Company Profile
The origin of the company
Bank of America (ticker: BAC) was formed in 1998 through the merger of NationsBank and Bank of America. It is the second largest banking institution in the United States and the second largest bank in the world by market capitalization. Both are second only to JPMorgan Chase. Bank of America is one of the four largest banking institutions in the United States.
The predecessor of Bank of America
The predecessor of Bank of America mainly came from the following three banks:
- FleetBoston Financial: Boston, Massachusetts (1784)
- National Bank: Charlotte, North Carolina (1874)
- Bank of Italy: San Francisco, California (1928)
Founding of the company
The current general consensus in the industry is that the establishment of Bank of America can be traced back to the Bank of Massachusetts (FleetBoston Financial) in 1784, which is the second oldest bank in the United States.
Business and scale
Main business
Its main financial services revolve around commercial banking, wealth management and investment banking. Through a series of mergers and acquisitions, based on commercial banking business, it established Merrill Lynch for wealth management and Bank of America Merrill Lynch for investment banking in 2008 and 2009 respectively (later renamed Bank of America Securities).
How big it is?
As of 2018, the investment bank is considered the third largest in the world. Its wealth management division manages US$1.081 trillion in assets under management (AUM) and is the world’s second-largest wealth management company after UBS.
In commercial banking, Bank of America operates retail branches in all 50 U.S. states, the District of Columbia and more than 40 other countries. Its business banking business covers 46 million consumer and small business relationships in 4,600 banking centers and 16,000 automated teller machines (ATMs).
Bank of America’s Unique Position
Inventing Visa
In 1958, the bank invented a bank credit card called the BankAmericard, which was renamed the Visa Card in 1976. It is now well known as Visa (ticker: V), the world’s largest credit card network group.
A group of other California banks later banded together and issued MasterCard to compete with American banks. It is now known as Mastercard (ticker: MA), the world’s second largest credit card network group.
2nd largest commercial bank in US
Bank of America is the second largest commercial bank in the United States by assets, behind JPMorgan Chase (ticker: JPM). Bank of America has approximately 5,600 branches and 16,200 ATM locations in more than 150 countries around the world. Bank of America is the third largest company in the United States based on total revenue.
Company operations
Major acquisitions
- In December 2002, Bank of America spent US$1.6 billion to acquire a 25% stake in Mexico’s third largest bank, Grupo Financiero Scamander Serfin.
- On July 2, 2007, it acquired wealth management company U.S. Trust Corp. and its subsidiary U.S. Trust Company for US$3.3 billion.
- On September 14, 2007, Bank of America spent US$21 billion to acquire American LASALLE Bank, a subsidiary of ABN AMRO.
Was a major shareholder of China Construction Bank
In 2005, Bank of America acquired a 9% stake in China Construction Bank (CCB), one of China’s four largest banks, for US$3 billion. Bank of America has offices in Hong Kong, Shanghai and Guangzhou and hopes to significantly expand its China business through this transaction.
Because the Bank of the United States has its own liquidity difficulties and is in urgent need of funds. In November 2011, Bank of America announced plans to divest its majority stake in China Construction Bank. In September 2013, Bank of America sold its remaining shares in China Construction Bank for up to US$1.5 billion, officially withdrawing from China.
Competitors
It competes with JPMorgan Chase, Citigroup and Wells Fargo directly.
The financial crisis transformed it
Acquisition of Merrill Lynch
In September 2008, due to the financial tsunami that had not been seen in a century, Bank of America reached an agreement with Merrill Lynch to acquire Merrill Lynch for US$44 billion to form the world’s largest financial services institution. This was a move that shook the global financial community. event. Merrill Lynch was facing bankruptcy at the time, and the acquisition effectively saved Merrill Lynch from bankruptcy.
Accept U.S. government bailout
In January 2009, the U.S. government injected an additional $20 billion into Bank of America and provided guarantees for the bank’s assets of no more than $118 billion.
Buffett and Bank of America
Buffett comes to the rescue
A few years after the unprecedented financial tsunami, the European debt crisis triggered a series of global financial crises, and U.S. banks experienced a liquidity crisis. At the time, Bank of America’s stock price had plummeted amid the crisis and endless legal woes stemming from its disastrous acquisition of Countrywide Financial. Other issues, such as Europe’s spate of sovereign debt crises and concerns about a U.S. debt default, are largely beyond the company’s control.
As a last resort, Bank of America turned to Berkshire Hathaway. In 2011, Buffett’s Berkshire Hathaway invested $5 billion in Bank of America through preferred stock, helping the then-troubled large bank raise capital to improve its balance sheet. Bank of America has now settled most of its crisis-era litigation and strengthened its capital position.
The highlight of this investment isn’t just the generous 6% return ($300 million in annual dividends) on Buffett’s $5 billion investment. It also came with warrants to buy 700 million Bank of America shares for $5 billion, or $7.14 a share, roughly equivalent to the market price of the bank’s shares at the time. The exercise period is 10 years, which means that Berkshire can inject up to US$10 billion into Bank of America.
