The Bank of America (BofA) remains one of the largest financial institutions in the world. The institution boasts of approximately 47 million consumer relationships as well as over 4,600 retail centers (Bank of America, 2016). It is a global leader in the management of wealth, trading, and investment. The company has operations in 50 states and serves about 3 million business owners. In 2008, at the height of the Great Recession, BofA was one of the banks that received federal aid to enable it to recover from the devastating effects of the financial crisis (Covitz et al., 2013). As banks grapple with the rising costs of operations and the impact of technological advances in the sector, BofA faces a set of unique challenges. To surmount these obstacles, the corporation needs to capitalize on its strengths and opportunities while mitigating the weaknesses and threats in order to maintain its position in the market. This paper is, therefore, a presentation of BofA’s strengths, weaknesses, Opportunities, and Threats (SWOT).
Strengths
Bank of America’s strengths lie in its revenue growth, solid performance of its stocks, expanding profit margins and good returns on equity. These strengths outweigh the fact that the company’s net income has been below par. In an analysis of the company’s performance in the years 2015 -2017, it emerged that the return on equity at BofA stood at 3.77%, 5.45% and 6.66% in the years 2015, 2016 and 2017 respectively. This growth was also demonstrated in the bank’s earnings per share which increased by 15% in the last quarter of 2017 as compared to the same period last year. This is higher than the earnings per share at JP Morgan which stood at 14.11% in the same period while those of Wells Fargo stood at 13.36%. Currently, reports indicate that the bank’s profit margins are high standing at 84.85% (Bank of America, 2016). The bank’s net profit margin stands at 20.91% which is beyond the industry’s average. The strong financial position of BofA makes it attractive to investors, and this is bound to fortify its position in the market over time.
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Bank of America was one of the banks that were in such bad financial shape following the Great Recession that it had to receive federal aid so as to remain afloat. At the heart of the losses that were suffered by the bank were two acquisitions that would later be described as catastrophic (Blinder & Zandi, 2015). The bank had acquired Countrywide Financial, the largest mortgage originator at the time of the recession. However, by the time of the acquisition, Countrywide had been engaging in several malpractices which included the inflation of home values and misrepresentation of the quality of mortgages issued as a result of the inflation. As a result of the acquisition, BofA ended up compensating private investors $ 8.5 billion as a result of Countrywide backed securities (Covitz et al., 2013). In addition to this, it had to settle numerous legal suits. Based on the losses and failures of this period, the bank had no choice but to examine the primary data that it had during the recession in order to acquire lessons that would help it to move forward.
As of 2015, BofA’s research group was touted as the best research group in emerging market research (McElhaney, 2017). As a result of leveraging this strength in the aftermath of the Great Recession, the bank was able to build upon information concerning the investment patterns on various generations such as the Baby Boomers and the millennials. It is due to this tradition of strong research that has been fortified over the years that BofA was quick to warn industry players in the year 2016 that there would be a recession in 2017 if the economic trends at the time were to continue (Kawa, 2016 ). The research group helped the bank set up appropriate financial buffers in addition to exercising prudence in its cash flow, credit and operations to avoid ending up in the same position. Currently, the research by BofA shapes the industry and covers over 3,200 stocks and 1,100 credits globally.
Weaknesses
Bank of America is regarded as a Systematically Important Financial Institution (SIFI). This refers to a financial institution that is considered to be important, and as a result, special regulations and procedures are put in place to prevent its collapse (Cetina et al., 2017). The current regulations require that SIFI banks put in place stringent measures to prepare for failure, have a deep equity cushion in place, undergo resource intensive stress tests and have more expensive assets (Blinder & Zandi, 2015). All banks that are worth more than $ 1 billion are subject to enhanced capital standards. The standards require banks to maintain a specific equity-assets ratio (Cetina et al., 2017). While these standards place a unique burden on BofA to keep up, they also present an opportunity given that they are likely to cushion the bank if another recession takes place in the new future. The SIFI standards dictate the nature of risks that can be taken by BofA thus preventing the reoccurrence of the financial crisis in which the bank took dangerous risks in acquisitions, lending, and expansion (Cetina et al., 2017).
