Chillin' out till it needs to be funded
When May 2009 began, the stress test results more or less indicted Bank of America asking it to raise $34 billion in fresh equity to cover its gap. This came on the heels of its questionable act ( Kenneth Lewis is still responding to the resulting enquiries) in first accepting and then trying to finagle out of the Merrill Lynch takeover using the MAC clause. But all that is past as BofA successfully raised the required capital and closed the second quarter with exceptional trading profits of $6.7 billion and a top line of $33.9 billion showing its old magic and leaving the markets with a lot of positive expectations. The market reaction has not been that positive in terms of actual stock performance as people wait for the next few steps to show and prove that this is indeed the best investment american investor should make.
Wells Fargo had a far worse business performance but they were only $17 b short in the stress test, as BofA was one of the biggest mortgage and trading players, not good old WFC. Probably that image gap is the first thing BofA must prioritize for 2010. Where it was the strongest retail brand in the US after its 2001 takeover of Fidelity in the east, today it looks like it may be playing second fiddle to others. Not only because it had to cough up more capital, but also because it is one of the very few who sold their crown jewels outright in China and other Emerging Markets and whose global presence is now severely in question.
While the US Economy suffered a 6.1% deceleration in Q1 of 2009 and passed a shaky $3.9 trillion Budget for 2009 after much soul searching, Non Performing assets continued to grow at the bank rising to $31 billion at June 2009. The bank is currently on its way to sell Columbia Asset Management for an expected $2 b in pre tax gains and will likely report $12-13 b in pre tax profits in each of the remaining two quarters thus maintaining profitability after paying preferred dividends to the Government and even paying off some of the $45 b it had to borrow from the government. It is also selling the Asian real estate investing business of erstwhile Merrill Lynch. (Merrill’s Asian Business Drawing Strong Interest)
Will BofA therefore be able to act as the Market Leader American Investors expect it to be from here? There is no other way. However, it cannot sell all the banking businesses it acquired albeit in the last 5 years like MBNA (2000-1) and hope to do so. The Merrill Lynch units in Asia and at home in North America also have to turn in a good performance as the investment banking business becomes the most profitable at current valuations. It’s higher fees on retail accounts by itself will not be able to absorb rising credit losses as retail customers implode on current accounts ( overdrafts) , cards and mortgages.
To quote Ken Lewis at a recent Town Hall meeting in LA where he was addressing the Countrywide/Mortgage issues – “The bad news is that consumer confidence is at its lowest point since 1992. It’s easy to see why. Here in Los Angeles, distressed home sales are up from 3 percent of total sales in spring of 2007 to 30 percent in spring of 2008; 3.7 percent of all homes are in foreclosure; and across California, home sales prices are off almost 30 percent. And that is not to mention $4 gasoline and record food and commodity prices that are pinching household budgets.” In mortgages, the market will return to more traditional products also, along with Home buyer education and renegotiation of defaulting loans and that is no small exercise, but financial innovation has to continue as well. At this stage, while BofA consolidates it has to invest in more of market development efforts thru its extensive network and refocus on producing returns from the world’s nook and corners like in China and Brazil where there is more and more business as BRIc countries maintain their growth. BofA has to find robust business models and risk management while increasing its presence in Europe, LatAm and the developing world without decimating itself in the crisis and imploding on itself. Direct Banking models, Prudent Credit Card lending and tapping unbanked populations in responsible lending and banking programs are but obvious choices which cannot be swept aside for feigned problems in their operating structures. Business is successful in China, there are successful Credit Card companies and you are Bank of America, not an also ran. You owe it your investor and your customer.
Bank of America is among the world’s leading wealth management companies and is a global leader in corporate and investment banking and trading across a broad range of asset classes serving corporations, governments, institutions and individuals around the world and serves clients in more than 150 countries