Getting Bank of America to Grow Again

April 11, 2013, 11:11 AM UTC
Moynihan visits a BofA branch in Charlotte. The CEO is introducing new incentives to attract more money from his best customers.
Photo: Brian Finke

The reigning champion of bank turnarounds wants me to see firsthand how he plans to kick-start his company’s growth. That’s why, on this sunny Tuesday morning, Bank of America CEO Brian Moynihan has brought me to a newly renovated BofA branch in Charlotte, a couple of miles from the bank’s headquarters downtown. Relaxed and engaged, the chief executive tells employees that he received a silver pin the day before, marking his 20 years of service with the company. “It didn’t even bother me that they gave it to me on April Fools’ Day,” he jokes. Moynihan quizzes the home-loan and wealth-management bankers on how many customers they’re referring to one another. Encouraging existing customers to increase their assets with BofA, he explains, is key to his strategy. A 23-yearold teller and recent college graduate named Brandon Nelson steps forward and says, “I’d like to move up to corporate.” The CEO volleys right back. “Everyone at corporate should start at the branches,” replies Moynihan enthusiastically. “That’s the place to learn the business.”

Moynihan’s mood is so lighthearted that it’s astonishing to recall how dire Bank of America’s prospects — and Moynihan’s future — appeared just two years ago, when I first wrote about him in this magazine (“Can Brian Moynihan Fix America’s Biggest Bank?” July 25, 2011). BofA was facing tens of billions of dollars in losses on the toxic mortgages it inherited in its disastrous 2008 acquisition of Countrywide. The prevailing view was that the banking behemoth would have to sell stock at panic prices just to survive. Many analysts and regulators found Moynihan, who became CEO in 2010, so plodding, inarticulate, and gaffe-prone that they figured he would be fired within months. Fortune, however, took the unpopular view that Moynihan was the right man for the toughest job in banking. He also turned out to have a fan in Berkshire Hathaway’s Warren Buffett, who bought $5 billion in preferred stock in BofA in August 2011.

bofA.04.29.13 chart Fortune Chart

Moynihan, 53, has confounded the skeptics ever since. He pursued a cautious, tough-it-out strategy to make the bank healthy even if the economy didn’t recover much. By selling far-flung holdings from Mexico to Ireland, reducing BofA’s operating costs by 10%, and shedding risky loan portfolios, Moynihan rebuilt the balance sheet. In the process he raised capital ratios from perilously low levels to a near industry-best measure of safety. And he accomplished that feat despite paying out more than $40 billion in mortgage settlements since 2010. Most analysts agree that, while BofA will face more pain from home loans, it has covered at least 70% of the total losses, and the remaining outlays will be manageable. The Federal Reserve’s stress test in March found the bank to be financially sturdy enough to survive another financial crisis.

The CEO’s strategy has solidified his own position and boosted his reputation in the eyes of Wall Street: In 2012, Bank of America’s stock was the top performer in the 30-company Dow Jones industrial index, doubling from under $6 a share to almost $12. “Most people didn’t think Moynihan had any chance to rebuild BofA’s capital,” says veteran banking analyst Nancy Bush of NAB Research. “His success is one of the biggest banking surprises in decades.”

But after rescuing Bank of America from the brink of disaster, Moynihan now needs to prove that his company can grow again. In a series of interviews ranging from his Manhattan office overlooking Bryant Park to his 58th-floor suite in Charlotte to the suburban bank branch, Moynihan emphasized that indeed he is moving to a new strategic phase, from disaster prevention to expansion. “Until recently the question was, Do we need to raise capital?” he says. “Now it’s, Can we grow the franchise?”

“This is a war. We’re competing with powerful rivals with nationwide networks. And we plan to win.” BofA CEO Brian Moynihan on his plan to woo mass affluent customers

To do so, he must reenergize BofA’s core business and historical strength: branch banking. Bank of America’s success or failure in its consumer division — by far BofA’s biggest, with $34 billion in revenue last year — will determine whether the bank lumbers along as a moderately profitable franchise or proves to be a real winner with strong, consistent growth. Building momentum won’t be easy.

