Bank of America's "Project New BAC" - For Good or for Bad?

Mgmt 619: Capstone Project
Fall 2011
Prof. Madsen

Neeraj Dhulekar
Chris Henshaw
Julia Levites
Ethan Levy
Lissa Streegan

Table Of Contents

I. WSJ ARTICLE and EXECUTIVE SUMMARY .............................................................. 6
I. A. WSJ Article - BofA Readies the Knife .......................................................................................................6
I. B. Executive Summary ....................................................................................................................................9

II. EXTERNAL ANALYSIS .................................................................................................. 12
II. A. Industry Definition ................................................................................................................................... 12
II. B. Five Forces Analysis ................................................................................................................................ 12
II. B.1 Five Forces Analysis-Commercial and Investment Banking ............................................................ 12
II. B.2 Five Forces Analysis- Mortgage Banking ........................................................................................... 13
II. C. Macro Environmental Forces Analysis, Economic Trends and Ethical Concerns .................................... 14
II. C.1 Global/Economic ................................................................................................................................. 14
II. C.2 Social ................................................................................................................................................... 15
II. C.3 Technological ...................................................................................................................................... 15
II. C.4 Governmental/Political ........................................................................................................................ 16
II. C.5 Ethical ................................................................................................................................................. 16
II. C.7 Demographic Trends ........................................................................................................................... 16
II. D. Competitor Analysis .................................................................................................................................. 17
II. D.1 Competitors ......................................................................................................................................... 17
II. D.2 Primary Competitors ........................................................................................................................... 17
II. D.3 Primary Competitor‟s Corporate/Business- Level Strategies .............................................................. 18
II.D.4 Strategic Positioning - Value and Cost Drivers and VRIO Analysis ................................................... 22
II.D.5 Value - Cost ......................................................................................................................................... 25
II.D.6 Comparative Financial Analysis .......................................................................................................... 29
II. D.7 Implications of Competitor Analysis .................................................................................................. 31
II. E. Intra-Industry Analysis ............................................................................................................................. 31
II. E.1 Stage of Industry Evolution ................................................................................................................. 31
II. E.2 Strategic Groups Analysis ................................................................................................................... 31
II. E.3 Other Competitive Dynamics .............................................................................................................. 33
II. F. Threats and Opportunities ......................................................................................................................... 33
II. F.1 Emerging Threats and Opportunities ................................................................................................... 33
II. F.2 Threats and Opportunities Implications for Strategy ........................................................................... 33
II. G. Summary of External Analysis ................................................................................................................. 33

III. INTERNAL ANALYSIS .................................................................................................. 34
III.A. Business Definition and Mission............................................................................................................... 34

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III.B. Organization Structure, Controls and Values ............................................................................................ 34
III.B.1 Organization Structure ........................................................................................................................ 34
III.B.2 Employee Controls, Values, and Ethics .............................................................................................. 35
III.C. BofA – Strategic Position Definition ........................................................................................................ 35
III.C.1 BofA - Corporate Level Strategy ........................................................................................................ 35
III.C.2 Business Level Strategy ...................................................................................................................... 38
III.C.3 Resources and Capability Level .......................................................................................................... 41
III.D. Financial Analysis ..................................................................................................................................... 44
III.D.1 Performance and Operating Ratios ..................................................................................................... 44
III.D.2 Discounted Cash Flow Analysis ......................................................................................................... 44
III.D.3 Scenario Analysis ............................................................................................................................... 46

IV. Analysis of the Effectiveness of the Strategy .................................................................. 48

V. Recommendations .............................................................................................................. 49
V. A. Three Short and Long Term Strategies .................................................................................................... 49
V. A.1 Short Term #1 - Sell Risky Assets ..................................................................................................... 49
V. A.2 Short Term #2 - Layoffs .................................................................................................................... 49
V. A.3 Short Term #3 - Loan Modification to 40 Years................................................................................ 50
V. A.4 Long Term #1 - Feed the Mortgage Business Segment ..................................................................... 51
V. A.5 Long Term #2 – FHA Loan Program................................................................................................. 52
V. A.6 Long Term #3 - Invest in Innovation Infrastructure .......................................................................... 53
V. B. Strategy Implementation .......................................................................................................................... 54

VI. Conclusion ......................................................................................................................... 56

