With assets totaling over $3 trillion, Bank of
America is the second largest bank in the U.S.
today. Shares of the company have seen
astonishing gains of over 290% in the last
decade.
Bank of America is truly massive.
They've got something like two trillion in
deposits and another trillion dollars in
loans. They have one of the world's largest
wealth management firms, and they're a commercial
bank of pretty good scale. And all of that's
under one roof under the Bank of America roof.
But Bank of America's rise to success has been
anything but smooth sailing.
The 2008 financial crisis pushed the bank to
the brink of collapse.
It was a loss so catastrophic that it
required a $45 billion bailout from the U.S.
Treasury.
Bank of America was one reason why much of the
investing public and consumers and government
lost faith and trust in banking.
If the government did not intervene for Bank of
America and the other banks, Bank of America
would have failed.
Fast forward to today, Bank of America is
thriving despite concerns over inflation
and threats of a possible recession.
The bank reported a net income of $31.9 billion
in 2021, compared to just $4 billion in 2008.
As the rates have gone up and if the recession is
shallow, then we're going to see widening
spreads and the ability of Bank of America to
have a significant earnings from net
interest income.
This is unique to the banking industry.
And Bank of America being one of the largest
banks stands to benefit the most.
So how was Bank of America able to stage
such an impressive comeback? And where is it
headed next?
Bank of America's Story dates back to 1904, when
Amadeo Giannini founded the Bank of Italy, which
sought to provide banking for working
immigrants facing discrimination.
Bank of America's original business model,
when it was still Bank of Italy in 1904, was
this notion of finding underserved individuals,
groups and communities.
The immigrant community in San Francisco at that
time was not welcome in the established banks, so
most of them kept their extra cash, if they had
any, in mattresses or mason jars in their
apartments. A.
P. Giannini knew that this money wasn't earning
interest, and so he went to the people he knew
from his years working on the wharf and said, if
you will deposit your money with me, I will pay
you a small amount of interest every month.
Bank of America was the first bank to establish a
statewide branching system which allowed it
to rapidly expand across the state of California.
From there, the company began relying on
acquisitions to grow across the nation.
There is a very ambitious young banker named Hugh
McColl, who in the eighties and nineties
basically tried to create his own version of
what Bank of America had on the West Coast, which
is essentially gobbling up competitor banks in
the southeast region.
So in 1998, Hugh McColl leads the acquisition of
Bank of America. So this was essentially
NationsBank, his institution, which was
the roll up of the Southeast acquiring Bank
of America on the West Coast.
So for the first time, you had the
coast-to-coast branch network.
Today, Bank of America has grown to become a
giant in the banking industry.
It is the seventh largest bank in the world
based on total assets and the second largest in
the United States, serving approximately 68
million consumers and small business clients.
Bank of America has four main divisions.
They've got the consumer bank, they've got the
Wall Street division, they've got an asset
management division, and they've got a commercial
banking business.
But you could really kind of divide what they
do into two big buckets.
The first bucket is interest income.
Retail banking still remains Bank of America's
main focus and source of revenue, contributing to
more than a third of its net income.
Bank of America held more than $1 trillion in
average deposits from retail consumers during
the third quarter of 2022.
Bank of America is a powerhouse in retail
banking. They increased their deposits equal to
the size of the sixth largest bank over the
last two years. There's no press release, no
merger announcement. This was all organic.
They are making spreads or what is called net
interest income off of the difference between
what they offer as a deposit rate and then
minus the cost of funds that they have either
through the markets or the Federal Reserve.
In the third quarter of this year, in fact, they
made about $14 billion in net interest alone.
The other bucket is something that is
referred to as fees, which really is inclusive
of a wide variety of things. So everything
from overdraft fees, credit card, to advisory
fees for advising on huge M&A deals.
You know, in the third quarter, they made about
close to $11 billion in non-interest income.
Bank of America found itself on the brink of
collapse just more than a decade ago.
Shares of the bank were trading for as low as
$2.53 in 2009.
And net income dropped from a high of $21
billion in 2006 to just $4 billion in 2008.
The financial crisis was catastrophic because it
was a perfect storm where banks were taking
very high speculative risk in certain areas of
lending, and the government oversight or
regulation really did not keep pace with
complex markets.