Bank of America has a presence in Europe, Middle East, and Africa. It is so keen on developing in these markets that for the past five years, it has been ranked first by Institutional Investor for its research in these markets (McElhaney, 2017). The company has offices in 21 countries that are spread in these three continents. These offices play a role in the diversification of its assets and portfolio (McElhaney, 2017). Following the recession in 2008, the bank sold its stake in China Construction Bank to raise capital. In addition to this, it exited the credit card business in the UK, Ireland, and Canada. In the restructuring process, the bank also lay off numerous workers in its offices abroad and closed some of its offices. The bank has been cautious in its approach towards expansion ever since. However, this does not mean that there are no opportunities in the global market. Guided by its understanding of the Europe, the Middle East, and Africa (EMEA) markets as a result of research that has been accrued for years, the bank can package custom-made solutions in the emerging markets which would help boost its profit margins in these markets.
Opportunities
Bank of America boasts of 34 million digital active user accounts of which 22 million use the mobile version of the banking application. The BofA’s digital active user base is above that of JP Morgan Chase which stands at 28.4 million (Bank of America, 2016). On the other hand, that of Wells Fargo stands at 20 million. Thus, BofA could capitalize on these users in the future to continue lowering its operational costs while increasing its profit margins. The bank has also been aggressive in developing its mobile app. It was among the first banks to roll out the fingerprint verification in 2015. Currently, the bank is experimenting with the possibility of iris scanning (Bank of America, 2016). This innovative approach is perhaps informed by the fact that millions of transactions take place on its online platforms.
The mobile app allows its customers to deposit checks. As a result, one in every five cheque deposits at BofA takes place through the mobile app. Since 2011, the bank has been seeking ways of cutting its operational costs through layoffs and the closure of some its branches. The growing adoption of mobile banking is driven by the fact that it only costs one-tenth of what it would cost to transact via the online app. Owing to this development, the bank has managed to cut over $ 15 billion in yearly costs since 2011. There has also been a 28% increase in online transactions over the years, but there has also been a decline in the number of employees (Bank of America, 2016).
In case BofA maintains this trend, then it is bound to keep up with the ever-increasing changes in technology. This will ultimately place the bank in a position where it can compete against other financial institutions that are equally keen on embracing technology in their operations. The effect is already being seen in the lending arm of the bank in which 22% of the loans are attributed to digital sales (Bank of America, 2016). With the growing importance of the smartphones in the market, it is essential for the bank to continue with its innovative practice in this area if the growth is to be sustained. There is also an opportunity for the bank to expand and improve its global cross network via its mobile app given that it has an international presence. While traditional banks express concerns over security regarding international money transfers, the smartphone age demands flexibility, acceptability, and convenience (Mills & Mccarthy, 2017).
As banks continually strive to survive in politically, socially and technologically adverse conditions, there is a need for them to train and retain the best talent. Unlike in the past where employees were content with working for one institution for their entire working life, the current crop of employees is keen on acquiring experiences at different organizations. As a result, BofA’s Bank of America Merrill Lynch boasts of a graduate training and mentorship programme. In this programme graduates are given an opportunity to acquire a hands-on experience as well as gain access to training materials provided by the institution. The bank also offers its employees with opportunities for career mobility within the organization and across various business divisions (Bank of America, 2016). As the bank focuses on delivering excellent services to its clients, it is keen on ensuring that there is collaboration among its employees and across its various divisions. Having put all these measures in place, the bank has an opportunity to maintain its current trend using in-house talent. However, it needs to be vigilant given that its competitors also require talent and are constantly finding new ways of attracting and retaining that talent.
There are also opportunities to partner with non-banking entities in these markets. Possible partners include tech firms that would help BofA to offer banking solutions capable of serving the local market (Mills & Mccarthy, 2017). Currently, Asia holds the potential of being a hub of mobile lending and hence the bank ought to capitalize on that. In addition to this, the bank can capitalize on the African nations that are rising by offering its wealth management expertise and experience to the emerging crop of millionaires. Further, Africa and Asia are currently experiencing a rapid growth in the tech sector and innovative products and are seeking to find their way into the global market (Mills & Mccarthy, 2017). Given that the bank has a presence in 21 countries, it could position itself as a banking solution provider that supports regional as well as international expansion.