VII. Appendix .......................................................................................................................... 58
Exhibit 1: Commercial Banking & Investment Banking Industry and Ecosystem ............................................. 58
Exhibit 2a: Commercial/Investment Banking Level 1 & 2 Analysis ................................................................. 59
Exhibit 2b: Commercial/Investment Banking Level 3 Analysis ......................................................................... 64
Exhibit 3a: Mortgage Banking Level 1/2 Analysis ............................................................................................. 64
Exhibit 3b: Mortgage Banking Level 3 Analysis ................................................................................................ 69
Exhibit 4: BofA Segments and % Revenue ........................................................................................................ 70
Exhibit 5: Bank Holding Companies market share by Deposits, Credit Card, Consumer Loan Revenue ......... 70
Exhibit 6: Bank Holding Companies by Fees Generated from M&A, Equity, Bonds, and Loans ..................... 71
Exhibit 7: Rumelt‟s Corporate and Business-Level Strategy Classification ....................................................... 71
Exhibit 8: Porter‟s Generic Strategies Matrix (Business Level Strategy) ........................................................... 71
Exhibit 9a: JPMorgan Chase Revenue by Segment ........................................................................................... 72
Exhibit 9c: JPMorgan Chase BCG Matrix for Investment Banking .................................................................. 72

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Exhibit 10a: Citigroup Revenue by Segment ..................................................................................................... 73
Exhibit 10b: Citigroup BCG Matrix for Investment Banking ............................................................................ 73
Exhibit 11a: Wells Fargo Revenue by Segment................................................................................................. 73
Exhibit 11b: Wells Fargo BCG Matrix for Commercial Banking ..................................................................... 74
Exhibit 12a: Goldman Sachs Revenue by Segment ........................................................................................... 74
Exhibit 12b: Goldman Sachs BCG Matrix for Commercial Banking ................................................................ 74
Exhibit 13a: Morgan Stanley Revenue by Segment ........................................................................................... 75
Exhibit 13b: Morgan Stanley BCG Matrix for Commercial Banking ............................................................... 75
Exhibit 14a: BofA VRIO Analysis ..................................................................................................................... 75
Exhibit 14b: Bank of America Value Drivers ..................................................................................................... 76
Exhibit 14c: Bank of America Cost Drivers ....................................................................................................... 77
Exhibit 15a: JPMorgan Value Drivers ................................................................................................................ 78
Exhibit 15b: JPMorgan Cost Drivers .................................................................................................................. 78
Exhibit 15c: JPMorgan VRIO Analysis .............................................................................................................. 79
Exhibit 16a: Citigroup Value Drivers ................................................................................................................. 79
Exhibit 16b: Citigroup Cost Drivers ................................................................................................................... 80
Exhibit 16c: Citigroup VRIO .............................................................................................................................. 81
Exhibit 17a: Wells Fargo Value Drivers ............................................................................................................. 81
Exhibit 17b: Wells Fargo Cost Drivers ............................................................................................................... 82
Exhibit 17c: Wells Fargo VRIO.......................................................................................................................... 82
Exhibit 18a: Goldman Sachs Value Drivers ....................................................................................................... 83
Exhibit 18b: Goldman Sachs Cost Drivers ......................................................................................................... 83
Exhibit 18c: Goldman Sachs VRIO .................................................................................................................... 83
Exhibit 19a: Morgan Stanley Value Drivers ....................................................................................................... 84
Exhibit 19b: Morgan Stanley Cost Drivers ......................................................................................................... 84
Exhibit 19c: Morgan Stanley VRIO Framework ................................................................................................ 84
Exhibit 20a: Commercial Banking V – C Analysis ............................................................................................ 85
Exhibit 20b: Commercial Banking Profit Analysis ............................................................................................. 85
Exhibit 20c: Commercial Banking V-C analysis ................................................................................................ 86
Exhibit 21a: Investment Banking Customer Value Capture ............................................................................... 86
Exhibit 21b: Investment Banking V-C analysis .................................................................................................. 86
Exhibit 22a: Ratio comparable analysis for top 10 US banks and the industry for last 12 months ..................... 87
Exhibit 22b: (cont.) ............................................................................................................................................. 88
Exhibit22c: Bank of America performance (ratios) for 2008-2011 .................................................................... 89
Exhibit 23: Bank of America Organizational Structure and Business Segments ................................................ 90
Exhibit 24: Bank of America Business Segments and Aggregations.................................................................. 91
Exhibit 25a: Bank of America BCG Matrix for Commercial Banking ............................................................... 91

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Exhibit 25b: Bank of America BCG Matrix for Investment Banking ................................................................. 91
Exhibit 26: BofA Value Chain ............................................................................................................................ 92
Exhibit 27a: Layoffs scenario methodology ....................................................................................................... 93
Exhibit 27b: Layoffs scenario implementation ................................................................................................... 94

VIII: Financial Background Appendix ................................................................................. 95

IX: Bibliography.................................................................................................................... 108

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I. WSJ ARTICLE and EXECUTIVE SUMMARY

