Transcript AGENDA - Tulane University

Bank of America
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AGENDA
• Commercial Bank Industry
• History & Operation
• Evaluation
• Regulation
• Risk Analysis
• Current Challenges and Solutions
Commercial Bank Industry
Yuzhang, Luo
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Commercial Bank
• Commercial bank is one type of bank that
accept deposits from customer, then use the
deposit to make business loans and offering
basic investment products.
Comparison
Mainly focus in deposit and loans from
corporations or large business
Mainly focus in deposit and loans
from individual
Comparison
The U.S. congress required
commercial bank only engage in
banking activities.
Banking Activities: Deposit
and Loan activities
The U.S. congress required
investment bank only engage in
capital market activities.
Capital Market Activities:
Selling of long-term debt or
equity-backed securities
Porter Five Forces Model
Porter five forces Model is a commonly use model which use to
analyze the level of competition within an industry.
Threat of New Entrants - Low
High Capital Requirement
Complexity Approval process
High Regulation Requirement
Threat of Substitutes - Medium
Non-banking financial
company
Bond, Stocks etc.
Bargaining Power of Customers - High
Easy to Switch
Many Choices
Strong Competition
Bargaining Power of Suppliers - High
Easy to Switch
Many Choices
Strong Competition
Industry Rivalry - High
Huge Number of Bank
Less Product
Differentiation
History & Operations
Peiyuan Liu
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Agenda
1
Foundation
2
Expansion
3
Reduction
4
Operation
The Born of Bank of America
October 17,
1904
• Amadeo Giannini, typical banks denied to serve
immigrants
• Bank of Italy
1906
• San Francisco earthquake
• Leading financial institution in SF
1928
• Consolidated some banks, the largest
• Renamed as Bank of America National Trust
and Savings Association
The Expansion in California
1909 legislation allowance
• Expanded in CA & western states
1950s Several federal laws
• Separated into several institutions
The Rexpansion Outside CA
1983
1992
1998
• Seafirst
Corporation
of Seattle
• California rival,
Security Pacific
Corporation
• Banks in Arizona,
Oregon,
Washington
• Russia Bond
Default
• Acquired by
NationsBank
of Charlotte
M&A During Financial Crisis
Before 2008
• FleetBoston
Financial
• MBNA (credit
card giant)
• Banco Itaú
• The United
States Trust
Company
• ……
2008
After 2008
• Countrywide
Financial
• Merrill Lynch
• The largest
financial
services
company in
the world
• $20 billion
from Trouble
Asset Relief
Program
• Fined more
than $18
billion
Downsized itself
2011, planed to reduce estimated 36,000
people
2014, sold tow dozen branches in
Michigan to Huntington Bancshares
End of 2014, remained 4,800 branches
Operation Introduction
Consumer banking
Global corporate and investment banking
Global wealth and investment management
Consumer banking
Largest division
More than 35% total revenue
4,800 branches & 15,800 ATMs
Global corporate and investment
banking
Running under the Merrill Lynch subsidiary
Investment banking activities
Sales & trading in fixed income and
equities markets
Global Wealth and Investment
management
• Primary lines of business: Premier Banking &
Investments (including Bank of America Investment
Services, Inc.), The Private Bank, Family Wealth
Advisors, and Bank of America Specialist.
• More than $900 billion total asset under
management
Evaluation
Lingxiao Shen
Chi Zhang
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BOA’s Stock Price Over the Ten-year
BAC vs. S&P 500
Source from Yahoo. Finance
BAC vs. S&P 500
BAC and S&P 500 Regression
0.15
•Correlation between BAC
and S&P 500 is 0.59
0.1
0.05
0
-0.4
-0.3
-0.2
-0.1
0
-0.05
-0.1
0.1
0.2
0.3
•Slope of the regression
line is 0.21
Total Revenue Growth Rate
90,000.0
30.0%
80,000.0
25.0%
70,000.0
20.0%
• Growth rate
turned to negative
during the crisis.
15.0%
60,000.0
10.0%
50,000.0
5.0%
40,000.0
0.0%
30,000.0
(5.0%)
20,000.0
(10.0%)
10,000.0
(15.0%)
0
(20.0%)
Total Revenue(MM)
Total Revenue Growth Rate
• the legacy of
mortgage crisis
and legal problems
Net Interest Margin
Net Interest Margin (Cont.)
It implies a bank’s profitability.
It does not include operation expense and other expense.
Normally, the number is between 2X and 5X.
Net Interest Margin (Cont.)
