Posted: May 25th, 2022
The Bank of America is one of the country’s largest retail banks. It is mid-2009, the recession has been declared to be over but there is still a lot of economic uncertainty, and the Bank must set strategy going forward. Traditionally, the bank has grown through acquisitions, and there are a lot of low-priced assets in the financial industry right now. However, any acquisition must fit with the bank’s overall strategy and its current financial position. The bank has just complete a major merger and that is one strategic issue, the ongoing economic troubles in particular in the housing market is another major issue, and at this point another issue is simply defining what the bank will look like going forward. Therefore, this is as much about setting strategy as it is about implementing strategy.
The BCG Matrix is a means by which the company’s strategic position can be understood. The axes of the matrix are business growth rate and market share. Businesses to be retained are those with either high market share and low growth rate (cash cows), high market share and high growth (stars) and sometimes low market share/high growth rate businesses (question marks). Low growth businesses with a low market share are considered to be “dogs” and should be liquidated (VBN, 2013).
Most of BoA’s businesses are cash cows, as the company has a fairly high relative market share in businesses that are low growth. The financial industry in the U.S. is mature, and with slow growth expected in housing markets in the coming years there is not much growth expected. There are not a lot of high growth businesses in which to invest, so no real stars. There might be a dog or two. The case notes that BoA has a diversified business divided among home loans, deposits, global card services, global wealth, global markets and global banking. This points to a strategy that focuses on identifying and divesting dogs, while eschewing major new investments. Integrating recent acquisitions should be a much bigger focus.
With recent acquisitions and the mid-2000s market run-up, Bank of America has seen a significant expansion of its balance sheet. Even 2010 saw an increase in assets, albeit not much of one. Interesting that here in mid-2009 the company has its 2010 financial statements already. That’s what I call a forward-thinking company. Equity has declined slightly, indicating that the liabilities have increased faster than assets. While total assets increased 1.5% last year, total liabilities increased 1.9%. That was the rate of increase in deposits — remember that a bank’s balance sheet is quite a bit different from the balance sheet of any other company. Increasing deposits is a good thing, because that increases the amount that the bank can lend. Despite the sluggishness in the economy, lending for “loans and leases” was up 4.1% last year. Thus, the balance sheet reveals that BoA is beginning to see signs of recovery in its businesses as well. The recovery has even extended into retail lending, something that was expected to recover more slowly than the economy as a whole, given that unemployment has not recovered the same way that that GDP has.
The problem for BoA is on its income statement. First, while interest income has increased 9.3%, non-interest income has fallen by 19%. This has contributed to a net loss for the first time in recent history. The provision for credit losses is much lower than in 2009, but it is still at a very high level historically, meaning that there are considerable toxic assets still on the bank’s books. Expenses are high, with the new acquisitions. Consider that while revenues 2007-2010 increased 64%, noninterest expense (i.e. operating expenses) increased 119%. This indicates that the new businesses are not as efficient as the bank’s old businesses. The bank, therefore, must consider that it has to do more cutting of acquired businesses in order to effectively streamline. Not surprisingly, the awful performance on the company’s income statement has taken its toll on the Bank’s share price, which has fallen from $53.39 in 2006 to $13.34 today, wiping out a pretty big chunk of owners’ equity in the process.
There are no proposed strategies presented in this case. This is not a capital budgeting case; it is a strategy case. No cash flow figures are presented for any of the vague concepts discussed for Bank of America’s future. The challenges are explained as follows. The first is the further integration of Merrill Lynch. Clearly this is the major priority right now for Bank of America. This is so for two reasons. The first is that Merrill came with a lot of toxic assets. The provision for loan losses is still very high, indicating that BoA recognizes that there are still a lot of toxic assets of its books, and most of these come from Merrill. They need to be dealt with, and that will require a further high to the income statement. Second, Merrill is not particularly efficient. The expenses/revenues was much higher in the mid-2000s. Since the acquisition, Bank of America has faced very high costs. It will need to reduce these costs. The BCG Matrix provides a way forward, as the company must identify the dogs in Merrill’s business (and its own) and get rid of them. If there are stars, those should receive investment, but with a slow-growing economy it is more likely that the company needs to focus on integrating Merrill and shedding the dogs before it can truly focus on growth.
