In 2011, a little over a year after taking the helm at Bank of America (NYSE:BAC), CEO Brian Moynihan predicted that the nation's second-biggest bank by assets would earn between $22 billion and $24 billion a year after the effects of the financial crisis receded fully into the background.
Moynihan's strategy was a novel one for Bank of America, which had spent the previous six decades gorging on acquisitions as the states and Congress dismantled restrictions on branch and interstate banking. The new Bank of America, said Moynihan, would grow with the customers it has, not assume a lot of risk in an effort to acquire new ones, as it did with its 2008 purchase of mortgage originator-cum-criminal enterprise Countrywide Financial.
"I can't stress enough to you how much of a peace dividend we'll get without mergers," Moynihan told investors and analysts at the bank's 2011 investors' day. "That peace dividend is effectively a permanent dividend."
Although Bank of America still has ground to cover before returning to its former glory, its performance in the latest quarter offered a textbook illustration of Moynihan's strategy. Instead of focusing on increasing the quantity of assets on its balance sheet, the Charlotte, North Carolina-based bank is zeroing in on quality.
"This quarter, we were able to keep the absolute level of our balance sheet flat to the second quarter," Moynihan explained on the company's third-quarter conference call. "But by doing that, we continued to replace discretionary assets with good core customer loans."
Compared to the second quarter of 2015 and the third quarter of 2014, the bank's total loan portfolio changed in size by less than a third of a percentage point. At the same time, toxic and noncore loans held in its legacy assets and servicing (LAS) and all other segments fell by 29%, going from a combined $223 billion in the third quarter of last year down to $159 billion today. This was offset by a $61 billion increase in loans held by the bank's core operating units.
The net result is that Bank of America's balance sheet, while staying stable in size, is becoming both safer and more profitable. Its net charge-offs are lower than they've been in years. And even though short-term interest rates have yet to increase, which would boost the yield on banks' interest-earning assets, the growth in commercial loans contributed to a slight uptick in the bank's net interest margin, which measures the net yield on a bank's asset portfolio after excluding its cost of funds.
In short, while Bank of America has certainly made mistakes under Moynihan's watch, it's hard to argue with his strategy of making the bank better, not bigger.