Annualized Net Interest Margin
CITIGROUP INC
JPMORGAN CHASE & CO
WELLS FARGO & CO
BANK OF AMERICA CORP
Average
0
0.5
1
1.5
2
2.5
3
3.5
Return on Equity vs. Return on Asset
ROA vs. ROE
20.00%
1.80%
1.60%
15.00%
1.40%
ROE measures
the profitability
1.20%
10.00%
1.00%
0.80%
5.00%
0.60%
𝑅𝑂𝐴 =
𝑅𝑂𝐸
𝐿ever𝑎𝑔𝑒 𝑅𝑎𝑡𝑖𝑜
0.40%
0.00%
0.20%
0.00%
(5.00%)
(0.20%)
Return on Equity %
Return on Assets %
Stable leverage
ratio
Leverage Ratio
Leverage Ratio
14.00
A decreasing trend
12.00
10.00
8.00
Less aggressive
strategy
6.00
4.00
2.00
0.00
1
2
3
4
5
6
7
8
9
10
11
Price to Earning
P/E
Most popular
multiple
CITIGROUP INC
JPMORGAN CHASE & CO
Widely used in
Many industries
WELLS FARGO & CO
BANK OF AMERICA CORP
Average
0
2
4
6
8
10
12
14
16
Measures the
expectation
Price to Book Value
Book Value=Total Asset – Intangible Assets – Liabilities
Indicate a bank’s management efficiency.
How much managers can earn with one dollar investment.
It doesn’t show how a bank generates money.
Price to Book Value (Cont.)
Price to Book Value
CITIGROUP INC
JPMORGAN CHASE & CO
WELLS FARGO & CO
BANK OF AMERICA CORP
Average
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
Price to Free Cash Flow
P/FCF
Hard to
manipulate
CITIGROUP INC
JPMORGAN CHASE & CO
Increases operation
flexibility
WELLS FARGO & CO
BANK OF AMERICA CORP
Control leverage
Average
0
2
4
6
8
10
12
14
16
Indicates liquidity
Valuation
Multiple: P/B, P/E, P/FCF
Name
P/B
P/E
P/FCF
Average
1.08
11.26
7.7
BANK OF AMERICA CORP
0.73
11.34
6.5
WELLS FARGO & CO
1.69
13.37
14.02
JPMORGAN CHASE & CO
1.09
10.21
6.44
CITIGROUP INC
0.8
10.12
3.82
Valuation (Cont.)
P/B
$23.29 per share
P/E
$15.63 per share
Final price
$19.35 per share
10percent discount for conservatism.
P/FCF
$19.14 per share
REGULATION
Jiakai, Du
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Regulation Structure
Financial
Holding
Company & BHC
Federal Reserve
U.S. Banking
Subsidiary
OCC
FDIC
Non-U.S.
subsidiary
Federal
Reserve
Governments
Security
Exchanges
Central Banks
REGULATION
Resolution Planning
The Volcker Rule
Capital Requirement
Distribution
Insolvency
Deposit Insurance
Privacy
Resolution Planning
•
As a BHC with greater than $50 billion of assets, the
Corporation is required by the Federal Reserve and the
FDIC to annually submit a plan for a rapid and orderly
resolution in the event of material financial distress or
failure.
•
If both the Federal Reserve and the FDIC determine
that our plan is not credible and the deficiencies are
not cured in a timely manner, the Federal Reserve and
the FDIC may jointly impose on us more stringent
capital, leverage or liquidity requirements or
restrictions on our growth, activities or operations.
The Volcker Rule
•
The Volcker Rule prohibits insured depository
institutions and companies affiliated with insured
depository institutions (collectively, banking entities)
from engaging in short-term proprietary trading of
certain securities, derivatives, commodity futures and
options for their own account.
•
The Volcker Rule also imposes limits on banking
entities’ investments in, and other relationships with,
hedge funds and private equity funds.
Capital Requirement
•
As a financial services holding company, we are subject to
regulatory capital rules issued by U.S. banking regulators.
On January 1, 2014, we became subject to the Basel 3 rules,
which include certain transition provisions through January
1, 2019 (Basel 3 Standardized – Transition).
•
Basel 3 also expands and modifies the risk-sensitive
calculation of risk-weighted assets (defined in the Basel 1 –
2013 Rules) for credit and market risk (applicable to banks
that meet the definition as advanced approaches); and
introduces a Standardized approach for the calculation of
risk-weighted assets, which serves as a minimum.
