Bank of America (BAC) First Look

Executive Summary 📝

Introduction

Bank of America operates in the financial services sector and the diversified banks industry. They are one of the 3 largest banks but struggle with growth. In this initial look, I see if they warrant a deeper dive as a possible investment.

I was initially interested in BAC because Warren Buffett owns them and sings their praises. They also had a low P/E ratio.

Here’s what I found.

Key Findings

• BAC is a slow dying company that is getting crushed by its competitors who focus on giving customers what they actually want. With Fintech companies multiplying, customers get more options to choose from with better flexibility, lower fees, and better customer service.
• While Warren Buffett is an amazing investor, he is not immune to making mistakes. He has made many mistakes in the past, and this is one of them. He is not a god, and he is not always right.
• BAC is cheap, and for good reason:
  • Poor customer service
  • Lacking technology
  • High fees
  • No moat

When I initially took a look at the business in May 17, 2023, it seemed very attractive. It was trading at a discount, and had become attractive at roughly 8 P/E. However, after doing a little more research into the business, I realized that it was a dying business. It was not a good investment, and I would not recommend it to anyone who is wanting to grow their wealth. If I was only wanting to protect my wealth then that might be a different story.

In this report I’ll get into the history, management, and some thoughts on finance and valuation. I will not be initiating coverage or completing a deep dive, as they do not deserve the effort (or capital).

Table of Contents

Table of contents is clickable for easy navigation.

1. Executive Summary 📝
   1. Introduction
   2. Key Findings
2. Table of Contents
3. Company Overview 🏢
   1. Company History
   2. Business Model
   3. Management Team
   4. Board of Directors
   5. Industry Structure
4. SWOT Analysis 💪
   1. Strengths
   2. Weaknesses
   3. Opportunities
   4. Threats
5. Financial Analysis 💰
6. Valuation 💸
7. Conclusion ✔️
8. Endnotes 🔢

Company Overview 🏢

Company History

BAC started in 1904 as Bank of Italy. It was founded by Amadeo Giannini. He was the first to offer banking services to middle-class Americans. He was also the first to offer unsecured loans to middle-class Americans.

He was a pioneer in the banking industry. He was the first to offer unsecured loans to middle-class Americans. He was also the first to offer banking services to middle-class Americans.

Here is the first location in San Francisco:

The Bank of America saga is no ordinary tale. It’s a gritty narrative that spans over a century, set on the rugged backdrop of American financial history.

1904 – The Italian Uprising: Amadeo Pietro Giannini was a man on a mission. Sick of watching banks turn their noses up at the working class, particularly Italian immigrants, he established the Bank of Italy in San Francisco. His bank was a rebel among stiffs, unapologetically championing “the little fellow”.

1906 – Rise from the Ashes: When the San Francisco earthquake hit, it brought the city to its knees. But not Giannini. With banks locked up tight, he opened his doors – or rather, a plank on the street. With loans for rebuilding, he became a beacon of hope in the midst of disaster.

1922 – Invasion of Italy: Flexing his banking muscles, Giannini took over Banca dell’Italia Meridionale and established Bank of America and Italy. His empire was growing.

1930 – A New Era: Flexing his banking muscles once again, he consolidated his empire into the Bank of America, National Trust and Savings Association. He backed industries others thought were risky bets – films, aircraft, wine. The gamble paid off.

1950s – The Trailblazers: Bank of America was the maverick that gave birth to the BankAmericard (later rebranded as Visa), revolutionizing the way people banked and spent.

1980s – On the Brink and Back: The 80s hit hard. Bad loans and misguided ventures left the bank in turmoil. But salvation came from an unexpected quarter: North Carolina-based NationsBank. The underdog had just become the first coast-to-coast bank in the country.

1998 – The Phoenix Rises: NationsBank gobbled up BankAmerica Corporation, took its name, and the modern Bank of America was born.

2000s – Dancing with Danger: The 2008 financial crisis saw Bank of America playing a high stakes game, acquiring Merrill Lynch and scooping up a cool $45 billion in federal bailout funds. But by 2009, the bank had cleaned up its act, repaying the bailout in full.

Today – Still Standing: Today, Bank of America stands tall as one of the largest financial institutions in the world, dabbling in everything from banking and investing to asset management. It’s a testament to survival, a monument to the power of reinvention.

However they are not without their struggles:

NEW YORK, Feb 22 (Reuters) – Bank of America Corp (BofA) (BAC.N) amassed $1.2 billion in expenses for litigation and regulatory investigations last year including fines and settlements.
¹
As we’ll see, BAC has struggled to keep to do whats best for customers and shareholders in the name of short-term profits, or “short-termism”, aka “quarterly capitalism”.

