Business Analysis III

MGT/521

September 19, 2011
Bud Stinson

Business Analysis III

Bank of America was formed through a merger between the Bank of Italy doing business in the San Francisco area and Bank of America operating mostly out of the Los Angeles area. The bank slowly grew from doing business in the California area to expanding across the country and eventually the world. Bank of America did not start growing into the large financial institution most people know it as today until the late 1980s. Bank of America grew through a series of acquisitions and mergers. The goal of Bank of America through these acquisitions was to become the number one bank in the United States. Bank of America is the largest bank holding company in the United States (National Information Center, 2001). Even though Bank of America has established itself domestically as a financial leader, the bank offers services to consumers around the world. Recent economic trends around the world have given Bank of America the opportunity to continue to expand the business. The economy has been sliding for some time now. To help the economy bounce back the FED will lower interest rates hoping to spur the economy. Lowering interest rates will not turn the economy immediately. The transition can be slow and take up to a year and a half. The FED began lowering rates dramatically in 2008 because of the bank credit crisis. The government spent hundreds of billions of dollars to put some liquidity back into the financial markets. This was done to avoid a total collapse. After the bailouts interest rates could return to a reasonable percentage. This opened the door for consumers to begin borrowing money again. Just as important this allowed banks to begin to lend money. This allowed businesses to move forward with plans to expand. Individuals began looking at purchasing homes again. Because the financial world was still in turmoil there at least seemed to be some form of stability that was returned. Lowering interest rates is designed to stimulate the economy. Because rates are lower businesses can attempt to borrow money to expand their business. A few years back rates were almost twice as high. Financial institutions still have fear. Banks are in the business of lending money. Lending money when there is a risk of no return has caused some unrest. While the economy is struggling businesses are not bringing inasmuch income as expected. This has led to higher delinquency rates on small business loans. The lower rates stimulated the initial action but financial institutions will have a hard time recovering the funds if businesses are delinquent on their loans. Businesses are spending more money on credit because their cash is being stretched. Extending lines of credit can help banks bring in additional income, but it will spread the businesses and consumers even thinner than they already are. Banks have offered services in the past marketed as free. These services never were free to the banks. In the past “free” checking accounts were paid for by swipe fees. A swipe fee is the amount the bank charges the merchant every time a credit or debit card is used. A 21 cent limit has been placed on swipe fees by the Fed. Banks need to start charging fees to help bring in revenue. Most checking accounts have already started charging fees. Fees will come from different areas that consumers have not seen before. Paper statements and teller assistance are two areas that bank customers may be caught off guard by. Bank of America has started charging a $59 annual fee for their credit card (Okomo, 2001). This fee will only affect 5% of the customers, but it is another way to increase revenue. Bank of America offered customers the option to close their account to avoid paying the fee. To maximize their potential moving forward Bank of America will have to obtain their fees in a reasonable way. With the laws and regulations that have changed recently almost all banks have returned to charging fees for their services. Every bank will charge a fee for certain bank accounts. How the bank passes these fees along to consumers can mean the difference between losing consumers to the competition. Certain consumers are worth more to a bank than others. Consumers are not going to be happy about playing fees. Bank of America needs to make sure that if they need to lose customers they are losing the right customer. No bank ever wants to lose a consumer but there are customers who are more profitable than others. Banks used to grab as many customers as possible. That was the train of thought to bring in more business. The economy has forced financial institutions to start grabbing the right customer. Bank of America will want to recruit profitable new customers. Offering an incentive to new customers should come with a monthly requirement of direct deposit, and a certain amount of debit transactions. Finding these customers is crucial. Bank of America will need to market to consumers who will be depositing into their bank accounts so that there are funds passing through the institution. The economy has been a rough subject for the last few years. Bank of America continues to make adjustments necessary to survive in the ever-changing market. The bank has been making changes throughout the past few years to make sure it can remain a leader in the domestic banking industry. “Chief Risk Officer Bruce Thompson told investors that the bank has spent the past two year’s tightening underwriting standards for consumer loans and working through the poor credit cycle. He said the bank expects credit quality to continue improving in the year ahead” (O’Daniel, 2011,). The bank has been shedding real estate assets and selling off different parts of the company to bring in more cash. The statement of cash flows has not looked good recently. These recent sell offs have been done to improve the numbers on that statement.

