ZJW7364
11-12-2006, 02:00 AM
Analysis
In the annals of Bank of America's more than century of history, the past year certainly will rank among the firm's most bountiful.
B of A has made tremendous strides. It has generated record profits in 2006, consummated a lucrative merger with MBNA, and shaken off the last vestiges of doubt regarding the Fleet Boston acquisition. But past laurels are irrelevant to the question of whether success can be repeated in sufficient measure to provide superior future stock performance. We opine that B of A's recently robust growth will continue into 2007, that virtually inevitable net interest margin expansion will propel double-digit income gains for several years thereafter, and that procuring adequate and attractively priced funding--not finding sufficient loan growth--will fast become the firm's primary vexation.
We believe that B of A's future funding constraints--namely, luring in more deposits--will ironically come as a result of one of its greatest advantages, namely that it is already the leading retail bank in the U.S., with double the deposits of its nearest rival. Even as B of A has aggressively courted consumers in their demand for mortgages and credit cards--as well as businesses for their loan needs--the bank itself is finding cheap funding harder to come by. In times past, B of A solved this quandary quite simply by purchasing a competitor and its deposit base. However, a federal cap prohibits banks from purchasing rivals if the combined deposit market share would pierce 10%, which B of A already has. Barring a repeal of this ceiling--or B of A developing some proprietary process for capturing greater market share organically--the firm's deposit growth rate will be only about 5% per annum in future years. In our view, this will present the firm with only three obvious options: 1) Reduce loan growth, 2) Issue higher-cost debt to fund loans, or 3) Deploy resources into investments in riskier or less attractive markets, like buying foreign banks and expanding into brokerage or asset management.
That said, these issues would not give us pause in investing in B of A at attractive prices, as we have accounted for them within our valuation. For a company that offers commodity products and services, B of A is an impressive firm with an attractively profitable business. We estimate 18% returns on invested capital on average over the next five years, and given B of A's strong competitive position, the firm should maintain above-average returns for many years thereafter.
Highlights
We continue to anticipate that non-mortgage consumer, commercial lending and market sensitive fee-based businesses will drive revenue growth in a healthy economy in 2006 and
2007.We believe that continued solid credit quality and efficiency improvements are likely to make a positive contribution to the company's earnings growth. We view the acquisition of MBNA as an opportunity for BAC to add higher returning loans to its portfolio and help mitigate the effects of a challenging interest rate environment. We look for the net interest margin to remain relatively stable or widen.
Overview
CORPORATE OVERVIEW. Bank of America has operations in 31 countries, with about 6,000 banking centers and approximately 17,000 ATMs in the U.S. at the end of 2005. BAC reports the results of its operations through four business segments: Global Consumer and Small Business Banking, Global Business and Financial Services, Global Capital Markets and Investment Banking, and Global Wealth and Investment Management.
Global Consumer and Small Business Banking provide a diversified range of products and services to individuals and small businesses through multiple delivery channels. Global Business and Financial Services serves domestic and international business clients providing financial services, specialized industry expertise and local delivery through a global team of client managers and a variety of businesses. Global Capital Markets and Investment. Banking provides capital-raising solutions, advisory services, derivatives
In the annals of Bank of America's more than century of history, the past year certainly will rank among the firm's most bountiful.
B of A has made tremendous strides. It has generated record profits in 2006, consummated a lucrative merger with MBNA, and shaken off the last vestiges of doubt regarding the Fleet Boston acquisition. But past laurels are irrelevant to the question of whether success can be repeated in sufficient measure to provide superior future stock performance. We opine that B of A's recently robust growth will continue into 2007, that virtually inevitable net interest margin expansion will propel double-digit income gains for several years thereafter, and that procuring adequate and attractively priced funding--not finding sufficient loan growth--will fast become the firm's primary vexation.
We believe that B of A's future funding constraints--namely, luring in more deposits--will ironically come as a result of one of its greatest advantages, namely that it is already the leading retail bank in the U.S., with double the deposits of its nearest rival. Even as B of A has aggressively courted consumers in their demand for mortgages and credit cards--as well as businesses for their loan needs--the bank itself is finding cheap funding harder to come by. In times past, B of A solved this quandary quite simply by purchasing a competitor and its deposit base. However, a federal cap prohibits banks from purchasing rivals if the combined deposit market share would pierce 10%, which B of A already has. Barring a repeal of this ceiling--or B of A developing some proprietary process for capturing greater market share organically--the firm's deposit growth rate will be only about 5% per annum in future years. In our view, this will present the firm with only three obvious options: 1) Reduce loan growth, 2) Issue higher-cost debt to fund loans, or 3) Deploy resources into investments in riskier or less attractive markets, like buying foreign banks and expanding into brokerage or asset management.
That said, these issues would not give us pause in investing in B of A at attractive prices, as we have accounted for them within our valuation. For a company that offers commodity products and services, B of A is an impressive firm with an attractively profitable business. We estimate 18% returns on invested capital on average over the next five years, and given B of A's strong competitive position, the firm should maintain above-average returns for many years thereafter.
Highlights
We continue to anticipate that non-mortgage consumer, commercial lending and market sensitive fee-based businesses will drive revenue growth in a healthy economy in 2006 and
2007.We believe that continued solid credit quality and efficiency improvements are likely to make a positive contribution to the company's earnings growth. We view the acquisition of MBNA as an opportunity for BAC to add higher returning loans to its portfolio and help mitigate the effects of a challenging interest rate environment. We look for the net interest margin to remain relatively stable or widen.
Overview
CORPORATE OVERVIEW. Bank of America has operations in 31 countries, with about 6,000 banking centers and approximately 17,000 ATMs in the U.S. at the end of 2005. BAC reports the results of its operations through four business segments: Global Consumer and Small Business Banking, Global Business and Financial Services, Global Capital Markets and Investment Banking, and Global Wealth and Investment Management.
Global Consumer and Small Business Banking provide a diversified range of products and services to individuals and small businesses through multiple delivery channels. Global Business and Financial Services serves domestic and international business clients providing financial services, specialized industry expertise and local delivery through a global team of client managers and a variety of businesses. Global Capital Markets and Investment. Banking provides capital-raising solutions, advisory services, derivatives