BofA: Whipping a Behemoth into Shape
As a top lieutenant at Bank of America (BAC ), Kenneth D. Lewis was Mr. Fixit for CEO Hugh L. McColl Jr.'s many problematic deals. So when McColl passed the baton to Lewis, a 32-year bank veteran, in April, 2001, many investors feared he'd preserve his mentor's legacy--without fixing the earnings shortfalls that were McColl's hallmark.
But to Wall Street's surprise, the 54-year-old Mississippian wasted no time moving out of McColl's shadow. In contrast to his predecessor's grow-at-all-costs approach, he has shrunk the Charlotte (N.C.) bank with a vengeance. His goal: to generate more profits from its chronically underachieving franchise, which now serves 2 million businesses and 30 million households. To do so, Lewis has shed underperforming businesses, beefed up customer service, and brought in new managers. And to appease the bank's shareholders, he recently boosted BofA's dividend by 7% and mapped out plans to buy back 8% of the bank's shares.
As a result, Wall Street is giving Lewis the vote of confidence that McColl never received. BofA's stock has risen 37% since the start of 2001, to $61.95. It had fallen to $36 a share in 2000 from a high of $76.80 in July, 1998, after news that McColl's NationsBank Corp. and San Francisco-based Bank of America would merge. "There's a quiet revolution taking place at Bank of America," says Prudential Securities Inc. analyst Michael Mayo. "Lewis is shifting the focus from empire-building to value creation."
Lewis dismisses any notion that he's dismantling McColl's empire, which became the nation's third-largest bank institution behind Citigroup and J.P. Morgan Chase & Co. "We had a certain time to gain size and scale to become a survivor," says Lewis. "We had the right model for the times." Still, the bank never achieved the breakout profits that McColl promised because of the difficulty in integrating such acquisitions as Boatman's Bancshares, Barnett Banks, and Montgomery Securities, a $1.2 billion buy that soured when the majority of Montgomery's investment bankers defected. Sean J. Ryan, an analyst at the independent research firm Fulcrum Global Partners LLC, estimates that net operating income in 2001 rose less than 2%, to $4.80 per share--a third lower than McColl predicted at the time of the BofA deal. U.S. bank earnings are expected to rise 5% on average.
Improving earnings will be tough in an economic downturn marked by an industry-wide ballooning of bad debts. For 2002, Ryan expects a 9% rise in profits--in line with other banks--to $5.25 per share, excluding a 40 cents gain from new goodwill accounting rules. Lewis says he has no appetite for "large dilutive deals." So a rumored merger with Merrill Lynch & Co. (MER ) is unlikely. Instead, Lewis is wielding the knife. He has retired $26.5 billion of costly debt, quit low-margin businesses such as auto leasing, and walked away from scores of customers, including the likes of Wal-Mart Stores Inc. (WMT ), whose business wasn't very profitable for BofA. Together the moves have shrunk the bank's balance sheet by $40 billion since mid-2000, to $640 billion.
Lewis is also tackling the bank's sloppy customer service. He upgraded teller training programs, organized services around types of customers rather than product lines, and tied executive salaries to targets for cross-selling more products. At the same time, he's infusing the bank with fresh blood. He added three outsiders, including ex-Olympics executive Peter V. Ueberroth and Sara Lee (SLE ) CEO C. Steven McMillan, to the bank's clubby board. And he broadened McColl's circle of longtime advisers with nearly two dozen marketing and technology executives from such places as Eastman Kodak Co. (EK ) and FedEx Corp. (FDX ) "If we're going to achieve our goals, we're going to need more than a roomful of bankers to do the job," he says.
Bankers still have their uses. BofA's team made a big bet in the late 1990s that interest rates would fall. Nearly half the $638 billion gain in net interest income that the bank booked in the last quarter came from interest-rate swaps. Some analysts say BofA's profits could be vulnerable if rates rebound quickly, though the bank says it has unwound those swaps and is ready for an upturn. Still, if Lewis can't produce the earnings shareholders want, he may have to dust off his Mr. Fixit skills again.
By Dean Foust in Atlanta