To increase the cash flow at Bank of America the bank has decided to start selling off some of its assets. Bank of America has been selling its noncore assets to help realign the balance sheet. Bank of America recently has started selling off its credit card operations. Credit card portfolios require a large amount of capital to be put up to maintain. The MBNA Canada credit card arm has been sold to Toronto-Dominion Bank. The international card business has been sold off as well. The most recent asset sale expected to close at the end of this quarter is the sale of half of its stake in China Construction Bank Corporation. The sale should generate about $8.3 billion in cash with an after tax gain of about $3.3 billion (Cooper, 2011). Bank of America will continue to sell off the noncore assets as the firm looks to bring more cash into the organization. The statement of cash flows has been coming up short for a few quarters now. An influx of cash is needed in the organization. Bank of America will need to be careful selling off these assets. Selling too many can prove to be costly. The recent acquisition of Countrywide put Bank of America in a tough spot in the mortgage industry. The bank has been battling for years to try to dig out of the mess that Countrywide created. Bank of America has moved these bad loans to a separate part of the business. This includes the Countrywide loans. These loans need to be modified to be brought back to current or foreclosed so that Bank of America can continue to move forward. According to Terry Laughlin, the legacy asset servicing executive of Bank of America, “We’re going to get after this, we’re going to do it the right way, and we’ll put it to bed in 36 months,” (O’Daniel, 2011,). The bank has a positive outlook that the end may be in sight. Most of Bank of America’s strategies over the past 18 months have been dealing with the crisis that was happening. It appears as though Bank of America has been trying to put a band aid on a rather large wound. The wound seems like it may be healing. Signs are starting to show that the end may be in sight as long as the bank plays its cards the right way. Warren Buffet has decided to make a large investment in Bank of America. The Countrywide ordeal seems to be coming to a close. The bank needs to continue to take the necessary steps to resolve and put this situation behind them. When the housing crisis ends Bank of America will be able to turn the negative business into positive. Some help may be needed from the government to make this happen. The strategy the bank is currently employing seems to be righting the ship. Bank of America has spent a majority of their time and efforts to correct the problems in the mortgage industry. The National Homeowner Retention Program was started to help homeowners in a bad position with their mortgage to salvage their home. Going into foreclosure or a short sale does not help anyone. Through this program Bank of America may forgive a certain percentage of the principal of the loan to help keep homeowners in their homes. According to Bank of America (2011) “Since the initial outreach to customers under the NHRP in December 2008 through March of this year, the Bank has offered an NHRP modification or started an NHRP-eligible trial modification under HAMP for more than 200,000 homeowners.” This plan is an exceptional way to not only help keep homeowners in their homes but also a way to create good publicity in the media. Reconnecting with the consumer can help to strengthen Bank of Americas reputation with the public. Bank of America will want to provide services to the consumers they already have as well the new consumers they are trying to attract. The recent partnership with Merrill Lynch is a wonderful way to help consumers. Merrill Lynch’s wealth management opportunities have not begun to be tapped into yet. Merrill Lynch offers a full spectrum of financial advice, resources, and product. The bank or Merrill Lynch does not have to sell products to consumers. What they need to do is provide sound advice for the consumers so a consumer can have a name in the banking and investment industry who can be trusted. The focus is getting back to the customer. If a customer walks away satisfied and happy the company will be doing well. A satisfied customer can lead to referrals of other potential consumers. Customer service training has been a big emphasis over the past year. Bank of America has used training on location to better prepare the employees to deal with customers. The bank has also employed the use of technology to get the training materials out to all of the employees in the company across the country. These training strategies will allow Bank of America to ensure all employees are trained the same. A customer in New York should receive the same quality of service as a customer in California. With all of the emphasis on the Internet and mobile banking the bank may consider shutting down some of the less