Bank of America hasn't lost its status as the country's largest bank so much as escaped it.
The reductions in size are considered good for its long-term health. Yet there are few immediate payoffs in an environment in which even its relatively slimmer rivals are struggling.
"We are doing everything we can to continue to position the earnings of our company," Chief Executive Brian Moynihan told analysts Tuesday. Bank of America will pursue growth in "very select areas," Moynihan said, but it is "now managing down [staffing] across all areas."
There is a reason for that. Asset dispositions, overhauls of — or even exits — from big lines of business, and more than $6 billion of accounting adjustments had far more effect on the company's third-quarter results than either expense cuts or revenue from operations. Even among the businesses that Bank of America's management has deemed core to its future, only its small business lending and private banking operations were mentioned as candidates for growth. That makes cutting back on unprofitable components of even core functions a necessity.
Improving Bank of America by having less of it isn't an inspiring vision. Standard & Poor's analyst Erik Oja described Bank of America's executives as sounding "tired" and "not enthusiastic."
Moynihan acknowledged that stanching the bleeding from Countrywide Financial and cutting back on unnecessary expenses was not sufficient to give B of A a sustainable business. The company's strategy, he said in the bank's third-quarter conference call, will be driven in part by a "focus on the slow economy and its impact on how we are going to run the company going forward."
"If you look at all the areas that they're cutting, I think they kind of listed everything," says Jason Goldberg, an analyst for Barclays Capital. "They're still going to be a massive retail bank, but maybe reduce branches. They're still a massive credit card player, but cut out some of the less profitable parts of that business. They're still going to be a mortgage player, but only do their own originations."
As in recent quarters, the jettisoning of some business lines and cleaning up of others took center stage. Over the course of the quarter, the company sold off half its stake in China Construction Bank, announced that it would discontinue correspondent mortgage business that accounted for about half of its originations, and offloaded private equity holdings. The simpler the bank gets, Moynihan said on the call, the greater the likelihood that B of A will be able to maintain stable earnings.
"One of the reasons that we have been as focused as we have on the core in shedding assets, and you look at what we did with the private equity portfolio, is to start eliminating the chances that these types of pluses and minuses come through," he said. While Countrywide's problems still create the potential for unpleasant surprises in the mortgage space, "we feel like we have done everything we can at this point."
Getting back to normal in its retail banking and capital markets is essential for B of A, but those businesses are still mediocre at best industrywide.
Though Bank of America reported growth in total deposits, commercial loans, and net checking accounts, Marty Mosby, an analyst at Guggenheim Partners LLC, points to a disappointing trend in the bank's principal operations. Bank of America faced quarter-over-quarter declines in its pre-tax earnings on deposits, card services, global commercial banking, global banking and markets, and global wealth and investment management business segments.
These business segments, Mosby says, most closely align with the bank's core retail and brokerage services.
"A decline in operating earnings in those business lines reflect some compression in those businesses," Mosby says.
Moynihan's comments appeared to reflect a sense that certain shrinkage would be desirable even in core businesses such as taking deposits. Asked about whether Bank of America would lose customers over its $5 monthly debit card fee for customers without high balances, Moynihan suggested that the departure of such clients wouldn't be a bad thing.
Customers who have a broad relationship with Bank of America can "get out of the fee," he said. "The issue is when people split their relationship and use our convenience and our access and our 18,000 ATMs and our no foreign ATM fees and our online banking products and all that and yet have their relationship elsewhere, that is tough for us to afford to provide."
An overall reduction in assets will be helpful to the bank, Mosby says. Diverstitures give Bank of America "some cushion as they have to, over the next year or year and a half, go through settlements and resolutions on mortgage issues."
"It generates some stability in your capital and further enhances your cushion to absorb the future losses they are inevitably going to have," Mosby adds.
FBR Capital Markets' Paul Miller takes that argument one step further, suggesting that reductions of BofA's size even in its core customer-facing businesses is likely the only way the bank will be able to meet the higher capital standards required by regulators.
"Given their own admission of being short on capital relative to Basel III, I don't think they can get there on earnings," he said. But even without capital pressure, Miller said that there was a compelling need to slim down.
"There are too many branches, too many back offices," said Paul Miller of FBR Capital Markets. "The industry's infrastructure is built for a bigger machine, and the machine's never going to get that big again. The first step is simplifying the business model, and then to cut that back."