Bank of America research paper Kim Adams Wilmington University
Bank of America's history dates back to 1904, when Amadeo Giannini founded the Bank of Italy in San Francisco to cater to immigrants who were denied service from other banks. Shortly following the opening of Bank of Italy the San Francisco earthquake struck, causing most banks to halt all lending practices. Giannini managed to rescue funds to start lending within a few days of the disaster to those who was willing to rebuild. Bank of America was formed when Giannini consolidated his Bank of Italy with Bank of America. As of 2010, Bank of America is the 5th largest company in the United States by total revenue, as well as the second largest non-oil company in the U.S. (after Walmart). In 2010, Forbes listed Bank of America as the 3rd biggest company in the world. (CNN Money) As one can imagine, all industries from mom and pop stores to multi million corporations have felt the wrath of the economic downturn. To make the statement that any bank is performing desirably would be a slight exaggeration. Prior to the recession, banks (including Bank of America) were content with relaxed lending guidelines, contracting out any brokers, and questionable appraisers. The above noted coupled with American’s constant desire for more, set the United States up for a perfect storm. The share price, like the US banking market in general, has dipped significantly from its relatively recent highs. The last twelve months have remained painful, many are optimistic but in actuality the share price has not been significantly different from that at the end of December 2008. For now, it appears that Bank of America is continuing to struggle like the majority of the banking industry. Banks were forced to reevaluate spending and lending practices due to the weaker marked and new government regulation that will cut their profits. One of the major effects the economic downturn and changes in regulations had on business it that it minimized the profit margin for business, with this being said many businesses had to make drastic cuts so they would not have to feel the burn of dwindling profits. Bank of America is not exempt for being forced to reduce cost. They plan on cutting annual spending by $5 billion in the next two years by eliminating 40,000 jobs, Reuter’s reports. Most of the reductions will come from the firm’s consumer banking and bank systems architecture, CEO Brian Moynihan said, according to Reuters.” The company built itself through acquisitions over decades and has not properly integrated systems and closed unnecessary branches,” Reuters writes. “Bank of America has about 50 senior employees reviewing some 150,000 ideas for cutting costs.” (CNN MONEY) Bank of America has plans to eliminate 6,000 jobs this year and expects a significant part of their reductions will come from attrition and the elimination of unfilled positions. Simply cutting jobs is not the only thing that Bank of America is doing to improve their economic position, Goldman Sachs plans to cut as much as $1 billion in non-compensation expenses -- costs not directly linked to salaries, bonuses and benefits -- over the next 9 months. (K Engelmann)

Lending practices have taken a drastic turn towards the more conservative route. Moreover, obtaining a loan prior to the recession was relatively easy. Banks charged private mortgage insurance if you had the loan to value of above 80%, but they would typically lend up to 100% financing making it a better possibility for American’s to become homeowners. Banks took into consideration your debt to income, loan to value, and credit score, those were the biggest deciding factors; if ones credit score was good enough, most banks would not verify income. Now lending guidelines have become extremely strict, the possibility of having an interest only, stated income, or 100% financing is unheard of. Bank of America was hit hard in the mortgage industry especially with the purchase of Countrywide Financial corp in 2008. They are set to lose nearly all the mortgage market shares, it gained by buying Countrywide Financial Corp in 2008, in the latest sign of how painful the acquisition has been for the bank ( S Orlofsky) Most of Bank of America’s lending came from this acquisition, this has set Bank of America back thus forcing them to take the above noted measures to maximize on profits with the hopes of minimizing their financial bourdons. Bank of America is not the only one reporting negative mortgage figures in the current economy; financial analysis said “There is no question that 2011 will be worst mortgage lending year in a decade."

Ethical issues

Bank of Americas Code of Ethics contains the following key themes consistent with their Core Values:
• We honor our Code. • We act ethically. • We manage risk effectively. • We are fair and honest in our communications. • We safeguard information. • We protect Bank of America assets. • We conduct our financial affairs responsibly. • We care about one another. • We respect laws and regulations. • We will not misuse information. • We value our communities. (Bank of America Code of Ethics)

Bank of America’s Code of Ethics contains the key points one would hope a large company who employees over 288,000 Americans would want to uphold. Bank of America culture was know very well throughout Delaware for it has many employees that reside here. The common perception of Bank of America as an employer was for the most part positive, slightly mirroring a cult but their employees truly believed in their mission and loved the company. Unfortunately, Bank of America (much as any bank that is not fee less like ING DIRECT) is scrutinized for nickel and diming their customers. The unstable environment makes any alteration (major or minor) in the cost of doing business with a company very important, Customer are less willing to pay for unnecessary items and/or fees because we are more conscious of our spending due to effects of the recession.

