How Bank of America Makes Money: consumer banking

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Bank of America (BAC), one of the world’s largest investment banks and financial institutions, serves a broad range of customers, including individual consumers, wealthy investors, large corporations and governments. It operates primarily in the U.S., where it gets the vast majority of its revenue, as well as in dozens of countries around the globe. The company faces a broad array of competitors, including JPMorgan Chase & Co. (JPM), Citigroup Inc. (C), Goldman Sachs Group, Inc. (GS), credit card issuers like Visa, Inc. (V), hedge funds, and private equity firms.  The Charlotte, North Carolina-headquartered company expanded from a regional player into a global giant through a series of major acquisitions in the past several decades. 

Key Takeaways

  • Bank of America provides financial services to customers including consumers, wealthy investors, institutional clients, and governments.
  • The company’s Consumer Banking segment provided the largest share of total revenue and the fastest revenue growth in FY 2019.
  • Bank of America repurchased more than $28 billion of common stock last year.

Bank of America’s Financials

Bank of America has staged an operational turnaround in the wake of the 2008 financial crisis, when many experts feared it might slip into bankruptcy.  But the company registered slowing growth in FY 2019 as the economic expansion reached its 10th year. It reported total revenue, net of interest expense of $91.8 billion for FY 2019, up only 0.2% from the previous year. That was a sharp slowdown from FY 2018, when revenue grew 4.1% YOY. Net income also fell to $27.4 billion in FY 2019, down 2.5%. For Q4 of FY 2019 reported on January 15, the bank beat estimates by a small margin. Stock buybacks totaling $28.1 billion last year, combined with trading revenue, mitigated the negative effect of low interest rates. The bank’s net interest income, a key indicator, declined 3% in Q4 after rising 1.5% for the full year. 

Bank of America’s Business Segments

Bank of America’s four business segments are categorized predominantly according to the types of customers utilizing each area. The Consumer Banking segment is focused on consumers and small businesses, while the Global Wealth & Investment Management segment addresses the needs of individual clients with over $250,000 of total investable assets. Global Banking provides investment banking services and related products, while Global Markets focuses on institutional clients. The data shown in the pie charts above excludes net losses and negative revenue in the company’s “All Other” segment, which we detail further below.

Consumer Banking

The Consumer Banking segment provides varied credit, banking, and investment products and services to small businesses and consumer clients. These range from traditional savings accounts, CDs, and IRAs, to credit and debit cards, residential mortgages, and loans. In 2019, Consumer Banking accounted for 41.0% of total revenue and about 45% of net income. The segment generated the most revenue across all segments, accounting for $38.6 billion in revenue. This is up about 2.6% YOY, making it also the fastest-growing segment. Consumer Banking net income was $13.0 billion, also the largest of all segments and up 7.0% YOY.

Global Wealth & Investment Management

The Global Wealth & Investment Management segment provides financial advisory, brokerage, banking, and retirement products to clients with large amounts of investable assets. In 2019, this segment generated $19.5 billion in revenue, up 0.4% YOY. This segment also accounted for $4.3 billion in net income, an increase of 6.6% YOY. Global Wealth & Investment Management represented about 21% of total revenue and 15% of net income for 2019.

Global Banking

Bank of America’s Global Banking segment offers lending-related products and services, including underwriting and advisory services, as well as investment banking products. The segment accounted for 22% of annual revenue and 28.0% of net income for the year. The customers in this segment are most commonly middle-market companies, commercial real estate firms, not-for-profit organizations, and corporations of various sizes. Global Banking was the second-largest segment in 2019 in terms of revenue, generating $20.5 billion for the year. This was up 2.4% YOY. Global Banking also generated $8.1 billion in net income, down 3.1% YOY.

Global Markets

The Global Markets segment provides sales and trading services as well as research services to institutional clients, including financing, securities clearing, settlement, custody, and market-making services. The segment generated $15.6 billion in revenue for 2019, down 3.5% YOY. It accounted for $3.5 billion in net income, down 11.5% from 2018. In spite of its declines, Global Markets made up nearly 17% of all revenue and 12% of net income for 2019.

‘All Other’ Segment

Bank of America’s “All Other” segment includes non-core mortgage loans, liquidating businesses, equity investments, and other activities which are not categorized in one of the four primary segments above. This area posted a revenue loss of $2.4 billion and a net loss of roughly $1.4 billion. 

Bank of America’s Recent Developments

In Bank of America’s Q4 2019 earnings call in January, Chief Financial Officer Paul Donofrio said that interest income will fall further in the first half of 2020, but that it is expected to rise later in the year, assuming a more stable rate environment and driven by strong loan and deposit growth. In the news release accompanying the report, Donofrio said the company “managed well” through a period of shifting from rising rates to lower rates. Donofrio made his comments before the coronavirus began to spread globally.

Source: Investopedia

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