I. A. WSJ Article - BofA Readies the Knife
BofA Readies the Knife1
Bank Plans to Cut $5 Billion in Costs by End of 2013; 30,000 Jobs to Disappear

Bank of America Corp. Chief Executive Brian Moynihan announced a $5 billion cost-pruning
plan that includes 30,000 job cuts. Pulling it off will require the Charlotte, N.C., company's
embattled boss to convince skeptical analysts and investors that he is serious about shrinking the
nation's largest bank in assets without seriously damaging employee morale.
"Brian is trying to do a balancing act,'' one BofA executive said.”Satisfying investors and not
scaring the hell out of employees-it's tough to do.''
The 51-year-old Mr. Moynihan, fighting to steady the bank and jump-start profits as concerns
deepen about its exposure to the slowing US economy and a slew of mortgage-related losses and
lawsuits, said the expense cuts would be made in consumer-related businesses by the end of
2013.
Mr. Moynihan also vowed to "get more aggressive" about lowering costs. The first phase of an
overhaul called "Project New BAC," after the company's ticker symbol, will lop off 18%, or $5
billion of the $27 billion in annual costs in consumer banking, global technology and other areas.
At a widely anticipated speech at the Barclays Capital financial conference in New York, Mr.
Moynihan said nothing about corresponding job cuts.
Later on Monday, though, Mr. Moynihan told BofA employees in an internal memo that "overall
employment levels'' would come down by 30,000 over the next few years. A separate QandA on
the company's internal website referred to the cuts as "the most difficult outcome of this work.''
The actual number of positions cut likely will be higher than 30,000. The estimate includes the
rehiring of some employees, as well as new positions that are expected to be added over time,
according to a BofA spokesman. The number also reflects positions cut through attrition or
elimination of unfilled jobs.
"This is an impact the management team does not take lightly, and we know well how difficult it
will be," Mr. Moynihan said in the memo to employees.
The BofA spokesman declined to provide the gross number of jobs being eliminated. "From an
expense standpoint, I'm not sure that's relevant," he said. "What investors care about is how are
you going to get that fixed cost down."

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"Everyone's extremely worried," one BofA employee said Monday.
BofA shares rose seven cents, or 1%, to $7.05 in 4 p.m. New York Stock Exchange composite
trading. The stock is down 47% so far this year.
Paul Miller, an analyst at FBR Capital Markets, said the looming expense cuts aren't deep
enough to offset BofA's potential exposure to multiple billion-dollar lawsuits related to mortgage
woes. Many investors are worried BofA will have trouble raising enough capital to meet new
global requirements starting in 2013, though the bank has insisted it can meet them.
"This is what investing in this stock is about," Mr. Miller said. "It is not about cutting costs."
BofA began scrutinizing its sprawling operations for cuts in May and concluded the process last
week. Company officials discussed higher job-reduction targets than the number unveiled
Monday, including roughly 40,000 as recently as late August, according to people familiar with
the situation. As of June 30, BofA had 288,000 employees.
In comparison, Wells Fargo and Co. said in July it plans to cut 12% of its quarterly noninterest
costs by the end of 2012. On Monday, PNC Financial Services Group Inc. said the regional bank
will trim its expense base by 6%, or $550 million, in 2012.
PNC didn't disclose any job cuts, though its cost-savings plans include 700 ideas submitted by
employees. "We did not have a nickname for our expense program," said James E. Rohr, PNC's
chairman and chief executive. "We called it continuous improvement." PNC shares rose 3.9%, or
$1.79, to $48.17 at 4 p.m. in New York Stock Exchange composite trading.
BofA said its goal is to reduce costs as a percentage of revenue, or its efficiency ratio, to 55%. At
the end of 2010, the company's efficiency ratio was 63%, higher than at rivals J.P. Morgan
Chase and Co., Citigroup Inc. and Wells Fargo, according to SNL Financial. The industry
average is 74%. Hudson City Bancorp Inc., in Paramus, N.J., has an efficiency ratio of 30%, the
smallest among all US banks, according to SNL.
In a second phase of the belt-tightening effort at BofA, officials will try to reduce some of the
$28 billion in expenses in commercial banking, wealth management, corporate banking and
investment banking. BofA didn't specify cost-cutting or job-reduction targets, except to say they
would be lower than in consumer businesses.
Mr. Moynihan also said BofA is looking to put behind it other costs that aren't related to normal
business activities, including mortgage and litigation expenses. Such costs amounted to about
$18 billon of the company's total expenses of $73 billion for the year that ended in March.

