Breakingviews

Bank of America’s prudence is at odds with times

3 minute read

Brian Moynihan, chairman and chief executive officer of Bank of America, speaks during the Bloomberg Global Business Forum in New York City, September 25, 2019. REUTERS/Shannon Stapleton/File Photo

Register now for FREE unlimited access to reuters.com

NEW YORK, Oct 14 (Reuters Breakingviews) - Brian Moynihan is a bank chief who likes to be prepared for the worst of times. That means Bank of America (BAC.N) has been missing out on the best of times.

Third-quarter earnings on Thursday showed a bank that treads more carefully than chief rival JPMorgan (JPM.N) and consequently extracts less profit for shareholders. Take credit cards, a particularly lucrative type of lending: Bank of America’s $76 billion of average balances at the end of September was roughly half JPMorgan’s. That’s one reason Moynihan’s bank gets 3.3% interest yield on loans, while Jamie Dimon’s gets 4%. It’s sizeable when spread across a $1 trillion loan book.

Similarly with trading. Bank of America typically extracts more revenue than rivals for every dollar that it puts at risk, but overall it bets less. Revenue from dealing in stocks and bonds was $3.6 billion in the third quarter versus $6.3 billion at JPMorgan. Moynihan’s bank also lags in advising on deals. Advisory fees of $654 million were a record for Bank of America but still roughly half what Dimon’s consiglieri, or those of Morgan Stanley (MS.N) boss James Gorman, brought in.

Register now for FREE unlimited access to reuters.com

Being less daring has advantages. The Federal Reserve has set a lower minimum level of capital for the $360 billion Bank of America than other large banks. And interest makes up around half of Moynihan’s revenue, so his bank benefits more when rates and demand for loans rise. Net interest income rose 10% in the third quarter. It barely rose at all at JPMorgan and fell at Wells Fargo (WFC.N). That’s likely to be one reason Bank of America trades at 14 times expected earnings for the year ahead, a premium to its rivals, according to Refinitiv.

But prudence has brought fewer rewards than it should, thanks to massive official support for markets and economies during the pandemic. And risk-aversion might become a risk if it hinders Bank of America’s innovation. JPMorgan has added twice as many digital consumer bank customers since the end of 2020. Bank of America has filed patents by the truckload but largely eschewed acquisitions, while its rival has bought a stake in Brazilian digital lender C6 Bank and UK wealth manager Nutmeg, among other additions.

Moynihan’s intention to stay on until 2030 suggests he thinks the characteristics that make a good boss now will still be in fashion then, despite the dramatic shift towards technology-based banking. Meanwhile, his relative caution points to a belief that the next crisis might reward caution more than the last one did. Right now, these seem contrarian bets.

Follow @johnsfoley on Twitter

CONTEXT NEWS

- Bank of America on Oct. 14 reported $22.8 billion of revenue for the third quarter, up 12% from the same period a year earlier. That was above the $21.8 billion forecast by analysts, according to Refinitiv.

- The U.S. lender made $7.3 billion of earnings applicable to common shareholders, 64% higher than a year earlier.

- Net interest income, which makes up around half of Bank of America’s revenue, increased by 10% as average deposits rose by 15% on a year earlier.

- Sales and trading revenue increased by 12% year-on-year, and the bank reported near-record investment banking fees of $2.2 billion, a 23% increase from a year earlier.

Register now for FREE unlimited access to reuters.com
Editing by Swaha Pattanaik and Amanda Gomez

Breakingviews
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.

More from Reuters