Having a free checking account is almost a thought of the past. Bank of America is leading the way in capitalizing on newly created fees. Prior to the most recent fee changes, many customer were only charged a fee if they did something the bank saw as negative, for example bounce a check or overdraw on your account. Customers adapted to these fees for they agreed with the punishment of the above items, now customer’s feel like they are being penalized for doing nothing wrong, thus leading into how consumers view banks (with Bank of America in the front) as unethical for charging unnecessary fees in an already troubled economy. Customers are appalled to find out that Bank of America instituted a five-dollar per month charge for usage of its debit cards effective early next year (ABC News.) Consumers are not pleased with the news and have taken to the blogosphere in droves to vent their displeasure, the Friday after the announcement the bank’s stock dropped by more than 3.5 percent which can only be a forecaster of what will happen in the future if banks continue to set new fees! Many can only assume that if a corporation as big as Bank of America is adding fees and cutting jobs, that other such as TD bank and other institutions would like to mirror the success of Bank of America will soon follow.

Marketing Strategies

Going into 2011 Bank of America clearly outlined 2 major strategies that they want to focus on for the year, they want to lead the industry towards a better way of banking and wealth and capitalize the business account market. They also noted that they will do this by offering clear and straightforward banking that provides greater choice and control, services and products they value, personalized advice, a quality service experience, unmatched accessibility, and world-class technology that is reliable and secure. (Bank of America 2010 year-end report.) They want to utilize their already industry leading banking products and making them more interactive and convenient.

From business checking and business loans, to employee retirement planning, to access to capital markets worldwide, there’s nothing growing companies can’t find through Bank of America. This gives us a significant opportunity to deepen relationships among the hundreds of thousands of companies we already serve, including small businesses, mid-sized companies, and some of the largest multi- national corporations in the world.” (Bank of America 2010 year end report.) Bank of America wants to support the unique needs of small businesses, the backbone of the U.S. economy, thus allowing them to help fuel economic stability and job growth across our communities. The market for business checking, saving, and small business loans are becoming extinct so being able to maintain and increase their domination position in the business market would be valuable.

Strengths and weaknesses

Bank of America has a dominant market position and leverages its position to insure the competitive advantage over its peers. However, the losses due to subprime market exposure put pressure on it’s capital. Bank of America shares many strengths but it weaknesses cold be the reason Bank of America looses its leading position.

Strengths

• Leading the market position in the United states

• Growth in core banking

• Product innovation capabilities

• The bank’s global assets equal to $2.261 trillion.

• Convenience (online banking, mobile banking, large retail branch availability)

• In addition to being a leading retail bank, Bank of America is one of the largest wealth management firms in the world and a leading investment banking firm serving clients all around the world.

• Approximately $147 billion in new and renewed credit for customers and clients in Q2 2011

• A leading global corporate and investment banking platform, serving clients in over 100 countries

• A leading investment research platform covering 3,300 companies in nearly 60 countries

Weaknesses

• Weak wholesale banking operations

• Bank of America faces litigation problems driving up its expenses

• Declining share and interest price- the second-quarter 2011 net loss was $9.13 billion, equal to $0.90 per share. Second-quarter net interest income fell 7.9%, while the net interest margin narrowed to 2.49% from 2.66%, and interest-earning assets dropped 1.3%.

• Negative public relations due to increase in fees and job layoffs

• New costs associated with integration and management systems can leave the group more vulnerable to shifts in the market and the economy.