The CEO is seeking to win over the same broad public that has grown to revile BofA for its record of poor customer service, inflated fees, and damaging blunders, such as foreclosing on the homes of active-duty members of the military. And BofA remains a damaged brand to many. In a survey released in December the closely watched American Consumer Satisfaction Index, retail-banking customers voted BofA last among the four biggest U.S. banks — which combined hold 36% of U.S. deposits — with a rating of just 66, well behind J.P. Morgan (JPMQL) at 74, Wells Fargo (WFC) at 71, and Citigroup (C) at 70.

Moynihan admits that the bad publicity in recent years “did some damage.” He also recognizes that BofA needs to greatly improve its standing with customers. In that vein, he has just unveiled the bank’s first big ad campaign in six years, a splashy array of TV and print spots featuring the tag line “Life’s better when we’re connected.” The campaign invokes qualities most people may not see right now in this giant bank: how appreciated and well-served you’ll be banking at BofA.

bofA.04.29.13 chart2 Fortune Chart

Despite its dented reputation, BofA is at least holding its own in retail against its two big coast-to-coast rivals. The best evidence is in U.S. retail deposit growth, where BofA has matched J.P. Morgan and Wells Fargo since 2010. BofA benefits greatly from its strong presence in fast-growing markets, especially in the Southwest, where it is highly popular with Hispanic Americans. If Moynihan can add improved customer service to his company’s outstanding branch footprint, BofA should be a formidable competitor in the next great battle in banking.

That battle is a contest for the more than 25 million so-called mass affluent households with investable assets of over $50,000. That’s where the money is, and it’s the group the big banks all covet. “This is a war,” says Moynihan. “We’re competing with powerful rivals with nationwide networks and a wide range of offerings. And we plan to win.”

Construction Of New Houses Rises In February New homes being built in Petaluma, California. A housing rebound is giving a boost to the mortgage portfolios of big banks like BofA.Justin Sullivan — Getty Images

To gird for battle, Moynihan is reconfiguring thousands of branches from sales-and-teller outlets into full-service centers that offer a wide range of sophisticated products and advice. Today more than 2,000 BofA branches — including the one Moynihan and I visited in Charlotte — have been renovated and equipped to house three onsite specialists: a home-loan officer, a small-business banker, and a financial adviser from Merrill Edge, an online brokerage service that’s part of Merrill Lynch and competes with discount brokers such as Charles Schwab. The specialists receive most of their pay in salary rather than commissions and garner a big part of their business not from cold calling or mailings, but from what they call “warm leads.” If a client remarks to a financial adviser that he wants to buy a house, for example, the adviser walks the client across the hall to meet the mortgage banker.

It’s a back-to-the-future return to the relationship banking style of the 1950s. Moynihan has actually espoused this approach at every job going back 20 years since he originally joined Fleet, which, as FleetBoston, was acquired by BofA in 2004. And he strongly believes that it’s the right way to go in a market newly buffeted by regulations and legislation that sharply curtail longtime sources of profit, such as exorbitant overdraft and credit card fees. But the strategy isn’t exclusive to Bank of America. The trend is sweeping the industry, with different banks seeking to cement relationships in different ways.

Read More: Android Pay Arrives at Bank Of America ATMs

BofA’s three national rivals, J.P. Morgan Chase, Wells Fargo, and Citi, are targeting the mass affluent with strategies similar to BofA’s. J.P. Morgan boasts full-service branches manned with specialists. (J.P. Morgan has revealed a less conservative approach, however, with the continued embrace of risk in its trading unit, as evidenced by its “London Whale” losses last year.) Wells Fargo also offers mortgage, small-business, and wealth-management specialists in most branches. And Citi, while it has a much smaller U.S. footprint concentrated on the coasts, is following suit. Hence, the prized assets of the mass affluent will go to the players that dominate the best markets and execute their me-too strategies most deftly. “Relationship banking is the correct model,” says Vernon Hill, founder of Commerce Bank, purchased by Toronto-Dominion in 2007. “Execution is Bank of America’s problem.”