The whole industry essentially started to
maximize leverage, started to kind of push
the boundaries. All of this is based on the
premise that housing in this country would never
decline, that housing prices in this country
would never fall. What we saw was that, sure, it
could fall and it could collapse.
The ill-timed acquisitions of several
companies, including Countrywide Financial
Corporation and Merrill Lynch, only added fuel to
the flame.
Bank of America participated in a broader
merger mania.
In 2005 it acquired MBNA, the credit card giant,
and in that process took on a whole bunch of bad
consumer debt. In 2008, Bank of America acquired
Countrywide Financial.
Countrywide had been implicated in the
mortgage crisis.
Countrywide had also engaged in predatory and
racist lending practices. And when Bank
of America took that on, it took on a huge burden
of debt and that sort of toxic environment and
toxic asset that in many ways dragged the bank
down. And then, of course, in 2008, Bank of
America acquired Merrill Lynch.
Mortgage derivatives, CDOs, brought down
Merrill Lynch to almost failure before Bank of
America stepped in.
After that acquisition, Bank of America had to
digest both Countrywide and Merrill Lynch while
dealing with its own problems and talk about a
headache, talk about ill-timed acquisitions.
As a result, Bank of America saw provisions
for credit losses rise from just $5 billion in
2006 to more than $48 billion by the end of
2009. After the recession ended, Bank of
America also faced legal problems stemming from
its various acquisitions, one of
which led to a historic $16.65 billion
settlement, holding the bank responsible for
financial fraud during the 2008 financial crisis
. Bank of America was unavailable to
participate in this documentary.
Bank of America paid $4 billion for Countrywide
in 2008, and the final price tag, including all
legal costs, was probably 15 times that
close to $50 to $60 billion.
To put that in context, that's more than the
tangible equity the entire Bank of America
had at the time in 2008.
Ultimately, the Treasury Department stepped in to
provide $45 billion and a guarantee of protection
for potential losses to help Bank of America
through its struggles.
Warren Buffett also played a pivotal role in
boosting confidence in the bank.
I recall talking to Warren Buffett about ten
years ago for a magazine piece I was writing about
B of A. It really struck me how he loved their
deposit base.
He thought that was their killer advantage.
Their coast-to-coast network of branches
provided such cheap funding that this is
really the reason why he decided to invest at the
time and ultimately decided to save the
industry by investing 5 billion back into 2011.
But the hard-learned lessons from the
financial crisis have led Bank of America to
undergo significant changes.
The big change at Bank of America is that they have
gone from irresponsible growth to responsible
growth.
What they really decided to do after that was say,
look, we've got a complete franchise, we're
big in all the product lines we want to be in.
We have the scale we need to.
Now we just need to make it run and make it work
together.
A more conservative lending standard is just
one example of the bank's aim for
sustainable growth.
One key aspect of Bank of America responsible
growth is to say no and to say no more often and
say no to subprime lending and say no to
transactions that have too much debt.
Say no to clients that might be causing a lot of
risk so that when they say yes, it results in a
lot more growth that's sustainable, responsible
and better for their reputation.
Another example is the bank's meaningful
investment in its future.
B of A has, perhaps better than than most,
has done a good job of digitizing their
businesses. They're spending money in
technology. They're using those savings to
buy back stock and to improve their financial
performance. And that's been the story of
certainly the last five or so years of B of A.
These changes have allowed Bank of America
to earn its position as the second largest bank
in the United States.
The bank's most recent earnings for the third
quarter topped expectations, with $24.61
billion in adjusted revenue.
Coming into this year was one of the favorites, if
not the favorite, among bank analysts.
Because of that coast-to-coast branch
network, of that that cheap deposit funding,
they were seen as one of the big beneficiaries of
the Fed is raising interest rates.
It's going to allow the industry to make more
money in terms of just that net interest income
that we talked about.
And despite the threat of a looming recession, Bank
of America's rise might just be beginning.
This is a decade in the making in terms of
preparation for a recession.
So Bank of America has de-risked their loans,
they've de-risked their trading, they've
de-risked their risk appetite.
They've been preparing their technology for more
business volumes and they've been preparing
the strength of their customer relationships
for the time when rates rise. And I estimate that
so long as loan losses don't more than triple.
Bank of America's earnings will grow
through a recession.
And if that happens, on the other side of that,
not only should Bank of America stock go back to
their historical valuation, but they have
a chance to re-rate above the historical
ranges where they previously traded.