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Morningstar | Bank of America Is Building Up One of the Top-Tier U.S. Banking Franchises

The ill-advised acquisitions of shaky investment bank Merrill Lynch and shady mortgage lender Countrywide Financial in the early days of the global financial crisis led to a decade of troubles for Bank of America shareholders. After spending billions of dollars to settle legal and regulatory issues and years reshaping its business, and with top management running an increasingly lean operation, the bank is finally generating acceptable returns for shareholders.Bank of America's strategy of simplification, efficiency, and risk reduction has slowly begun to pay off. Assets have remained fairly flat since 2009. But by almost any other measure, Bank of America is a different company. Management increased the bank's Tier 1 common ratio dramatically, closed nearly 25% of branches, and trimmed personnel equivalent to the population of Evanston, Illinois. The bank's lending practices have also been revamped. Consumer loans are now made largely to customers with average FICO scores over 750, while the average American's score was 50 points lower.We think scale and scope advantages are increasingly important as the role of technology in banking grows. Bank of America generated noninterest income averaging just under 2% of total assets over the last three years, in line with JPMorgan Chase and not too far behind wide-moat U.S. Bancorp and Wells Fargo, each averaging 2.2% of assets in fee income. Expenses are also continuing to decline even as revenue grows.Ironically, the biggest risk to Bank of America's new, more conservative strategy is that its peers seem to be following the same playbook. Competition for high-end credit card customers has increased, with firms like JPMorgan and American Express offering escalating perks and rewards for cardholders. Wells Fargo's long-standing emphasis on cross-selling multiple products produced exorbitant pressures on front-line employees and led to widespread fraud in the bank's branches. Bank of America no longer faces existential threats, but it must continue to squeeze out efficiencies in order to succeed.