B of A Ambitions Reflect Banks’ Strength in a Weak Economy
Like many chief executives these days, Bank of America Chairman Kenneth Lewis believes the U.S. economy is going nowhere.
The bank recently had to revise its forecast, Lewis says, because “we don’t see recovery until the second quarter of next year.”
Yet Lewis is confident that his bank, the nation’s largest with 4,500 branches coast to coast and more than $600 billion in loans and investments, will come through this slowdown without serious trouble. And so will other banks.
In fact, Lewis sees the banking industry ready to dominate financial services in this decade, acquiring or taking business from brokerage firms and insurance companies.
To be sure, BofA and other banks have bad loans to write off in the aftermath of the high-tech collapse. But “we also have earnings to afford the write-offs,” Lewis says. BofA’s earnings were down for the first half, but analysts predict its profit will be up a bit this year and more next year.
That’s one reason bank stocks have held up well in a declining stock market. Bank of America stock, which closed Friday up $1.27 to $61.50, has risen almost 30% since early January.
That’s only a start, Lewis says. In this decade, “there will be fewer banks, fewer brokerage and investment banks and fewer insurance companies. Banks will be the acquirers of brokerage and insurance firms,” Lewis told The Times last week in a visit to Los Angeles.
Such confident expectations indicate changes to come in the economy and the stock market.
Why will banks prevail in financial services? Capital, Lewis says. Banks have more equity capital than typical brokerage or insurance companies. Bank of America, for example, has roughly $50 billion in equity capital, compared with less than half that for the largest brokerage firms, Merrill Lynch and Morgan Stanley Dean Witter.
The banks’ advantage is that they can make more and bigger loans. Businesses depend on banks more than on other financial institutions for day-to-day capital. And banks are pressing their advantage.
If a company wants loans, banks are asking for other business such as stock underwriting and merger-and-acquisition counseling that is more profitable than collecting interest on loans.
Citigroup recently demanded a share of the underwriting when Philip Morris spun off Kraft Foods in an $8.7-billion sale of stock. Citi’s demand was met. The firm that combines Citibank and the investment firms Salomon Bros. and Smith Barney got to co-manage Kraft’s offering, with fees in the tens of millions, edging out Goldman Sachs and Merrill Lynch.
Bank of America recently told Wal-Mart and IBM that if loans and credit lines were their only business with the bank, they should go elsewhere. Lewis, a native of Meridian, Miss., with a finance degree from Georgia State University, explains the rationale: “If we’re going to tie up capital for a client, then we want enough business to earn a better return on that capital.”
Bank ambitions could affect business nationwide. Today’s Bank of America, the result of the 1998 merger of North Carolina’s NationsBank and California’s Bank of America, owns the largest bank in Florida--the former Barnett Banks--and in Texas--the former First Republic of Dallas.
BofA has a much larger branch organization than either Citigroup or J.P. Morgan Chase, the two most prominent models of bank and investment firm combinations to emerge since the 1999 repeal of a law that prohibited such mingling.
Banks soon will start asking to handle cash management or insurance for their small to medium-size company customers. They also will play a greater role in obtaining financing for start-up companies and new technologies. And they will want to manage depositors’ retirement savings, competing forcefully with mutual fund companies and brokerage firms.
Can banks succeed in all those roles? They have before. Bank of America, in the early 1900s, helped finance the state’s agriculture, wine and movie industries.
Later, however, as the San Francisco-based bank became big and sclerotic, it lagged in financing the modern electronics and high-tech industry on its doorstep.
Despite that misstep, Lewis says, the bank can back fledgling companies in biotech, optical networking and other technologies. “We would do it through equity financing rather than loans,” he says.
A separate question is how well Bank of America, now based in Charlotte, N.C.--NationsBank’s old headquarters--can serve California. Liam McGee, president of the California segment that delivers more than one-third of BofA’s operating income, says the bank today pays far more attention to Southern California’s diverse community of entrepreneurial companies than the old bank ever did. “We are active in every part of this community,” McGee says.
Competing bankers say BofA is “hard to beat if it plays its balance sheet”--a reference to the big bank’s capacity to make loans--but otherwise it’s unexceptional.
Nationally, analysts are divided on BofA. Tom Brown, a longtime bank analyst who heads his own money management firm, Second Curve Capital, says, “BofA is too centralized and hierarchical to allow innovation and flexibility in the field.”
But analyst Michael Mayo of Prudential Securities sees BofA undergoing the largest overhaul in its history. “You’ll see a $1-billion reduction in costs next year and operational changes accelerating after that,” Mayo says.
Lewis himself predicts that within a few years, BofA “will have less in assets than J.P. Morgan Chase, but will have $2 billion more in after-tax income per year.”
Considering that the two firms will have roughly comparable net income this year--more than $7 billion each--that’s a bold prediction.
Lewis will make it come true or be retired--and BofA “will undergo more reorganizations until somebody gets it right,” Brown says.
An important point overall is that U.S. banks are strong today and looking through the current slowdown. They have been relatively strong since October 1989, the eve of a serious economic slowdown, when Federal Reserve Chairman Alan Greenspan told banks to mend their finances and build up equity capital by investing in government bonds.
The banks did so, gained strength and now have great expectations. That’s a reminder that government can play a constructive role in business and that good business is a long-distance race, not a sprint.
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Money Line
Here is Bank of America’s list of what it views as its competitors in the financial services industry where it ranks. Total assets in billions as of June 30.
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Company Assets Citigroup $953.4 Fannie Mae 737.2 J.P. Morgan Chase 712.7 HSBC Holdings 691.8 Bank of America 625.5 Morgan Stanley 497.4 Dean Witter Allianz Group 410.6 American Int’l Group 333.2 Wells Fargo 289.8 Berkshire Hathaway 148.8
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Source: Company reports
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James Flanigan can be reached at jim.flanigan@latimes.com.
