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Bank of America CEO Brian Moynihan Photograph by Simon Dawson — Bloomberg via Getty Images

Bank of America CEO Brian Moynihan is finally starting to deliver

Jul 15, 2015

At a splashy investor conference in March 2011, Brian Moynihan unveiled a vision for Bank of America that was both extraordinarily ambitious and remarkably conservative. The ambitious part encompassed the chief executive’s pledge to make BofA, which had been hobbled by the financial crisis, one of the world’s most profitable enterprises.

Moynihan, who’d been CEO for just 15 months, boldly predicted that BofA would achieve between $22 billion and $24 billion in annual profits once markets returned to normal.

The conservative part was Moynihan’s strategy for success, a blueprint so old-fashioned it sounded positively radical. That day, in the baroque ballroom of Manhattan’s Plaza Hotel, Moynihan championed a traditional, 1950s style of banking: grow with your existing customers rather than court new ones, eschew aggressive sales tactics that lead to risky lending, and, on the investment banking side, avoid risky trading and generate steady fees raising money for clients.

To Moynihan, consumer banking offered a matchless advantage: low-cost deposits furnished by millions of checking accounts. But banks had been squandering the big earnings that those bargain deposits should have generated by pursuing rapid growth and expensive acquisitions.

Moynihan declared that the back-to-basics approach was the ticket to tremendous earnings power. But for four long years, B of A never managed to remotely fulfill the potential its leader kept touting.

If BofA had delivered the top-of-the-range profit prediction of $24 billion last year, it would have out-earned every company on the Fortune 500 except Apple and Walmart. Instead, the bank posted puny profits of just $4.8 billion.

Three main factors account for BofA’s disappointing performance. First, the mortgage settlements and litigation, chiefly a legacy of its disastrous purchase of Countrywide Financial, proved far larger than expected, exceeding $70 billion to date, more than the costs to JP Morgan, Citigroup, and Wells Fargo combined. Second, servicing millions of delinquent mortgages swamped BofA with extra, unexpected expenses for personnel and paperwork. And third, extraordinarily low interest rates curbed revenues from its giant portfolio of consumer and business loans.

Moynihan relentlessly attacked what he could control, BofA’s bloated costs, lowering headcount and shuttering unprofitable branches. He kept promising that once the litigation and servicing expenses faded and interest rates began to rise, revenues would surge while the lean, far-lower structure of personnel and overhead would remain flat. That combination would create strong “operating leverage,” meaning that any rise in revenues would flow directly to earnings.

Finally, Moynihan’s strategy appears poised to deliver. On July 15, he announced surprisingly strong earnings for the second quarter of 2015, results that move BofA far closer to its targets. Profits surged to $5.3 billion; on an annualized basis, that’s around $21 billion, close to the low-range of the 2011 goal. Profits aren’t quite as good as they look: BofA booked around $800 million in after-tax extraordinary items, including proceeds from the sale of real estate loans. So if we adjust profits by that amount to $4.5 billion, then BofA posted “normalized” 12-month earnings of $18 billion. That’s a return on equity of 11.4%, not far from the low-end of its goal of between 12% and 14%.

The cost-throttling campaign proceeds in full force. For the year ended March 30, BofA’s non-interest expense—the cost of people, rent, computers, and the like—fell from $13.1 billion to $12.7 billion. Headcount dropped from 271,000 to 233,000 and continues to fall by around 3% a quarter. As Moynihan predicted, the once-crippling expense of servicing delinquent mortgages is also shrinking, dramatically. It declined from $1.4 billion to $900 million in the past year. At the peak, those servicing costs were running a ruinous $2 billion a quarter.

Once again, during the earnings call, Moynihan cited BofA’s greatest asset: cheap deposits costing just 175 basis points. And BofA has an abundant $1.5 trillion of them, the biggest pool of all the retail banks. What Warren Buffett lauds as those “big, sticky” deposits are a principal reason he became a major BofA shareholder in the dark days of 2011.

Those deposits will become far more profitable as rates inevitably rise. Moynihan predicts that each one-point increase in the yield on Treasuries will contribute $3.9 billion in additional revenues, most of it pure, pre-tax profit.

Because BofA’s results lagged Moynihan’s promises for so long, many analysts and investors figured that either his strategy wouldn’t work or that he was incapable of making it work. In fact, his approach is the right one. And finally, the vision expressed that day at the Plaza is coming into view.

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