The heightened regulatory and compliance costs associated with large universal banks, makes one question whether being big continues to be the asset it once was for a company like Bank of America (NYSE:BAC). To this end, analysts and commentators are beginning to question whether the nation's second biggest bank by assets will eventually break off its 2008 union with Merrill Lynch.
In this segment of Industry Focus: Financials, The Motley Fool's Gaby Lapera and John Maxfield discuss this possibility, concluding that it's not as farfetched as one might think.
A transcript follows the video.
This podcast was recorded on May 9, 2016.
Gaby Lapera: Do you think Bank of America will sell Merrill Lynch?
John Maxfield: Here's the question about Bank of America and Merrill Lynch. It looks to me, and I would say that a lot of bank analysts would agree, that Bank of America, as it is presently constructed, i.e. as a universal bank with this huge slate of operations, both investment banking operations and retail banking operations, it doesn't look like that combination is going to produce the type of profits that investors are going to expect over the long run.
So then, the question is, what does Bank of America do about this? Does is basically spin Merrill Lynch back off? And I don't see that happening, because Merrill Lynch does have really valuable wealth management businesses that Bank of America does benefit from a lot, that are really stable and add to its business, as opposed to subtracting from it. Mostly likely, you would think it would keep those wealth management operations.
The question is, what will it do with those Wall Street operations? Does it just continue to slog along and hope things turn around eventually? Does is shut those down? Does it spin those off to another bank or to a competitor? That's the big question. But I would certainly say that, if Bank of America's profitability does not improve, and because of the regulatory constraints around these things, and the way Bank of America is built, it looks like it's going to have a hard time earning the same type of money as Wells Fargo. And at that point, I mean, two years or five years from now, we'll be more than a decade past the financial crisis. If Bank of America isn't able to earn that 1% on its assets, I would have a hard time envisioning investors sitting pat and just letting things continue on as they are.
Lapera: Yeah, especially because the bank has talked about increasing efficiencies a lot, now that they're done with all their legal woes. Well, for the most part, they're done with all their legal woes. I think they're probably going to start looking internally and seeing what cost-cutting measures they can take. They've already started doing it. This might just be a natural progression of that.
Maxfield: Yeah. Under project BAC, they've cut over $8 billion in annual expenses on a yearly basis. But you can only cut expenses so far. The problem at Bank of America really is no longer about expenses. The problem now is about revenue. How will it generate more revenue?
Gaby Lapera has no position in any stocks mentioned. John Maxfield owns shares of Bank of America and Wells Fargo. The Motley Fool owns shares of and recommends Wells Fargo. The Motley Fool recommends Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.