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Project New BAC is one of several moves by Mr. Moynihan during the past month to solidify
the bank's finances and refocus its operations. Last week, he ousted two high-ranking lieutenants
and installed two others as co-chief operating officers.
BofA also sold $5 billion of preferred stock to Warren Buffett's Berkshire Hathaway Inc. and
agreed to sell half its remaining stake in a major Chinese lender. The bank is trying to sell a large
piece of its mortgage business.

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I. B. Executive Summary
Bank of America Corporation (BofA) is a bank holding and financial service corporation
headquartered in Charlotte, North Carolina. The firm offers a suite of products and services and
operates in deposits, global card services, home loans and insurance, global commercial banking,
global banking and markets, and global wealth and investment management. It employees
288,000 people who service the United States and 40 countries, is currently the second largest
bank holding company in the United States with $2.2 billion in assets, and is the fourth largest
bank in the US with $58.59 billion by market capitalization.

In 2011, BofA has been the subject of criticism and scrutiny. With reports of quarterly negative
net income and a 48% decline in stock price, BofA is currently facing a strategic challenge that is
threatening firm survival. To deal with its high exposure to mortgage-related losses and
lawsuits, and the slow recovery of the U.S economy, BofA has been forced to make multiple
changes to its organization in order to cover soaring costs and disproportional revenues, while
also attempting to maintain customer and shareholder confidence.

Given the complexity and depths of its problems, the scope of this analysis concentrates on two
business segments where BofA can consider change while defending its strategic position in the
industry during it recovery efforts. Specifically, it focuses on commercial banking (including
retail) and investment banking, and calls attention to its mortgage-lending business because of
this segment‟s strategic importance.

Industry attractiveness is low in commercial banking, investment banking, and mortgage lending
because of moderate-high barriers to entry, high supplier power, moderate buyer power (high in
mortgage), high rivalry and low threat of substitutes. Government regulations and politics
heavily influence this industry, which is extremely interwoven in macroeconomics given the
influence, size and international reach of its major players. As threats and opportunities to the
industry exist at the macro level, key players in this mature industry compete at the corporate
level on measures of parity while existing and emerging threats fight for customer share at the
product level.

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Though many firms offer financial services, the primary competitors considered to BofA in this
analysis hold the largest market capitalization in the industry and compete across similar product
lines, services, and geographies for nearly the same customer segments. Little differentiation
amongst them exists thus competitors compete for customers based primarily on customer
service and reputation. For this analysis, in commercial banking, BofA‟s primary competitors
are JPMorgan Chase, Wells Fargo and Citigroup while in investment banking they are Goldman
Sachs, Morgan Stanley and JPMorgan Chase.

BofA‟s corporate strategy over the last 5-10 years has been to broaden its product offerings
which included acquisitions of Countrywide for its consumer mortgage portfolio, and Merrill
Lynch to broaden its investment banking customer base and product portfolio. Its promise of
providing a personalized set of products across any customer segment has been a key driver of
BofA‟s positioning strategy. Yet as the financial crisis unfolded, this plan seems to have
backfired and has led it into the complex and costly mess where it stands today.

In an effort to stabilize profitability, BofA‟s recovery plan, called “Project New BAC”, proposes
aggressive cost cutting, divesture of non-core assets, and generation of new capital through
private investment, and sales of its correspondent mortgage lending platform. Its goal is to cut
$5 billion in spending, improve its revenue/cost ratio to 55%, and return the firm to pre-2009
health in the long term. In order to do so, it has announced plans to commit 30,000 in layoffs,
cut costs across the board, and sell a portion of its shares in China Construction Bank. As it is
currently its biggest issue, BofA is also contemplating the fate of its mortgage business. Rumors
of selling, bankruptcy, and a split off from the assets that it acquired from Countrywide have
built a fury of speculation as to how BofA can best clean up its mortgage predicament.

In order for BofA to regain its health and defend its strategic position, we propose three long and
short-term recommendations that can help to stabilize BofA‟s profits and salvage its mortgage
lending investment by absorbing its losses. In the short term, BofA needs to save and generate
cash, and can do so by laying-off employees and selling some of its risky and non-core assets.
To lessen the blow from its existing sub-prime mortgage troubles and purge them from its
balance sheet, BofA must also take advantage of the government‟s Federal Housing

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Administration Insurance program. In the long term, BofA needs to continue to invest in
infrastructure, restructure its mortgage rates to aid its customers, and continue to feed its
mortgage division with capital from its higher performing business segments.

