Branches Still Core of Bank of America
Sometimes, it pays to be a bit old-fashioned.
Deregulation of the financial services industry allowed Bank of America Corp. to take on the likes of Citigroup Inc. and J.P. Morgan Chase & Co. in areas such as securities underwriting and brokerage services. But the core business of the Charlotte, N.C., bank remains plain old branch banking.
That retail business has been a bulwark in these tricky times, generating two-thirds of BofA’s revenue. As Americans flee the crumbling stock market, money has flowed from risky investments to the safety of bank accounts. And as interest rates have plunged to 40-year lows, mortgage lending has boomed.
To be sure, BofA--formed by the 1998 merger of NationsBank Corp. and San Francisco-based BankAmerica Corp.--has lost big on loans to telecommunications and cable companies, as well as to Latin American governments. But the recent woes of other mega-banks are worse.
In the crucial California market, meanwhile, BofA faces stiff competition both from old rivals such as Wells Fargo & Co. and new ones such as Citigroup, which is buying California Federal Bank parent Golden State Bancorp Inc.
Last week, BofA’s chief financial officer, James H. Hance, talked about the state of the banking industry in an interview with The Times. Here are some excerpts:
Question: For some time you have been cutting back on the number of big corporate loans on your books and emphasizing that you prefer borrowers who also used your investment banking and other services. Now regulators are taking a tough look at banks for improperly tying these services together. Is this going to be a problem?
Answer: The regulators are very sensitive to tying, but Bank of America is legally complying with the rules, no question about it. The market is moving toward the universal bank model, but interestingly it’s customer-driven, where a customer is looking for a better value across a whole range of services--treasury services, lending, underwriting, whatever. What you can’t do is go to a customer--and I’m simplifying it--and say: “I will give you a loan if you give me X amount of fee business and investment banking,” or something like that.
If a customer comes to you and says, “I’m going to give you all this business and we’ll think about credit and all the rest of this stuff,” then you can respond to him. But you’ve made no demands on them, so there’s a big difference there.
Q: You say you’ll defend and expand key consumer franchises like California with a “laser-like” refocusing to offer customers more convenience and service. How much have you grown recently and what are your growth plans?
A: One of the easy statistics we talk about is that in the first six months of this year, we added 240,000 net new checking accounts nationwide. Last year, all year, we added 191,000. This year, we’re on pace for a goal of 550,000. Today we have 4,300 U.S. banking centers, more or less, and we’re going to add to that by 600 over three years. And they’re going to be primarily, almost entirely, in our top 25 markets, L.A. of course being one of the biggest. And that’s a commitment of about $450 million a year, about $2 million-plus per branch. So it’s a sizable commitment to expand our retail franchise.
Q: Back in 1999, fewer than 1% of your loans were nonperforming, or bad, loans. But nonperformers reached 1.45% of your total loans last quarter. Meanwhile, we keep hearing about new problems at companies and the economic recovery looks shaky. When’s it going to turn around?
A: I think the nonperforming loans are going to go up a little bit [because companies are continuing to struggle]. The loss rates, though, are coming down. And the reason is that the really highly leveraged problem companies have more or less worked through the system. If it weren’t for the fact that it’s still not clear the economy is recovering--and incidentally we think it has all the signs of recovery with the exception of the equity markets--we would be more comfortable in believing that our credit losses have peaked.
Q: Sub-prime lending has been back in the news in a negative way, with First Alliance Corp. and Citigroup settling big FTC predatory lending cases. Last year, Bank of America sold off its business that catered to these risky borrowers, saying it was too unpredictable. Can you explain what that meant?
A: We predominantly were buying sub-prime real estate loans from someone else who was originating them--the borrowers really weren’t our customers and we didn’t have a direct relationship with them. So you leave yourself susceptible to who the originator is ... and in the sub-prime world that’s dangerous, because you don’t know what [the loan originator] is committing to. Second, the profit margin is inherently reduced because the originator gets some of it. And third, the loss rates on sub-prime in general are very volatile and very subject to the economy. That business was profitable for us when we sold it. But the return wasn’t at the level we wanted.
Q: What’s your view of the housing markets and the current high prices?
A: Here in Los Angeles, as I understand it, there’s a woeful shortage of houses. That what they tell me--a huge housing shortage to the point where it’s inhibiting growth. What would make us concerned about mortgage loss rates would be a double-dip recession or a consumer meltdown, and that could potentially lead to lower real estate prices and certainly lead to stress on payment of principal and interest.
Q: How serious is the prospect of another slowdown?
A: We actually don’t think we’re going to see a double-dip recession. We don’t think the consumer will spend a whole lot more, but we think spending will just continue [at an steady pace]. And sooner or later that demand will carry over into the middle-size businesses, and you’ll start to see some growth. Because right now they’re not building inventories, and their demand for loans is very low. And we need that as a leading indicator before the economy picks up some.
Q: Anyone ever tell you they find the video ads on your ATMs annoying?
A: We have had that feedback indeed. I think [the advertising program] is going to be modified. It’s not a [significant] revenue stream--it was supposed to be a customer convenience. We’ll see.
