The first-quarter 2015 bank call reports are in, and I will be reviewing what they indicate about the health of the industry in other columns soon. In this column, I am going to focus on Bank of America (BAC).
I've been very critical of Bank of America for the past several years, principally because it doesn't exhibit any kind of growth strategy or even a reason for existing. That remains the case today and is magnified in comparison to the growth and business strategies of the other three money centers: JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC).
The lack of direction at BAC is most obviously exhibited in the near term by its stock performance relative to the other three. Year to date, BAC is down by about 9%, whereas Wells is about where it started the year and Morgan and Citi are up about 2% and down about 2%, respectively.
The lack of a growth strategy is even more obvious in the comparative five-year returns for these stocks, with BAC unchanged while Wells, Morgan and Citi are up 72%, 60% and 33%, respectively.
The only reason BAC's stock has performed even this well is because it has done an excellent job since 2009 of slashing its size and expenses, which has mitigated losses and afforded investors some optimism that a new growth strategy would eventually be forthcoming.
And this is where the problem is today.
The management team at BAC appears to have become experts at reducing costs in line with reductions in revenue and assets, to the exclusion of all else.
Total assets at about $1.626 trillion and total deposits at $1.26 trillion are close to unchanged, with a slightly negative trajectory over the past three years. Total loans of $871 billion are at the lowest level in three years and continue a negative trend.
Within the breakdown of loans held by type, the most significant change is that after having lost its dominant position in the residential mortgage lending space to Wells Fargo officially last year, mortgage holdings are now not even the largest asset class at the bank.
As of Q1, commercial and industrial (C&I) loans are the largest asset class at BAC, with a balance of about $215 billion vs. $207 billion for first trust residential mortgages.
The mortgage portfolio has declined by 27% in the past three years, while the C&I portfolio has increased by 22%. There's been no substantive change in the aggregate outstanding values of any other loan class.
From a business strategy standpoint, the company is essentially treading water. Investors have been willing to accept that for most of the past six years due to the fact that the management team has had to focus its attention on absorbing and mitigating legacy losses.
Most of this is now done and yet the company is still not exhibiting a direction for growth.
The company has cut its full-time employee head count to 156,000 in Q1 2015 from 159,000 in Q4 2014, a reduction of 2% just for the quarter, and down a whopping 24% in the past three years.
The outstanding value of nonperforming mortgages declined in Q1 by another 14%, just for the quarter, to about $17.5 billion from $20.3 billion, and down by a fantastic 69% in the past three years from $56 billion.
Slashing expenses, nonperforming assets and employees all help to mitigate losses and are commendable from an investing standpoint, but doing so is not a replacement for a business strategy and growth.
The expansion of C&I lending is also not a growth strategy unless the proceeds from those loans are going into productive purposes. Since the Lehman crisis, however, the banks have been using C&I lending to allow their largest corporate borrowers to facilitate financial engineering by way of putting on carry trades and funding share buybacks.
The largest provider of C&I loans for financial engineering purposes has been Bank of America.
I applaud the company and its management for having been able to navigate the post-Lehman crisis and the attendant legacy issues at the bank as well as they have, but the time for the company to announce, or simply start acting upon, a strategy for growth is overdue.
There is, however, no indication from the financial condition of the bank that anything is imminent in this regard.
At the time of publication, Arnold had no positions in the stocks mentioned.