Bank of America SWOT Analysis and Growth Strategies
Growth strategies
Innovative products
Bank of America has been one of the US
banks long known for product and service innovations. In 2006, it introduced
Business 24/7, a suite of small business services, including Business Credit
Express, a card-based service that helps qualified customers get credit easily.
It also launched a new money market savings account, Balance Rewards in 2006.
In 2007, it continued to introduce new products with the launch of No Fee
Mortgage PLUS (which eliminates most fees on conforming mortgages), Mobile
Banking (which enables customers to bank with their cell phones), new Risk Free
CD products (which include high fixed rates and penalty-free withdrawals) and the
new BankAmericard (which offers more rewards points and no point limits). These
new products will help it to offer value added products to its existing
customers and also attract new customers.
Targeting the Hispanic population
In 2007, it introduced credit cards to
immigrants, primarily among the Hispanic population. This card is targeted for
people who lack both social security number and a strong credit history. Bank
of America tested the program in 2006 at five branches in Los Angeles, and
later expanded it to 51 branches in Los Angeles County, home to the largest
concentration of Hispanics in the US. Since then it has made further advancements
for capturing the market with programs such as SafeSend, credit card services
and customer referral direct mail campaign. In addition, it is planning to launch
half of new stores in Hispanic neighborhoods going ahead.
According to the US census bureau, the
Hispanics accounted for almost half of the US population growth in the year
ending July 1, 2005, and the US Hispanic population is expected to triple in
size between 2000 and 2050. Therefore, rapidly growing Hispanic population
represents a huge opportunity for Bank of America to capture a significant market
share in this segment.
SWOT Analysis Report
Strengths
Strong market position
Bank of America has a dominant market
position in the US and leverages its position to gain competitive advantage
over its peers. It has presence in 32 states in the US, the District of Columbia
and more than 30 foreign countries. In the US, it has more than 6,149 banking
centers, more than 18,753 ATMs and peerless e-banking services. Bank of America
claims to be ranked number one Small Business Administration lender in the US
in 2007 and has relationships with 99% of the US Fortune 500 Companies and 83%
of the Fortune Global 500. It also claims to be largest online US bank with
more than 24m online banking customers in 2007. It was also the second largest
retail bank in the world in 2007 with revenues of $55,605m from its retail
banking business.
Strong balance sheet
Strong balance sheet has enabled it
pursue its expansion plans. It had an asset size of $1,716bn in 2007, an
increase of 17.5% over 2006. In addition, during 2003–2007 its asset size has
increased at CAGR of 23.6%. Its shareholders equity grew at an even more
impressive CAGR of 32.3% during the same period to reach $147bn in 2007. These
figures reflect its capability of managing the capital efficiently.
Weaknesses
Declining net interest margin
The bank’s net interest margin (net
interest income divided by average total interest earning assets) has been
declining since 2003. Although its net interest income has increased from
$20,505m in 2003 to $34,433m in 2007, its net interest margin has declined from
3.26% in 2003 to 2.6% in 2007. The decline was primarily due to the adverse
impact of an increase in lower-yielding, trading-related balances and spread compression.
In addition, the funding of the LaSalle merger also impacted the net interest
margin in 2007. Though its financial performance in the last few years has been
impressive, a further decline in net interest margin may adversely impact its
future profitability.
Opportunities
Acquisition of Countrywide
Financial Corporation
In January 2008, Bank of America agreed
to acquire Countrywide Financial Corporation, one of the largest mortgage
lenders in the US. The acquisition of Countrywide will add significant scale to
its operations, adding strong distribution and market share. On completion of
the acquisition, Bank of America will be US’s largest mortgage lender and loan
servicer. It will benefit from Countrywide's broader mortgage capabilities,
including its extensive retail, wholesale and correspondent distribution networks.
Countrywide operates more than 1,000 field offices and has a sales force of nearly
15,000. It will also gain greater scale in originating and servicing mortgages
in the US. Bank of America will move to the top of both originating and
servicing with a 25% share of the origination market and a 17% share of the
servicing market in the US. At the end of 2007, Countrywide had $408bn in
mortgage originations $1.5 trillion worth of service portfolio with 9m loans.
Threats
Subprime crisis
The subprime crisis may lead to short
term insolvency of the company. By the end of 2007, Bank of America had written
off $7bn losses and recorded a credit loss of $9bn, due to the subprime crisis.
Moreover, at the end of 2007, Bank of America had about $ $11,630m in its CDOs
out of which $8,176m was exposed to subprime. During 2007, it recorded losses
of $4,000m associated with its subprime super senior CDO exposure. The losses
reduced trading account profits by approximately $3,200m and other income by approximately
$750m. In addition, it incurred approximately $1,100m in losses related to
subprime sales and trading positions, approximately $300m related to its CDO
warehouse, and approximately $200m to cover counterparty risk on the insured
CDOs. In the case of continuing credit crunch, the capital adequacy ratios of Bank
of America may lead to short term insolvency.
