Bank of America Corp.'s Brian Moynihan largely avoided the spotlight this year after successfully defending his dual role as Chairman and CEO of the Charlotte, North Carolina-based lender in 2015. Now, he may be about to find himself back on investors' radar, but for different reasons.
With interest rates on the rise, an improving economy and a potentially looser financial regulatory climate under a Trump administration, prospects for the U.S. banking industry are as good as they've been in years -- and Bank of America may be one of the biggest beneficiaries. For shareholders, it means the $229 billion bank may actually start living up to their hopes after years of underperformance.
Bank of America estimates that a 1 percentage-point bump in both short- and long-term rates could increase net interest income at the bank by $5.3 billion over the following 12 months, exceeding the expected gains at rivals JPMorgan Chase & Co. and Citigroup Inc. (that's thanks in part to the lender's outsize exposure to non-interest-bearing deposits). Rates have already moved higher following the Federal Reserve's 25 basis-point lift this month and the central bank has forecast three more hikes next year, putting those income gains in sight for Bank of America.
It's a refreshing outlook for a bank that has been in recovery mode for much of the time that Moynihan has served as CEO. He took over in January 2010 in the aftermath of the financial crisis, a time when the problems facing the bank were so extreme that a Morningstar analyst likened Moynihan's predicament to being dealt a “nearly unplayable hand”.
During his seven-year tenure, Moynihan, a lawyer by trade, has worked to simplify the bank's structure, selling off non-core assets ranging from its non-U.S. wealth management unit through to stakes in companies including BlackRock Inc. and China Construction Bank Corp. Plus, since 2010, the bank has paid out a whopping $74 billion in credit crisis and mortgage-related settlements -- larger than the combined sum paid by the next five largest U.S. lenders -- while conforming to tightened regulatory controls and heightened capital requirements.
Throughout, Moynihan, 57, has maintained a fairly strict focus on the bank's expenses and cultivated a low-cost culture. Under his watch, headcount has fallen to 209,000 from 284,000 at the end of 2009, a decline that will likely continue (albeit less noticeably).
Like his counterparts Lloyd Blankfein at Goldman Sachs Group Inc. and Jamie Dimon at JPMorgan, Moynihan seems in no rush to relinquish his post -- and he still has work to do in burnishing his legacy.
Moynihan has yet to make good on a promise to lift the bank's return on assets to 1 percent, and will likely want to hold on to the reins until he oversees a recovery in the bank's return on equity ratio to above 10 percent, a measure not seen since before the crisis. While a rising interest rate environment and the likelihood of heightened trading activity will provide a helping hand, as you can see in this chart, there's a way to go yet:
He can also keep investors on his side by ensuring the bank is well-positioned to pass its future stress tests (and avoid ending up like Wells Fargo & Co.), which in turn should enable it to boost its payout ratio. Right now, Bank of America's dividend yield sits at roughly 1.3 percent, a notable discount to rivals such as JPMorgan and Wells Fargo at 2.2 percent and 2.7 percent, respectively. Factoring in $5 billion of planned buybacks, Bank of America's indicated payout ratio is well below peers at just 50 percent, underscoring significant room for improvement.
In an interview with Bloomberg Television's David Westin that aired Thursday, Moynihan said that despite Bank of America's nearly 35 percent rally this year, it's still "too low" and he believes the bank is getting a "great deal" as it continues to repurchase shares as part of its planned buybacks. That flies in direct contradiction to the consensus view of more than 30 analysts that cover the bank -- Bank of America is trading above their average price target at this time next year.
In 2017, we'll find out who was right.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
RBC analyst Gerard Cassidy estimates that his tenure could last another five to eight years. This would take his term to almost 16 years, which isn't impossible. For context, Hugh McColl was CEO of Nationsbank (which later merged with BankAmerica to create Bank of America) from 1983 through 2001--some 18 years.
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