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II. EXTERNAL ANALYSIS

II. A. Industry Definition
BofA operates in two broadly defined industries: Commercial Banking (CB) and Investment
Banking (IB). The CB industry targets mass-market consumers and small-to-mid size businesses
with traditional banking products and services, which include checking and savings accounts,
debit/credit cards, personal loans, mortgages, and certificates of deposit (CDs), among other
products. The IB industry involves creation and management of capital and assets for large
corporations, institutions, and high-net worth clients; product and services include loan
underwriting, intermediary between securities issuer and investors, facilitating of mergers and
acquisitions, and provision of brokerage services for institutional clients.2 See Exhibit 1 for a
diagram of the CB / IB industry and ecosystem in which BofA operates.

II. B. Five Forces Analysis

II. B.1 Five Forces Analysis-Commercial and Investment Banking 3 4 5
The level three industry analysis score for CB and IB is 3.84 out of 5, which represents medium-
low attractiveness (Exhibit 2a, 2b).

Threat of Rivalry: Threat of rivalry is significant in financial services and was graded as 4 out
of 5. The concentration ratio for CB is CR4 at 36%, which leaves room for competition since
none of the major players hold significant market share. For IB, distribution is different and
suggests lower competition with CR4 over 70%. The demand/supply ratio for CB and IB
suggests that the current economic crisis is still a strong influencer, which makes the entire
industry volatile.

Barriers to Entry: Barriers to entry are moderate for the industry. Capital requirements are
relatively high and create barriers for new companies to penetrate. Additionally, CB is a highly
regulated industry to protect safety of deposits and reduce bank failure rates. Among regulations
are FDIC requirements, Federal Reserve membership, and State and Federal Charter guidelines.
IB is not as heavily regulated, but more laws have recently been introduced due to the financial
crisis. From the customer side, switching costs are moderate and do not present a major expense
for the customer other than in time and inconvenience. Network effect can increase the number

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of customers and significantly reduce it as the same time as the financial services industry is
heavily reliant on brand reputation. Today, consumers are also highly sensitive to fee charges.
As we saw with the threat of the $5 debit card fee6, this change could have had damaging effects
on all brands.

Supplier Power: Human resources, information technology, and customers were considered as
supplier power and were divided into consumers and institutions. Financial institutions face
significant switching costs for suppliers, which are difficult to replace with substitutes.
Customers and institutions in turn rely on banks and will not be able to survive without banking
services in the current economic ecosystem. As some corporations establish banks themselves,
they also transform into threats.

Buyer Power: Buyer Power was estimated as moderate and scored 3.64 of 5. In a modern
economy, financial institutions play a key role in everyday activities therefore making buyer
power weak. Though switching costs might not be that significant for buyers, price paid for
financial services comprises a significant part of the buyer‟s costs.

Threat of Substitutes: Community banks, credit unions and cash are considered substitutes for
CB while brokers and customers themselves are substitutes for IB. Based on this analysis, threat
of substitutes is not significant due to the extensive network of banks that offer established
services at competitive prices.

II. B.2 Five Forces Analysis- Mortgage Banking 7 8
As BofA‟s mortgage business is the cause of financial problems for the firm at the time of this
analysis, the mortgage industry was analyzed as a separate segment in order to evaluate industry
attractiveness, as it will relate to our recommendations for the firm. It scored 3.88 out of 5
(Exhibit 3a, 3b). Key factors that influenced the analysis include the current mortgage crisis,
strong competition and high influence from suppliers and buyers.

Threat of Rivalry: Threat of rivalry is high with low diversity among competitors. High exit
barriers and low demand in current economic situations force incumbents to compete and cut

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costs. Large players do not control the majority of the market and none hold significant share
compared to others in the segment.
Barriers to Entry: Barriers to entry are moderate-high. Increasing government regulations and
demand for low cost operations make the industry less attractive for new entrants. At the same
time, brand loyalty and switching costs are low and have allowed for newcomers to enter.

Supplier Power: Supplier power is significant in this segment. IT, human resources and
consumers were considered as suppliers. Cost saving is very important for incumbents and
drives the importance of having technology and innovation. As for human resources, employees
with a financial BofA background can easily switch to a different employer within the financial
market space.

Buyer Power: Though buyers do not pose threat of backward integration, they hold significant
influence over product costs. Since switching costs in highly competitive environments are not
significant, this allows buyers to shop for the best deal.

Threat of Substitutes: Threat of substitutes is low since small banks can‟t compete for loan
servicing with larger players. Small players compete with CBs only for loan initiations, but sell
those loans to large banks immediately after closing the deal because they can‟t afford to service
them.