Business Model

BAC operates in four segments: Consumer Banking, Global Wealth and Investment Management, Global Banking, and Global Markets:

Consumer Banking: This is the bread and butter of Bank of America. It’s all about everyday banking needs – checking and savings accounts, credit cards, mortgages, and loans. It’s also the digital wizard, taking care of online banking needs.

Global Wealth & Investment Management (GWIM): Here’s where BAC caters to the high rollers. This division offers wealth management services, retirement plans, and philanthropy strategies. It’s all about helping the rich get richer, and manage their wealth wisely.

Global Banking: This division is like the backbone for businesses, providing lending services, treasury solutions, and advisory services. From real estate loans to global transactions, it’s all about fueling business growth and keeping the gears turning.

Global Markets: This is where BAC plays with the big boys. The Global Markets division deals with sales and trading services for institutional clients. Think research, structured debt, and equity products. It’s all about the high stakes world of finance.

Here’s how those segments performed in the fourth quarter for 2022:

Management Team

Here’s a brief history and overview of some of the main players at BAC:

Brian Moynihan – Chairman of the Board and Chief Executive Officer

Brian Moynihan leads a team of approximately 215,000 employees dedicated to making financial lives better for people, companies of every size, and institutional investors across the United States and around the world.

Bank of America was named World’s Best Bank by Euromoney magazine in 2022, as well as America’s Most JUST Company by JUST Capital. The company has been recognized as a leader in financial services, including on Forbes magazine’s list for World’s Best Employers and World’s Top Female- Friendly Companies as well as Fortune magazine’s list of World’s Most Admired Companies and Best Companies to Work For. Bank of America also was named on People’s Companies that Care list and is the top global bank on Fortune’s Change the World list. The company has been ranked four times on LinkedIn’s Top 50 Companies in the U.S. list, and also is recognized annually as a top employer by Working Mother, LATINA Style, Black Enterprise, Military Times and U.S Veterans Magazine.

Moynihan participates in several organizations that focus on economic and market trends, including the World Economic Forum’s International Business Council Stakeholder Capitalism Metrics Initiative (chair), the Financial Services Forum, the Bank Policy Institute, the Business Roundtable, The Clearing House Association (chair), the American Heart Association CEO Roundtable (co-chair) and the Business Council. He also is a co-chair of the Steering Committee of the Council for Inclusive Capitalism and chair of the Sustainable Markets Initiative, which was founded by His Majesty King Charles III in his former role of His Royal Highness The Prince of Wales.

Moynihan serves as chair of the company’s Global Diversity and Inclusion Council and is a member of the advisory council for the Smithsonian’s National Museum of African American History and Culture. He is also a member of the Brown University Corporation’s Board of Fellows and the Watson Institute Board of Governors (chair), the Catalyst Board of Directors, the Council on Competitiveness Board (chair) and the Appeal of Conscience Board of Trustees.

Moynihan works with public officials, businesses and civic leaders at the local level through his participation on the Charlotte Executive Leadership Council, the Massachusetts Competitive Partnership (chair) and the Partnership for Rhode Island.

Aditya Bhasin – Chief Technology and Information Officer

Aditya Bhasin is chief technology and information officer for Bank of America and is a member of the company’s executive management team.

Bhasin leads a global team of more than 60,000 employees responsible for designing and delivering technology solutions for all eight lines of business, staff support groups, Global Information Security, Technology Infrastructure and Global Business Services.

Previously, Bhasin was head of Consumer, Small Business, Wealth Management and Employee Technology. In this role, he was responsible for designing and delivering technology for Consumer, Small Business and Wealth Management clients through Bank of America’s online and mobile banking apps as well as in financial centers and in Merrill and Private Bank offices. Bhasin and his team also drove the evolution of software delivery methodologies, agile development practices and architecture standards companywide, while identifying partnerships that connect Bank of America to the emerging technology ecosystem and innovations for clients.

Since joining the bank in 2004, Bhasin has held numerous leadership roles. He has led teams in Marketing, Analytics, Digital Banking, Home Loans and Strategy. Previously, he was a principal at Booz Allen & Hamilton, serving clients globally.

Bhasin is executive sponsor for the Women in Technology & Operations advocacy group, the Hispanic and Latino Leadership Advisory Council and the Black Leadership Advisory Council for Global Technology. He also serves on Bank of America’s Asian Advisory Council, which advocates for teammates of Asian descent to help advance and grow their careers. In 2022, he received the A-List Award for courageous leadership from Ascend Inc., the nonprofit pan-Asian membership organization for business professionals.

Bhasin chairs the board of trustees of the Discovery Place science and technology museums for children in the Carolinas and is a trustee of Hamilton College.

He holds master’s degrees in computer engineering and engineering management from Dartmouth College, and undergraduate degrees in chemistry and computer science from Hamilton College.

Alastair Borthwick – Chief Financial Officer

Alastair Borthwick is the chief financial officer for Bank of America, and is a member of the company’s executive management team.

