Montag Vows ‘New Game’ for BofA Investment Bank as Risk Cut

Bank of America Co-Chief Operating Officer Thomas K. Montag
Bank of America Corp. co-chief operating officer Thomas K. Montag said, “We went through a difficult time for a couple of months where we spent a lot of time with our clients explaining to them about our balance sheet.” Photographer: Jonathan Fickies/Bloomberg

Bank of America Corp.’s global banking and markets division is recovering after credit-rating downgrades ignited concern among clients and trading partners, said co-Chief Operating Officer Thomas K. Montag.

Executives from the firm traveled around the world to reassure corporate clients that the Charlotte, North Carolina-based company was a steady partner after Moody’s Investors Service cut the bank’s credit grades in September, Montag said in a Jan. 19 staff meeting.

“We went through a difficult time for a couple of months where we spent a lot of time with our clients explaining to them about our balance sheet,” Montag said. “I think we’ve gotten through the worst of it, and I think this firm, and the market by the way is telling us this, that this place has incredible potential. From this point forward, it’s a new game.”

Montag, 55, is under pressure to improve results after the division’s profit slumped by half last year to $2.97 billion, including two consecutive quarterly losses. Chief Executive Officer Brian T. Moynihan has said the business was critical to reviving income at the second biggest U.S. lender and has warned that he’ll cut costs more deeply if earnings don’t rise.

“Tom and his team don’t aspire to lose money in trading,” Moynihan, 52, told employees before adding that the division has been “recovering nicely” in 2012.

Bank of America lost market share last year to rivals including Morgan Stanley in the trading of equities, bonds, currencies and commodities, Matthew O’Connor, an analyst at Deutsche Bank AG, said in a Jan. 19 note. New York-based Citigroup Inc., the third-biggest U.S. bank by assets, also has lost share since getting a $45 billion taxpayer bailout.

‘Winning Them Back’

Corporate banking clients remained loyal after the downgrade, while hedge funds may have been harder to retain, Montag said.

“The markets guys are a little tougher to deal with, as you know,” he said. “We’re winning them back one by one.”

Bank of America is rated Baa1, the third-lowest investment-grade, after the two-level downgrade by Moody’s last year. The lender’s credit rating, which trading partners use to judge the risk of a failure to make good on commitments, now is below that of some of its counterparties, Montag said.

Jessica Oppenheim, a company spokeswoman, declined to elaborate on his remarks.

‘Good Year’

Moynihan today predicted a “reasonably good year” for investment banking as he attended the World Economic Forum’s annual meeting in Davos, Switzerland. Asked after a panel discussion whether the bank would continue cost-cutting, he said he would “keep shaping” the business in response to the turmoil in Europe.

The bank’s financial strength improved in the fourth quarter as Tier 1 common equity, a measure of its ability to absorb losses, rose to 9.86 percent from 8.65 percent in the previous three-month period. Bank of America shares had surged 31 percent this month through yesterday, driven in part by the balance sheet improvement, after falling 58 percent last year amid concern the lender would need fresh capital.

“At least for today, it feels like the capital question has largely been addressed,” Chief Financial Officer Bruce R. Thompson said during the staff meeting. The firm sold $33 billion in assets last year, helping bolster its cushion for losses. Analysts now question how Bank of America will improve profit, he said.

Goldman Sachs

Montag, a former trading head of Goldman Sachs Group Inc., has cut risk amid concern the default of a European nation could weigh on results. The company’s so-called value-at-risk, an estimate of how much it could lose in the securities markets in one day, compared favorably to its biggest competitors, he said.

“We operate at a much lower risk profile this year than almost anybody yet that we’ve seen,” Montag said. “If you look at our VAR versus JPMorgan or Goldman Sachs, on our measures, we think we’re at roughly half of their risk; versus Morgan Stanley, about 20 percent below their risk. So we have kept things very close to the vest.”

JPMorgan Chase & Co. is the biggest U.S. bank by assets, while Goldman Sachs is fifth and Morgan Stanley is No. 6. All are based in New York.

Bank of America also reduced exposure to some of the most indebted European nations. The lender had about $14.4 billion at risk in Greece, Ireland, Italy, Portugal and Spain as of Dec. 31, $245 million less than the previous quarter. MF Global Holdings Ltd. filed for bankruptcy Oct. 31 after a $6.3 billion bet on European bonds.

‘Debbie Downer’

“I always hate to be Debbie Downer on these things, but you know, Europe hasn’t happened yet,” Montag said. “A competitor of ours went bankrupt because of their exposure to Europe. Europe is still out there.” Montag was named co-chief operating officer in September, along with David Darnell, in a shakeup that resulted in the ouster of Sallie Krawcheck and Joseph Price. Darnell oversees retail units including deposits, wealth management, credit cards and home loans.

Analysts including Betsy Graseck of Morgan Stanley and Todd Hagerman of Sterne Agee & Leach Inc. have cited poor operating revenue in cutting estimates for Bank of America’s profit this year and next. Hagerman, in a Jan. 20 research note, cited the “persistent uncertainty” around trading results.

Moynihan said last week that his efficiency plan targets $6 billion to $8 billion in expense cuts, mostly from consumer banking units that account for the majority of the lender’s employees. He announced 30,000 job cuts from retail operations.

“The real good news for me is that I have two chief operating officers, so they get to do all the hard work from now on,” Moynihan said during the staff meeting. “Bruce and I can take a vacation and let them go to work.”

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