Buffett’s thoughts on Bank of America
In 2023, at the Berkshire shareholders meeting, Buffett said when talking about why he has been holding a position in Bank of America, “I like Bank of America and their management.”
Positions held by Berkshire Hathaway
Bank of America is Berkshire Hathaway’s second-largest stock investment, accounting for 10.6% of Berkshire Hathaway’s portfolio. As of the first quarter of 2024, Berkshire owned 1.032 billion shares of Bank of America, accounting for 13.1% of the large bank.
Buffett will significantly reduce his holdings of bank stocks held by Berkshire Hathaway in 2022. Except for Bank of America, which still ranks second in his stock investment portfolio (after Apple), other bank stocks have gradually withdrawn from the top ten positions. It’s on the list.
Not only did Buffett not reduce his holdings in Bank of America, Berkshire Hathaway continued to increase its position in the bank.
The company’s operating departments
Bank of America generates 90% of its revenue from the domestic market. Central to Bank of America’s strategy is to become the number one bank in the domestic market.
Consumer Banking
Bank of America’s Consumer Banking business, the company’s largest unit, provides financial services to consumers and small businesses, including banking, investing, business services and loan products such as business loans, mortgages and credit cards. In 2016, the consumer banking segment accounted for 38% of the company’s total revenue. Additionally, the company is a mortgage servicer.
It competes primarily with the retail banking units of the other three largest U.S. banks: Citigroup, JPMorgan Chase and Wells Fargo. The Consumer Banking organization includes more than 4,600 retail financial centers and approximately 15,900 ATMs.
Global banking
The Global Banking segment provides banking services, including investment banking and corporate lending products. It includes global corporate banking, global commercial banking, merchant banking and global investment banking. The segment accounted for 22% of the company’s 2016 revenue.
The bank’s investment banking business, operated by a subsidiary of Merrill Lynch, provides M&A advisory, underwriting, capital markets, and sales and trading in fixed income and equity markets. Its strongest categories include leveraged finance, syndicated loans and mortgage-backed securities. It also has one of the largest research teams on Wall Street.
Wealth and Investment Management
Wealth and Investment Management, which includes the businesses of Merrill Lynch Global Wealth Management and U.S. Trust Company, accounted for 21% of the company’s total revenue in 2016. It has more than $2.5 trillion in customer balances.
Global Market
The Global Markets segment provides services to institutional clients, including financial securities trading. This segment provides research and other services such as securities services, market making and risk management using derivatives. The segment accounted for 19% of the company’s total revenue in 2016.
Financial performance
2024 First Quarter Financial Report
In the first quarter of 2024, both revenue and net profit will decline compared with 2023, and the provision for credit losses will increase to $1.3 billion from $1.1 billion in the fourth quarter, and is significantly higher than the total loss provision of $931 million in the first quarter of 2023. gold. First-quarter net income also fell from $0.94 per share to just $0.83, underscoring the current headwinds for the company and the industry. Return on tangible common equity (ROTCE) fell to 12.7% this year from 17.4% last year.
The impact of inflation and economic
This is partly due to allegations related to the collapse of several banks last year, and partly to do with the impact of inflation and higher interest rates. Higher interest rates mean fewer loan approvals, higher default rates and more interest paid on retail deposits. But there is also positive help, such as higher loan interest rates. Poor economic conditions indicate a reduction in circulating funds, which is also the purpose of the Federal Reserve: to put the brakes on the soaring economy and reduce inflation.
Many of Bank of America’s recent wins speak to its resilience and how it’s taking advantage of the current macroeconomic situation to grow its business and position itself for the long term. It added 245,000 consumer accounts and more than 1 million credit cards in the first quarter, as well as 29,000 global wealth and investment management accounts. It also has market share in the global banking industry, with the number of accounts rising 25% in the first quarter compared with the same period last year.
Due to disciplined cost management, expenses grew below the rate of inflation, and net interest income exceeded expectations at $14.2 billion.
Capital market performance
Cheap valuation
The price-to-earnings ratio is only about 12 times this year’s estimated earnings per share. For a blue-chip stock like Bank of America, the chances of it staying so cheap for a long time to come are slim.
Dividend
Bank of America’s future dividend yield is 2.4%.
Stock price performance
As of the end of June 2024, Bank of America’s stock price is still down 16% from its high point
Related articles
- “Bank of America, too big to fall“
- “How does JPMorgan Chase make money?“
- “Wells Fargo, a major holding once praised by Buffett and Munger“
- “Citigroup, a downward companies“
- “What caused Citi to abandon its retail banking business in 13 countries“
Disclaimer
- The content of this site is the author’s personal opinions and is for reference only. I am not responsible for the correctness, opinions, and immediacy of the content and information of the article. Readers must make their own judgments.
- I shall not be liable for any damages or other legal liabilities for the direct or indirect losses caused by the readers’ direct or indirect reliance on and reference to the information on this site, or all the responsibilities arising therefrom, as a result of any investment behavior.