According to industry analysts, the future of banking will be characterized by cross-border knowledge transfer of capital. Also, there are constraints to the transfer of capital across jurisdictions with the increasing federal and international regulations seeking to prevent funding of criminal activities. Given that BofA is a SIFI bank, these regulations are more stringent hence bound to limit its scope of expansion in the global market. For this reason, cross-border banking partnerships would help the bank diversify its profit margin on the global market. This is by providing BofA with an opportunity to bridge gaps in the emerging markets. This will enable the bank to deal with the crippling effects of credit defaults in the developed world through acquisitions and mergers.
In 2005, BofA took an unnecessary risk and merged with MBNA, one of the biggest credit card companies in a merger that would be classified as one of the largest at the time. It quickly emerged that the bank was battling with bad credit card hence BofA found itself writing off debts to the tune of billions over the years in an effort to keep the company afloat. For instance, in 2008, the bank wrote off $ 20 billion in credit card debt. This was followed by the writing off of $ 29.6 billion and $ 23.1 billion in 2009 and 2010 respectively. To drive its growth, the bank resorted to giving credit cards to people who could not afford them. In the aftermath, stringent federal regulations were established to prevent a recurrence of such events. By incorporating these regulations, BofA has an opportunity to deal with the illegal risk-taking that may arise in the investment arm of the bank.
Threats
The digital age also presents a unique threat to BofA. For instance, cyber-attacks are becoming increasingly commonplace with the recent United States (U.S) presidential elections being riddled with allegations about the possibility of cyber manipulation. As BofA increasingly relies on online platforms to drive its sales, reduce its operational costs and enhance its profit margins, it is also essential for it to keep innovating mainly with regard to cybersecurity. This calls for vigilance as well as flexibility in dealing with the ever-evolving cyber-attacks. There is also an opportunity for the bank to grow in this area given that it has been quick to embrace innovative security features such as fingerprint identification on its mobile app. The bank can develop its cyber surveillance, and cybersecurity systems division hence advise other financial institutions on ways of maintaining the level of cybersecurity that it has attained.
The developed market where BofA is located is gradually aging. Hence, there is a need for a shift in focus from savings and investment to consumerism and credit. Similar trends have been experienced in the aging population in China and some European countries. As a result, the developing EMEA markets which have a younger population present the best opportunity to surmount the threat of falling interest rates and credit defaults. This is because a younger population is more energetic and prone to risk tasking as compared to an aging population whose capacity to work is dwindling and is risk averse. According to industry analysis, the global middle class is expected to grow by 180% between 2010 and 2040 with Asia outpacing Europe by 2018 (Bank of America, 2016). It has also been predicted that more than 30 billion people will move to cities particularly in the developing world as a result of the pull factors such as availability of employment opportunities and better housing. Thus, the next battleground for financial services will take place in cities in the emerging markets. Hence, there is a need for BofA not only to intensify its research efforts but also to make inroads into these markets. This is in a bid to prepare for the explosion of demand that will come with a youthful population, growth of enterprises and rapid urbanization.
References
Bank of America (2016). Bank of America Corporation 2016 Annual Report. Retrieved from http://www.annualreports.com/Company/bank-of-america-corporation
Blinder, A., & Zandi, M. (2015). The financial crisis: lessons for the next one. Report by the Center on Budget and Policy Priorities (Oktober 2015) .
Cetina, J., Loudis, B., & Taylor, C. (2017). Capital Buffers and the Future of Bank Stress Tests. Office of Financial Research. Retrieved from https://www.financialresearch.gov/briefs/files/OFRbr_2017_02_Capital-Buffers.pdf
Covitz, D., Liang, N., & Suarez, G. A. (2013). The Evolution of a Financial Crisis: Collapse of the Asset‐Backed Commercial Paper Market. The Journal of Finance , 68 (3), 815-848.
Kawa, L. (2016). BofA: Markets Are Complacent About the Risk of a Recession Next Year. Retrieved from https://www.bloomberg.com/news/articles/2016-10-05/bofa-markets-are-complacent-about-the-risk-of-a-recession-next-year
McElhaney, A. (2017). Bank of America Tops II’s Emerging Market Research Ranking. Retrieved from https://www.institutionalinvestor.com/article/b1505pcj9s4h6w/bank-of-america-tops-iis-emerging-market-research-ranking
Mills, K., & Mccarthy, B. (2017). How Banks Can Compete Against an Army of Fintech Startups . Retrieved from https://hbr.org/2017/04/how-banks-can-compete-against-an-army-of-fintech-startups
