation's two largest lenders: JPMorgan Chase and Bank of America (NYSE:BAC). While he seems to be letting up on the former (which is probably appropriate, given the acumen of its CEO, Jamie Dimon), Mayo remains hot on the trail of Bank of America. During the bank's latest conference call, Mayo pressured CEO Brian Moynihan to give precise profitability targets, which the bank has been reluctant to do for the past few years after some of its post-crisis projections veered widely from their mark.
Moynihan responded that Bank of America should earn between 12% and 13% on its tangible common equity by the end of 2016, or almost twice where it's at today. Yet although Mayo got the information he was looking for, he continues to urge investors to steer clear of Bank of America. In his latest research note, he laid out eight reasons to do so:
- Moynihan was promoted to chairman of Bank of America's board of directors despite missing 2014 targets and overseeing five consecutive years of downright dismal financial performance, earning less than 2% on its equity in all but one year from 2010 to 2014.
- Unlike its closest competitors, JPMorgan and Citigroup, Bank of America hasn't officially posted time frames for any published financial targets.
- Moreover, the goals that have been published -- thanks at least partially to Mayo's prodding -- are nothing more than aspirational, given the current state of Bank of America's operations.
- Despite having an oppressively bloated expense base, Bank of America has provided poor targets at best for gauging its success at slimming down its operations.
- According to Mayo, Moynihan's most recent letter to shareholders (located at the front of its 2014 annual report) "cherry picks stock price performance during only good period (last three years)," doesn't contain a single forward-looking metric, and ignores pertinent issues and missed targets.
- The bank's aggressive but overly general approach to cross-selling has the potential to encourage the bank's employees to push products on customers who will not benefit from them.
- A non-independent director, Chad Gifford, heads the bank's pivotal credit committee. In my opinion, though, this probably isn't altogether inappropriate, given Gifford's considerable banking experience (he was the CEO of BankBoston when it merged with Bank of America in 2004).
- Mayo says Moynihan exaggerated in his most recent shareholder letter when he claimed that Bank of America has the "best consumer bank" despite the fact that B of A was one of the worst-rated banks in J.D. Power's latest U.S. retail banking satisfaction study.
In short, these concerns have led Mayo's team to the conclusion that Bank of America's board, and "specifically the Governance Committee has failed to keep adequate oversight over management."
I agree with most of Mayo's points here. However, the bigger issue is simply that Bank of America has fallen so far behind competitors like JPMorgan in investment banking and Wells Fargo in mortgage banking that I can't help but think it will take many years, if not decades, for the one-time industry-leader to generate the level of revenue necessary to earn a double-digit return on equity through all stages of the next credit cycle.
Will Mayo and I be proven wrong? For what it's worth, I hope so. But I'd also say that the odds are stacked heavily against Bank of America's ability to rejoin the ranks of the nation's elite lenders anytime soon.