To gain an advantage on his rivals, Moynihan is deploying two new plans. First, he’s working on a fresh twist in “relationship pricing” that will be unveiled later this year. The concept is to eliminate most fees and reward the mass affluent mainly on the basis of the total balances they bring to BofA, by adding together what they have in checking, mortgage, credit card, and investments. It resembles the way airlines use frequent-flier miles. In theory, it’s simple: As balances get bigger, so does the list of rewards — higher rates on savings accounts, for example, and steep discounts on the closing costs for a home loan. Most other banks grant goodies based on how much customers use their products. No rival has ever gone this far in tying a slate of ever richer rewards to a measure as overarching as total deposits.

Jamie Dimon CEO Jamie Dimon testifying before congress in June 2012.J. Scott Applewhite — AP

Second, Moynihan wants to use that incentive carrot to win more business from the clients BofA already has. In contrast to his rivals, he’s no longer interested in making expensive offers to lure new customers. He calls his strategy “following our customers at just the right speed.” Says Moynihan: “We’ll grow with our current customers. It’s too expensive and risky to chase new ones. We’ve seen that movie many times before. You make lots of money in the good times, and you give it all back when the market turns.” Not that Moynihan won’t relish taking business from the competition when he can. “We’ll absolutely win market share from them,” he says. “If we know the client, if they have a second checking account with us and everything else with another bank, we’ll go for all of their business. And I won’t be satisfied until we get all of it.”

Although the crucial test will come in its retail-banking business, Bank of America will get a tremendous, practically guaranteed lift over the next several years as two forces that hobbled its profits reverse course. The first is the inevitable rise in interest rates. The timing is uncertain. But when it happens, the result for BofA is predictable. BofA has the largest share of domestic deposits among all U.S. banks, at 12.6% of the U.S. total, or $1.13 trillion at the end of 2012. Those deposits — technically “liabilities” — are great assets. “I like those deposits a lot,” Buffett tells Fortune. “They’re huge, sticky, and low cost, and they will stay that way.”

The deposits fully fund BofA’s $900 billion in loans. But the bank’s revenue from loans has been shrinking as the rates on its healthy home loans and credit cards have declined. To counteract the drag on profits, Moynihan has substantially reduced costs across the bank. In retail he’s closing more than 700 underperforming branches and lowering the employee count from 100,000 to around 70,000. When rates do rise, those management expenses should remain the same, and the funding costs, because so much of the deposit base sits in free checking, will rise only modestly. So the boost to earnings should be big. In its 10-K, BofA reckons that just a one percentage point across-the-board increase in rates will yield an extra $4.2 billion in pretax income.

For more on Bank of America, watch this Fortune video:

The second tailwind is a sharp reduction in the gigantic costs of servicing bad mortgages. From 2010 to mid-2012, the bank spent more than $12 billion annually on the systems and manpower needed to perform modifications on delinquent home loans and liquidate foreclosed properties, at one point employing an incredible 58,000 people for the task. But those costs are shrinking fast. The number of loans more than 60 days past due has dropped from a peak of 1.6 million in 2010 to 541,000 today. Moynihan predicts that by 2015 the servicing expense will fall to around $2 billion a year.

Meanwhile, BofA’s other primary business pillars, investment banking and the Merrill Lynch wealth-management franchise, are thriving. Combined, they earned $9 billion in 2012, 70% more than retail banking, even though retail is by far the biggest business and holds the biggest share of the bank’s equity.