popular branch locations. Branches have become places where customers come to get advice or participate in a specific transaction. The average customer does not visit branch locations as much. Most consumers choose to use ATM’s for deposit and withdrawal transactions even when bank locations are open and tellers are there to help. Bank branches cost money to operate whether consumers are there to perform transactions or not. Branch locations need utilities, insurance, and wages. The shutting down of branches in areas where they are less frequently visited can allow Bank of America to keep fees down. Human resources management plays an extravagant role in a business. The people involved in human resources management deal with administrative duties, planning, and record keeping. According to Nickels, McHugh, & McHugh, 2010, “Human resource management is the process of determining human resource needs and then recruiting, selecting, developing, motivating, evaluating, compensating, and scheduling employees to achieve organizational goals.” The people within the organization are the most important pieces of the organization. As the business world continues to change, human resources will help the people within the organization change. The new training that Bank of America has been rolling out is the responsibility of human resources. Human resources needs to make sure that the training is first rolled out to the people administering the training. The people in charge of the training must be resourceful enough to train the employees. After the trainers have been trained they must administer the training. Human services must make sure the corporation is providing the benefits that employees need and want. Without the proper benefits employees may leave for the competition. Well trained and happy employees will lead to a successful organization. Human resources must also be aware of the laws and regulations. Laws are in place to make sure businesses are running fairly and ethically. The human resources department must make sure that everything Bank of America is running is according to the law. Violations could result in fines and sanctions that could end up crippling a business. As Bank of America continues to grow the human resources departments needs to make sure that all employees at every location around the world adheres to all laws and regulations. A mutual fund manager’s job is to decide if investing in a firm will result in a profit being brought back from the initial investment. Bank of America’s financial statements show the firm is been in good standing. Bank of America has a current ratio of 1.11. This number seems a little on the low side but is good compared to the competition. Bank of America has started to liquefy some of its assets to bring additional cash funds in. The bank has been able to do so because of the good standing of the balance sheet. The recent financial crisis has Bank of America showing a loss on the most recent income statement. The recent mortgage acquisition of Countrywide can be blamed for part of these losses. Bank of America has moved forward with a plan to help them put this situation behind them. The expenses related to this have drained potential profits from Bank of America. A deeper look at the financial statements shows that Bank of America has sufficient amounts of cash. Bank of America’s capital has continued to increase as well. Bank of America is one of the largest banks in the country. The problems the bank has had with the government are slowly being resolved. Bank of America seems to have a plan to solve the mortgage crisis it became a part of through its acquisition. The stock is currently trading for the lowest price in the last two and a half years. This seems to be more because investors are scared of the stock more so than the poor performance of the company. Bank of America is here to stay and the stock price may not get much lower before the turnaround begins. Now would be a great time to invest in Bank of America.

Reference
Bank of America . (2011). Retrieved from http://homeloanhelp.bankofamerica.com/en/nhrpannouncement.html
Cooper, R. (2011, August 29). Bank of America sells shares in China bank for $8.3bn. The Telegraph. Retrieved from http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8729748/Bank-of-America-sells-shares-in-China-bank-for-8.3bn.html
National Information Center. (2011). Top 50 Bank Holding Companies. Retrieved from http://www.ffiec.gov/nicpubweb/nicweb/Top50form.aspx
Nickels, W.G., McHugh, J.M., & McHugh, S.M. (2010). Understanding Business (9th ed.). : McGraw-Hill Company.
O'Daniel, A. (2011, March 8). Bank of America CEO Brian Moynihan details 'grind-it-out strategy. Charlotte Business Journal. Retrieved from http://www.bizjournals.com/charlotte/blog/bank_notes/2011/03/bank-of-america-ceo-moynihan.html
Okomo, C. (2011). MyBankTracker. Retrieved from http://www.mybanktracker.com/bank-news/2011/02/17/bank-america-charge-59-credit-card-fee/