In this role, Borthwick is responsible for the overall financial management of the company, including accounting, balance sheet management, financial planning and analysis, corporate treasury, investor relations, corporate investments and tax.

He is also one of the vice chairs for the company’s Global Diversity & Inclusion Council.

Borthwick most recently served as president of Global Commercial Banking for Bank of America, a position he assumed in 2012. He led the Commercial Bank, one of the firm’s eight lines of business, which delivers integrated banking solutions to clients across Middle Market Banking; Real Estate; Healthcare, Education and Not for Profit; and Dealer Financial Services.

Previously, Borthwick was a managing director and co-head of Global Capital Markets. In that role, he had responsibility for Equity Capital Markets, Investment Grade Debt Capital Markets, Leveraged Finance, and Global Origination for Rates & Currencies. Borthwick has also served as head of Global Investment Grade Debt Capital Markets. Borthwick joined the company in 2005, and spent the prior 12 years at Goldman Sachs.

Borthwick is a member of the board of directors of the Posse Foundation, one of the most comprehensive and renowned college access and youth development programs in the United States. He is also Vice Chair of BritishAmerican Business, the leading transatlantic trade association created as a result of the merger between the British-American Chamber of Commerce in the U.S. and the American Chamber of Commerce in the U.K.

Borthwick holds a masters’ degree in business administration from the Amos Tuck School at Dartmouth College, and he graduated from the University of St. Andrews in Scotland where he majored in economics and statistics. He is a member of the Board of Advisors for Tuck.

Board of Directors

Here is a snapshot of the Board of Directors for BAC:

There’s nothing special about the BOD for BAC. It’s a typical board of directors for a large company.

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I’m afraid the market segmentation for the financial sector is going to become more fractured as different tech players enter the arena to take share. A great example of this is Apple introducing a savings account through Goldman Sachs.

The limit is 250,000 per account, which is the FDIC limit. This is a great example of how bigger banks are elbowing their way through the technology sector to take share from each other.

So, this isn’t Apple taking share from BAC, but Apple and Goldman Sachs taking share from BAC.

BAC will have to formulate a way to stay current in a world where the way we interact with banking is as important as ever.

Industry Structure

This leads us to the industry structure. TDLR: the old ways are gone. No longer do we have technology companies and bank companies, but banking and tech combining together to become as forefront as possible.

Maximizing convenience determines the industry structure.

Banking usually gets talked about in terms of top dog players, with JPM leading the pack followed by BAC and Citibank. The reality is, options lead the pack. The 22.6% above is “the rest” of the market. Over time this segment will grow, taking relative share from the other top players.

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SWOT Analysis 💪

Strengths

• Strong Brand Name – BAC is a household name. It’s a brand that is trusted and has been around for a long time.
• Strong Financials – BAC has a strong balance sheet and is well capitalized.
• Stable Dividend – BAC has a stable dividend that has been paid out for many years.

Weaknesses

• Poor Customer Service – BAC has a reputation for poor customer service.
• High Fees – BAC has high fees compared to other banks.
• Short-Term Focus – BAC has a short-term focus and is not focused on long-term growth. Their leadership continues to play a short game which pushes customers to rival banks.

Opportunities

• International Expansion – BAC has the opportunity to expand internationally.
• Customer Service Improvements – BAC has the opportunity to improve its customer service. This seems obvious, but it’s a big opportunity for BAC.
• Innovation – BAC has the opportunity to innovate and create new products and services.

Threats

• Deteriorating Market Share – BAC has been losing market share to competitors.
• Regulatory Changes – BAC is subject to regulatory changes that could impact its business.
• Evolution of Technology – BAC is subject to the evolution of technology with competitors like Apple and Google entering the banking space.

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Financial Analysis 💰

So far we’ve gone over the company overview, industry analysis, and SWOT analysis. Now it’s time to get into the financials.

When looking at the financials of any company, they are the results of the comapny’s strategy and business model. Thta’s important to keep in mind in this segment.

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Valuation 💸

“It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.”

-Warren Buffett

Since BAC is a mature and stable company, I made to input reasonable assumptions and err on the side of conservatism.

When we value a company, I like to combine P/FCF and ROIC.

Here is P/FCF for the last ten years:

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Conclusion ✔️

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Endnotes 🔢

¹
: You can read more here: Bank of America racks up over a billion in fees. ^↩

²
: Short-termism is a phrase used for the all-too-common practice of prioritizing financial gain in the short term at the exepnse of the long term. This is especially prevalent in public companies that incentivize their own managers to reach new highs in their respective area of influence every quarter. It also promotes cutting costs that beef up the bottom line in the short term but may be detrimental to the company in the long term. Most cost cutting surrounds research and development, personnel development, and other essential long-term investments.

I first learned about short-termism in Valuation by McKinsey. You can read about it
here
.^↩

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