That said, there are some opportunities at the tactical level that should be pursued. Mobile is not so much a great revenue opportunity — mobile is not a driver of business per se — but it is an area where Bank of American can establish competitive advantage. Over time, being more technologically-forward can help the company to capture new business by using social media to reach out to customers, by using mobile apps to provide better service when and where the customer needs it, and by improving the image of the bank to the customers. While more tactical in nature, it is clear that mobile is an area where Bank of America, by virtue of its size, can invest more than many of its competitors and gain some advantage (Yurcan, 2013).
Another strategic issue that is whether or not to pursue acquisitions. This is has been the major growth driver for Bank of America in the past. Today, there are many acquisition opportunities, many at good value, among financial institutions in the U.S. because of the recession. Bank of America, however, has to deal with a major acquisition in Merrill Lynch, has a low stock price and not a lot of free cash flow for anything big. A minor acquisition here or there, especially to boost technological capabilities, is fine, but only to around $5-$10 million or so. Major acquisitions should be off the table for the time being, as they will be too disruptive given the need to integrate Merrill for at least another year and this will require management’s undivided attention (Dahl, 2011).
As a consultant, I cannot recommended taking pro-formas or NPV calculations seriously when they are made with numbers that came from someone’s backside, even my own. The reality is that such analyses are garbage in, garbage out, and should not even be conducted. Since I am not inside either Merrill or BoA, I really don’t know what businesses I would divest, or even how to handle those toxic assets I need to get off the books. The CEO doesn’t want a bunch of nonsense; the CEO wants concrete information from people who have the facts. No such facts needed to perform this analysis were presented in the case. Again, this is a strategy case, not a capital budgeting case. Moreover, there are no changes recommended to the current strategy — it is not the right time. So the pro-formas are only going to reflect the current course of action — a minor acquisition or two will not affect the statements materially but the ongoing recovery of the economy might.
Thus, it is only for compliance purposes that these pro-formas exist. It is recommended that the CEO ignore them, since the person creating them lacks the inside knowledge that would normally take a team of experts several months to acquire. As an example, it wasn’t until 2013 that the company was able to make the decision to unwind the Merrill Lynch business unit (Son, 2013).
Income before Tax
The assumptions that went into this were that the company would see some revenue growth, but this would be constrained by selling off units. The same would affect the growth in total assets. Percentage increases were generally based off of the last time there were normal operating conditions, in the mid-2000s. Tax rates were based on that era as well. Further, the total liabilities were going to decrease under this plan because more of the toxic assets would be removed from the balance sheet. In the long run, the company would increase borrowing as part of its capital structure, however, largely because it would need to borrow to undertake share buybacks to prop up the stock price as the economy continues to founder for the next few years.
Dahl, D. (2011). How to prepare your management team for an acquisition. Inc. Magazine. Retrieved February 21, 2014 from http://www.inc.com/guides/201106/how-to-prepare-your-management-team-for-an-acquisition.html
MSN Moneycentral: Bank of America (2014). Retrieved February 21, 2014 from http://investing.money.msn.com/investments/stock-income-statement/?symbol=BAC
Son, H. (2013). BofA will dissolve Merrill Lynch unit while keeping name. Bloomberg. Retrieved February 21, 2014 from http://www.bloomberg.com/news/2013-08-16/bofa-plans-to-dissolve-merrill-lynch-to-simplify-company.html
VBN. (2013). BCG Model. Value-Based Management.net. Retrieved February 21, 2014 from http://www.valuebasedmanagement.net/methods_bcgmatrix.html
Yurcan, B. (2013). The future of mobile at Bank of America. Bank Systems & Technology. Retrieved February 21, 2014 from http://www.banktech.com/channels/the-future-of-mobile-at-bank-of-america/240151601
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