II. C. Macro Environmental Forces Analysis, Economic Trends and Ethical Concerns

II. C.1 Global/Economic
In 2008, the financial markets experienced a severe global downturn, which was immediately
triggered by the collapse of the US housing market. Several major banks went into bankruptcy,
the stocks of financial institutions were greatly devalued, and world governments had to step in
to stabilize the collapse through bank obligation assurance, fiscal and monetary policy
enhancements, and actual bank bailouts in some cases, succeeding in stemming the financial
crisis in 2009. One result of this has been extensive consolidation within CB and IB.
Analysts at the IMF predict that this decade will be the worst decade in terms of revenue growth
for the overall banking sector since the decade of great depression.9 Lack of loan growth and

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margins pressure has contributed in part to this weak growth. The European financial crisis is
also causing concerns for US banks.10
US banks are still recovering from the sub-prime mortgage meltdown. The newly implemented
bank capital adequacy and liquidity reform in the form of the BASEL III 11 global regulatory
standard will ensure that there will be tighter governance on the banks over their tendency of
being “risky”.
More recently, the US national agency that oversees Freddie Mac and Fannie Mae has filed a
lawsuit against all major banks including BofA. The lawsuit accuses them of misrepresenting
the quality of mortgage securities they assembled and later sold at the further aggravating the
housing bubble.12 While it may cost millions of dollars for all of the major banks, BofA in
particular faces damage uncertainties as large as $50 billion.13

II. C.2 Social
Banks realize the importance of economic vitality in their future growth strategies. As a result,
most of the banks and financial institutions have made corporate social responsibility (CSR) a
fundamental way to do business. These institutions are increasingly helping to generate
economic and social opportunities through responsible business practices, community-
development, lending and investing, philanthropy, diversity and inclusion, volunteerism, support
of arts and culture and environmental initiatives.14
The Socially Responsible Investing (SRI) based approach incentivizes institutional investors and
larger corporations to provide social development and growth in their communities as a
consequence of their normal business activities.15 As SRI grows to be a global phenomenon,
there is an increased pressure on financial institutions to keep up their brand value of social
responsibility. More and more financial institutions are investing heavily in their CSR strategies
today to be more profitable tomorrow.

II. C.3 Technological
The financial service sector is the biggest spender on IT technology. As it spent a whopping
$500 billion thus far, the industry accounts for nearly 20% of IT spending worldwide and is
estimated to total $132 billion by 2015, representing a 24% average annual increase.16
The key to success for financial services is superior customer service. Technology makes it
possible to create an easy and convenient customer service experience. Keeping this in mind, all
of the major banks can expect significant IT spending in the near future to remain competitive.

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Major spending will occur in the following key technology areas: 17 algorithm changes to
accommodate new rules, mobile banking applications for smart phones and tablets, social media
presence, green sector initiatives, and data analytics for personal and business sectors.

II. C.4 Governmental/Political
The industry is heavily regulated at the federal and state government level. These regulations are
intended to protect the public, prevent crime, and ensure the integrity of the industry. These
regulations can be argued to limit the profitability of banks in general as banks have to spend a
significant portion of their revenues adhering to these regulations.
Bigger banks are successful in exploiting the fact that government and political institutions are
their clients. This is evident from the fact that many bigger banks, including BofA, were bailed
out by government regulators after suffering humongous losses during the financial crisis.

II. C.5 Ethical
Large financial institutions have a history of involvement in ethical legal battles. Although all
major financial institutions have a formal code of ethics, gray areas exists when it comes to
certain financial judgments and decision-making. These ethical issues tend to adversely affect
investor confidence in both the short and long run. As a result, it reflects in poor financial
performances, financial crisis, and huge economic implications.
The post subprime era has seen many litigations and legal claims being made on most of the
financial institutions, including BofA. As a result, BofA shares have dropped almost 45% since
this time and continue to dive deeper today. As BofA faces a significant risk in legal costs to
date in FY011 on ethical grounds alone,18 it and others‟ unethical behavior must be addressed
immediately.

II. C.7 Demographic Trends
As seen in Table 1, the major markets of the financial services industry are made up of a variety
of products and services that serve different clients. Geographically, financial services firms are
located across the US.19 20

Other demographic information like age, income, ethnicity, gender, level of education etc., help
firms to decide on many important aspects of their business including new product development,
marketing and communications strategy and front-end technology usage.