The formula for success in branch banking has changed in recent years. The clientele divides roughly into two categories: what BofA calls “mass retail,” or households that earn $50,000 or less and often live paycheck to paycheck, and the mass affluent. Before the recent raft of reforms, banks could make money on mass retail customers. The reason was simple, if sordid: Those families generated big fee income from overdrafts on their checking accounts and debit cards. They also got gouged by soaring rates on their credit cards if they encountered financial problems. The Durbin amendment to the Dodd-Frank Act radically reduced the fees that merchants paid banks for debit card transactions. That made all customers less profitable, but especially the mass retail folks. As the biggest issuer of debit cards, BofA got hit hardest, losing $1.7 billion a year in revenue. It had also been a huge beneficiary of debit card overdrafts. When customers went $2 over their balances, they’d regularly get hit with $35 charges.

BofA currently has about 50 million retail customers. Some 9 million are mass affluent, and they have about 70% of the deposits. The bank now loses money on most of its 40 million mass retail customers. Moynihan believes he can break even on those lower-income households if he can hold on to their primary checking accounts and lure them into the new world of mobile banking. It costs a bank around $200 to open a checking account for a new customer and $250 to $300 to manage it because of infrastructure and staff expenses. BofA’s research shows that mass retail customers who deposit their paychecks in a checking account typically carry balances large enough that BofA can break even, if it can hold on to them. But if those customers keep opening and closing accounts, they quickly turn unprofitable. Moynihan believes his new, incentive-based approach will cut down on churn. The mobile-banking revolution also has the potential to dramatically lower the costs of serving the mass retail customers. And BofA is the industry leader in mobile, with 12 million customers — some 3 million more than at the start of 2012. Those mobile users deposit 500,000 checks a week by taking snapshots on an iPhone or Android phone. That process costs pennies, vs. dollars for deposits taken in by a teller.

“I like [BofA’s] deposits a lot. They’re huge, sticky, and low cost, and they will stay that way.” Berkshire Hathaway’s Warren Buffett, who bought $5 billion of BofA preferred stock in 2011.

That kind of efficiency will make Bank of America’s mass affluent customers more profitable as well. But the real boost will come if the bankers in BofA’s renovated branches can cross-sell those higher-income customers more mortgages and small-business loans. Once again, what BofA is counting on to bring in that money is the new model of rewards for balances. As the deposit levels grow, customers will get more and more of four types of rewards: extra cash back on credit cards, free stock and bond trades through Merrill Edge, higher rates on CDs and savings accounts, and points, or fractions of points, knocked off closing costs on a new home loan. What’s not at all clear is whether BofA will achieve a mix of rewards that will find favor with clients. It’s a problem the industry has wrestled with for years.

To judge whether Moynihan’s plan is working, Wall Street will be watching Bank of America’s business in the two cornerstone consumer offerings — mortgages and credit card loans. BofA has been shrinking production in both categories. That’s a good thing, because its undisciplined growth in those areas led to its huge credit problems. BofA’s mortgage business has only recently picked up again, with higher-quality loans to existing customers. “When rates are low, people leave their money in a bank because they get so little on a CD,” says bank analyst Bush. “Customers will stay put and accept mediocre service for a while. But when rates pick up, so will competition for customers.” That’s when we’ll find out if Moynihan’s elaborate rewards system is clicking with mass affluent customers.

Read More: Here’s Why Bank of America Is Slashing Up to 8,400 Jobs

On his visit to the branch in Charlotte, Moynihan exudes confidence in his plan. Just before leaving, he warmly greets a customer named Peggy Savas, who tells him that her ex-husband worked as an executive at BofA for decades alongside the legendary Hugh McColl, the former CEO who helped build Bank of America through a series of mergers. “I call Hugh to keep him up to date,” Moynihan assures Savas. Under McColl, BofA once was one of the most respected names in the banking industry. With its troubles finally easing, Moynihan is confident that it can be again.

This story is from the April 29, 2013 issue of Fortune.

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