•
The Federal Reserve requires BHCs to submit a capital plan
and requests for capital actions on an annual basis,
consistent with the rules governing the Comprehensive
Capital Analysis and Review (CCAR) capital plan. The CCAR
capital plan is the central element of the Federal Reserve’s
approach to ensure that large BHCs have adequate capital
and robust processes for managing their capital.
Distribution
•
We are subject to various regulatory policies and
requirements relating to capital actions, including
payment of dividends and common stock repurchases.
•
Many of our subsidiaries, including our bank and
broker-dealer subsidiaries, are subject to laws that
restrict dividend payments, or authorize regulatory
bodies to block or reduce the flow of funds from those
subsidiaries to the parent company or other
subsidiaries.
Insolvency
•
Under the Federal Deposit Insurance Act, the FDIC may
be appointed receiver of an insured depository
institution if it is insolvent or in certain other
circumstances.
•
In addition, under the Financial Reform Act, when a
systemically important financial institution such as the
Corporation is in default or danger of default, the FDIC
may be appointed receiver in order to conduct an
orderly liquidation of such institution.
Deposit Insurance
Pursuant to the Financial Reform Act, FDIC insurance
coverage limits were permanently increased to $250,000
per customer. All insured depository institutions are
required to pay assessments to the FDIC in order to fund
the Deposit Insurance Fund (DIF).
Privacy
We are subject to many U.S. federal, state and
international laws and regulations governing requirements
for maintaining policies and procedures to protect the nonpublic confidential information of our customers.
Risk Analysis
Qing Ye
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7 Types of Risk BOA Faces
Market Risk
Credit Risk
Liquidity Risk
Operational Risk
Strategic Risk
Compliance Risk
Reputational Risk
Market Risk
• the risk that changes in market conditions may adversely
impact the value of assets or liabilities, or otherwise
negatively impact earnings.
• inherent in the financial instruments associated with
BOA’s operations, primarily within its Global Markets
segment.
Interest Rate
Risks
Market
Risk
Foreign
Exchange Risk
Interest Rate Risk
• Represents exposures to instruments whose values
vary with the level or volatility of interest rates.
General
Instruments
Hedging
Instruments
Loans, debt Securities,
certain Trading-related
assets and liabilities,
deposits and borrowings
Derivatives such as
option, futures, forwards
and swap
Foreign Exchange Risk
• Represents exposures to changes in the values
of current holdings and future cash flows
Reality
denominated in currencies other than the U.S.
Dollar.
Reality
Identity
Identity
Creativity
Future
Cash Flows
Values fluctuate with
changes in the level or
volatility of currency
exchange rates or nonU.S. interest rates
Footprint of Bank of America
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“Manage Risk Well”
Financial
Loss
Regulatory Damage to
Sanctions
BOA’s
and
Reputation
Penalties
Manage Risk
Well
Risk Management Processes
Identify
Measure
Monitor
Control
• Inherent in BOA’s
business activities.
• Determine its level of
risk relative to limits.
• Business initiatives or
Tetfactors.
external
• Take action in a
timely manner.
• At various level
including risk
type, legal entity
and on an
aggregate basis.
• Establish and
communicate risk limits
and controls through
policies, standards,
procedures and processes.
Current Challenges and Solutions
Song, Yue
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Current Challenges and Solutions
1
Current Challenges
2
Solutions
Current Challenges
Lawsuit and Litigation
• BOA has been a defendant in lawsuits and also filed
lawsuits against other parties
• Aug 2013, U.S. Justice Department and SEC suit BoA
for lying to investors about $850 million in MBS
• Nov 2013, BOA sought dismissal of the lawsuit
• Aug 2014, BOA was asked to pay U.S.$16.65 billion fine
• Inflate expenditure, impact brand image
Current Challenges
Overdependence on U.S.
• The bank’s dependence on the U.S. for its revenues
may affect its business operations
• Generated 86.1% of its total revenues, net of interest
expense, from the US in FY2014
• Regional political and economic changes have
significant influence on BoA
Current Challenges
Weak performance in 1Q 2015
• Revenue $21.4 billion, EPS $0.27 (Lower than
estimated $21.6 billion, $0.29)
• A reduction in gain on sale of an equity investment
• Adjustments on the company’s debt portfolio due to the
impact of lower long-term interest rates
• Revenue decreased by 1% year-over-year
Solutions
• Enhance open of information
Lawsuit and
Litigation
• Follow government regulations
• Develop more services abroad
Overdependence
on U.S.
1Q2015 Weak
performance
• Improve stress test performance
• Generate high advisory fee from investment
banking services
• Control expense to create long term value