Industry Analysis

Bank of America top competitors are Citigroup (C), JPMorgan Chase (JPM), and (WFC)

|C = Citigroup, Inc. |
|JPM = JPMorgan Chase & Co. |
|WFC = Wells Fargo & Company |

Direct Competitor
Comparison | | | |BAC |C |JPM |WFC |Industry | |Market Cap: |61.72B |81.91B |120.54B |130.10B |28.17M | |Employees: |288,000 |263,000 |256,663 |266,600 |182.00 | |Qtrly Rev Growth (yoy): |-52.60% |12.20% |3.60% |6.60% |10.40% | |Revenue (ttm): |71.62B |63.07B |93.43B |72.49B |21.53M | |Gross Margin (ttm): |N/A |N/A |N/A |N/A |0.00% | |EBITDA (ttm): |N/A |N/A |N/A |N/A |N/A | |Operating Margin (ttm): |1.91% |20.41% |39.92% |34.58% |20.49% | |Net Income (ttm): |-16.32B |9.83B |18.55B |13.68B |N/A | |EPS (ttm): |-1.64 |3.24 |4.69 |2.58 |0.15 | |P/E (ttm): |N/A |8.67 |6.66 |9.55 |13.68 | |PEG (5 yr expected): |-1.37 |0.63 |0.76 |0.77 |1.24 | |P/S (ttm): |0.88 |1.31 |1.32 |1.94 |1.38 | | | | | |

Bank of America is part of the Mid-Atlantic Banks whom at this time is not doing ideal. The Regional Mid- Atlantic banks are down 2.05 as of October 2011. From a broad look Bank of America and its competitors are all reporting negative turn in stock price. Wells Fargo’s third-quarter earnings missed expectations as the banking giant recorded loan growth, but not enough to offset the drag in revenue from capital-markets operations or to make soaring deposits profitable. They are currently down (7.05) out of all the companies compared, they are down the lowest, EPS is up 20% from the prior year. Next, JP Morgan Chase is the industry leader in equities and in fixed income dispute its stock being down (2.14). Average daily revenue for Chase during the most recent quarter was a remarkable $118 million. The report shows that the bank made between $60 and $90 million on most days during the quarter. EPS was at $1.08 during the third quarter, after evaluating the numbers one can only come to the conclusion that JP Morgan Chase stock is undervalued so the risk factor is low. Citi Group has been struggling much like most banks since 2007, they are doing better but still are not out of the red. Citi’s second-quarter 2011 earnings came in at $1.09 per share, outpacing the Zacks Consensus Estimate of 96 cents. The result also improved from the prior quarter's earnings of 99 cents per share and the year-ago quarter’s earnings of 90 cents per share.

Recommendations

As you can see the market tends to go up and down together, as noted before the primary reason for Bank of Americas drastic downturn is due to the mortgages. My primary recommendation would be to evaluate the underwriting system to insure that any new mortgages obtained will be something that the company can keep on the books for more than 6 month (typically mortgages become profitable to banks after 6 months.) Next, one of Bank of Americas goals is to cut spending by $5 billion, but they are getting negative reviews because they are planning on cutting jobs and enhance fees for customers. I recommend that they research better operations to eliminate excess paper, processing times, and process flow. I would ask that they start with their mortgage process flow for that is the section that is harming Bank of America the most. They will need to review the process flow from the beginning application process, underwriting decisions, distribution of regulated documents, how the customer accepts the mortgage application, at what time and how the appraisal is ordered, the operation turn around time, how the customer interacts with the process etc. Currently, Bank of America’s mortgage process is relatively slow, if they could better the process flow and get more mortgages in, and faster that will increase profit coming in hopefully eliminating the need for pesky fees and minimizing jobs. My third recommendation is for Bank of America to halt all acquisitions and expansions projects until they can get a firm grasp on the budget and mortgage issues. I’m sure this will take some time to implement everything recommended but it will be for the betterment of the company and the economy.

Reference Page

CNN Money- 2011 http://money.cnn.com/magazines/fortune/fortune500/2010/full_list/

http://www.huffingtonpost.com/2011/06/17/wall-street-to-cut-expenses-staffing_n_879191.html

Banks May Shun $231 Billion Rollover of U.S. Emergency Loans-http://news.businessweek.com/article.asp?documentKey=1377-aBxDQXVc.C4A- 6TEMD9SNGFU29IOO2J9L710C6D

Analysis - Bank of America's mortgage market share plunges-http://www.reuters.com/article/2011/10/11/us-bankofamerica-correspondent-idUSTRE79A6YW20111011

Bank of America Code of Ethics-http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9OTc5Mjl8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1

Bank of America, Adam Smith and a Fee Market System-http://abcnews.go.com/Business/bank-america-fee-free-society-competitive-economy-lead/story?id=14692846

Bank of America year end review-http://media.corporate-ir.net/media_files/irol/71/71595/reports/2010_AR.pdf