Please ensure Javascript is enabled for purposes of website accessibility

Will Bank of America Go Back to Basic Banking?

By Motley Fool Staff - May 17, 2016 at 10:42AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The $2.2 trillion bank may be regretting its decision to be a jack of all trades when it comes to financial products and services.

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 (BAC 1.38%). 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: FinancialsThe 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?

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$31.56 (1.38%) $0.43

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/04/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.