A few years ago, I had the opportunity to interview Brian Moynihan onstage in front of a hometown audience near the Boston suburb where the Bank of America CEO resides. In the introduction, I intoned that when Moynihan became CEO in 2010, he was widely dismissed as a colorless attorney who lacked the operating expertise to rescue flailing colossus. “In fact,” I jested, “So many of the banking experts and competitors I talked to thought Brian would fail that the only two people who weren’t totally amazed by his success were…me and HIM!”
Moynihan––who’s seldom mirthful in public––reacted, or didn’t react, with typical stoicism, but the crowd loved it.
Moynihan did indeed defy the skeptics, and the strongest evidence so far is B of A’s fourth quarter report, issued on January 16. The bank wowed Wall Street by posting a strong $8.7 billion in pre-tax earnings, lifting the total for the full year to $34.6 billion, a 25.3% gain over 2017. (Keep in mind these numbers don’t include the boost from the 2017 federal tax cut.) In two days, B of A’s stock jumped 9.2%, adding $30 billion in market cap.
Those numbers enshrine Moynihan as Wall Street’s most unlikely star. He deserves that status by never wavering from the playbook that he first championed shortly after becoming CEO in the dark days of 2010. At the time, Moynihan pledged a return to the kind of low-risk, grow-with-your customers banking that prevailed in the 1950s. The idea was that banks are handed a treasure trove in the form of deposits at near-zero or extremely low rates. Banks, Moynihan said, should generate excellent profits by lending out those cheap deposits at far higher rates for credit card, corporate, margin, mortgage, and consumer loans. The rub is that for the past two decades, the banks almost invariably squandered the profits made in good times by taking big risks, especially in speculative trading and underwriting exotic securities. Moynihan promised to deploy capital markets to serve corporate clients, not chasing speculative windfalls.
At the time, I was highly impressed by Moynihan’s back-to-basic strategy and dogged determination. According to friends, his approach to business resembled his bulldog aggressiveness as a feared scrum half on club rugby teams. I’d also studied his success playing the role that Jamie Dimon filled for Sandy Weill. Under Terence Murray, the Sandy Weill of New England, Moynihan performed the tough integration work on the sundry acquisitions that built FleetBoston Financial.
And the strategy worked, despite a tough environment of record-low interest rates that squeezed the spreads between deposits and loans. So how did Moynihan do it? From the start, his blueprint called for B of A to grow with borrowers and brokerage clients (as for acquisitions, forget it) and sidestep the kind of hyper-aggressive sales culture that’s hobbled Wells Fargo, an institution that was a lot more valuable than B of A, and a lot more respected, when Moynihan took charge. Moynihan believed that B of A could expand with the economy without retaining any earnings. Hence, it could return all profits to shareholders in buybacks and dividends, and still increase revenues in line with the economy as its customers incomes and appetite for credit kept waxing.
Moynihan delivered on his top-line pledge. Since 2015, B of A’s revenues have increased by $8.3 billion or 10%, at a rate of 3.2% a year, pretty much in line with GDP. The big surprise: He’s gotten an extra kick from shrinking total expenses, a relative rarity in corporate America. In other words, he’s proven a master of “operating leverage,” increasing revenues faster than costs, and thus expanding margins. By reducing the workforce, pruning unprofitable branches, and taking leadership in servicing more and more account on the web, Moynihan shrank B of A’s cost base by $4.3 billion over the past three years, or 2.4% a year.
The combination of modestly growing revenues and falling expenses has added over $12 billion in pre-tax earnings since 2015, raising the operating margin, excluding credit costs, by 11 points to 38%. And once again, the upward march is happening without reinvesting those substantial earnings.
For now, Moynihan hasn’t managed to pay out 100% of profits––it does deliver around $6 billion a year in dividends––but that’s where he’s headed. So he hasn’t crossed the goal line yet. But the plodder so many thought couldn’t do it, is charging up-field, and charging fast.