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Table 1: Demographic Trends
Customers
IB Customers Served CB Locations Served CB IB
Served
Private 14% Retail 45% Southeast 30% 13%
Corporations 35% Small Business Great Lakes 18% 20%
Institutions 23% Corporations 35% Mid-Atlantic 14% 33%
Government 16% Institutions West 12% 13%
Municipal 12% Government 15%
Others 5%

II. D. Competitor Analysis

II. D.1 Competitors
The US banking industry has undergone significant change with two events changing the
traditional definition. The first was the passage of the Financial Services Modernization Act of
1999, which allowed commercial banks, investment banks, and insurance companies to merge
together into a single firm. The other was the 2008 credit crisis, in which large investment banks
and corporations were allowed to change their legal standing to become bank holding companies
in order to become eligible for liquidity and funding from the Federal Reserve.21 Given these two
developments, firms that were not traditionally defined as bank holding companies, such
investment-focused Goldman Sachs may now be considered competitors to BofA.
In addition to the increase in these large, diversified financial services companies, tens of
thousands of smaller banking institutions, which provide more focused banking services to
customers, such as smaller regional banks, credit unions, and savings institutions, among others,
also compete for customers.

II. D.2 Primary Competitors
In order to identify the primary competitors that BofA faces in the domestic US banking realm,
its key markets were defined. BofA is broken down into six business units. Each business unit
provides products and services that are primarily focused on serving either the CB or IB industry
(Exhibit 4). As the breakdown of revenue by target segment suggests, BofA dedicates the near
entirety of its resources to serving the CB and IB industries (~46% and ~41%, respectively).

Commercial Banking: While BofA has a diverse product line geared to CB customers, we will
focus on the core products of 1) deposits under management, 2) credit card loans, and 3)

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consumer and industrial loans (business lending) as proxy for commercial products and services.
Exhibit 5 highlights the top 10 bank holding companies in Q2 2011. Based on a weighted
relative ranking in each product category, the top 16 competitors to BofA in the CB market are
listed in order of primacy of competition.

Investment Banking: The Financial Times classifies the fees generated from four primary
activities as representative of IB market performance: mergers and acquisitions, equity issuance,
bonds issuance, and loan underwriting. Based on an aggregation of fees from US-based activity
for the first three quarters of 2011, the top 10 IB firms are listed in Exhibit 6.
Firms considered competitors to BofA may vary depending on the given product, service, or
geographic region. However, there are certain financial services rivals that consistently compete
against BofA across product lines, services, and geographies for roughly the same customer
segments. In order to delineate these primary competitors from the thousands of other
competitors, we listed the top firms in both CB and IB industries to determine the market leaders.
In CB, the top competitors to BofA are Citigroup (CG), JPMorgan Chase (JPMC), and Wells
Fargo (WF). These rival firms are among the top 10 competitors to BofA in deposits, credit
card, and consumer loan products. In IB, the top competitors to BofA are JPMC, Morgan
Stanley, and Goldman Sachs. Each of these three competitors has > 5% market share of the fees
generated from IB activities through Q3 2011, and/or double-digit growth rate year year-over-
year.

II. D.3 Primary Competitor’s Corporate/Business- Level Strategies
Exhibit 7 outlines the corporate and business level strategies for BofA‟s four primary
competitors in CB and IB. Exhibit 8 orients competitors on the Porter‟s generic strategies
matrix that highlights business-level strategies that drive competitive advantage.

BofA – Corporate Level Strategy: See section III.C.1.b
BofA – Commercial Banking: Business Level Strategy: See section III.C.2.a.1
BofA – Investment Banking: Business Level Strategy: See section III.C.2.a.2

18

JPMorgan Chase: Corporate Level Strategy
JPMC is divided into seven major segments or business units and targets its distinct financial
products and services to a particular customer segment. There is much cross selling and linkage
between products from both the selling and operational sides, which falls in line with JPMC‟s
strategy for organic growth. The linkage of activities and capabilities between CB and IB
businesses under the enterprise umbrella, and the fact that no business provides >70% of
revenue, means that the JPMC has a related constrained strategy (Exhibit 9a).

JPMorgan Chase - Commercial Banking: Business Level Strategy
JPMC‟s utilizes cost leadership to target mass market retail and business customers in CB. The
firm‟s cash back debit card, its low-fee checking account, free online banking, and ATM/Mobile
represent a low-cost business level strategy. While JPMC does try to pursue some degree of
broad differentiation through its large branch, ATM network, and customer service, its
promotional campaigns and public perceptions seem to weigh heavier on the cost leadership
quadrant. These CB business units comprise a large market share (~13%) of the US CB
industry, but in terms of aggregate growth rates, have a negative return (-6.4%). Based on these
facts, JPMorgan commercial banking is a „cash cow‟ in the BCG matrix (Exhibit 9b).

JPMorgan Chase - Investment Banking: Business Level Strategy
JPMC‟s IB adheres to a focused differentiation business level strategy by targeting corporations,
financial institutions, and institutional investors through “deep client relationships and broad
product capabilities”.22 JPMC‟s IB business unit captured the largest share of IB fees of any
institution in the US (and world), while still retaining a high growth rate of 14%. Based on these
two measurements, its IB unit can be classified as a „star‟ in the BCG matrix (Exhibit 9c).

Citigroup: Corporate Level Strategy
The CG organization is divided into three major segments and seven business groups. CG‟s
business segments offer some unique financial products to targeted customers with a significant
amount of cross selling. In addition, there is a large degree of operational and technological
platform sharing to provide different financial products. The sharing of linkages and attributes

19

between businesses, as well as the fact that no business provides >70% of revenue, translates to a
related constrained corporate strategy for CG (Exhibit 10a).

Citigroup - Commercial Banking: Business Level Strategy
The stated goal of the Regional Consumer Banking unit is to target “affluent” customers in “the
top 150 international cities” and urban centers with tailored financial product and service line
offerings.23 Within this smaller segment, CG appears to utilize both a cost leadership strategy
(low-fee checking/no fee debit card) while broadly differentiating itself through factors that
include product innovation and pricing, access to distribution channels, and technology
advances. Hence, CG pursues a focused low-cost and focused differentiation business level
strategy with its CB unit. Unlike its CB competitors, Citibank‟s commercial unit logged an
impressive 13.4%24 growth, higher than the 8% growth the IB unit saw in 2010. The CG CB
segments can therefore be placed in the „star‟ quadrant on the BCG matrix (Exhibit 10b).

Wells Fargo: Corporate Level Strategy
WF is comprised of three primary operating segments. Much like CG and JPMC, WF leverages
shared knowledge, processes, capabilities, and activities across its business lines to provide
operational efficiency as well as build competitive advantages that come with organizational
integration. The fact that nearly all CB and IB products can be sold from each branch, and
frequently by the same banker across shared platforms, shows how the bank‟s business units
share links and attributes, which combined with no unit accounting for >70% of revenue, results
in a related constrained corporate strategy (Exhibit 11a).

Wells Fargo – Commercial Banking: Business Level Strategy
The acquisition of Wachovia Bank in 2008 helped to propel WF into the #2 position for CB in
the US. Much like CG and JPMC CB groups, the CB business segment of WF adheres to a
combined cost leadership and broad differentiation business level strategy. Similarly, WF also
offers a low-cost checking account with bonus interest and cash back based on spending
behavior and additional accounts opened (e.g. credit card), though it does not match the discount
levels of JPMC. Instead, WF‟s broad differentiation focuses on “wallet share” – or promoting
the convenience of having all financial accounts with the Bank, including single point of

20

servicing as well as easy integration of accounts on platforms such as online or mobile banking.
WF‟s Community Banking segments command more than 10% of the CB market, making it the
fourth largest. It falls in line with most rivals, however, its negative YOY growth rate from 2009
to 2010 (-5.2%)25 qualifies it as a „cash cow‟ in the BCG matrix (Exhibit 11b).
Goldman Sachs - Corporate Level Strategy
Goldman Sachs reports its operating activities in four business segments that fall under the aegis
of IB. As nearly the entirety of Goldman Sachs revenue can be attributable to IB activities,
Goldman‟s corporate level strategy can be classified as dominant business (Exhibit 12a).

Goldman Sachs - Business Level Strategy
In the IB industry, Goldman Sachs targets very capital-heavy customers that include, according
to its 2010 annual report, “corporations, financial institutions, governments and high-new-worth
individuals.”26 Goldman‟s ascension from the #3 to #1 in merger and acquisition advisory and
#8 to #2 in the capital markets, attest to Goldman‟s ability to differentiate its services from other
IBs through a reputation for diligence and a successful track record. 27 Goldman pursues a
focused differentiation business level strategy exemplified from its commanding 5.0% market
share of fees generated from IB in the US. However, its relatively low 4% growth rate in fees
generated from 2009 to 2010 is much lower than many of its top rivals, classifying the entire
Goldman firm as a „cash cow‟ according to the BCG matrix (Exhibit 12b).

Morgan Stanley: Corporate Level Strategy
Morgan Stanley reports its operating activities in three business segments of which all can be
considered as part of IB. As all three business segments are focused on IB products and services
(albeit to different customer segments), Morgan Stanley can be classified as having a dominant
business corporate strategy as IB accounts for >70% of the firm‟s revenue (Exhibit 13a).

Morgan Stanley - Investment Banking: Business Level Strategy
Across its three business units, Morgan Stanley‟s business-level strategy can be classified as
focused differentiation. While the Global Wealth Management Group targets more mass-market
individual investors and small-to-medium sized businesses (primarily through the Smith Barney
Holdings subsidiary), the Institutional Securities and Asset Management units provide high-

21

quality services to large corporations and institutions as well as high net worth clients 28. Morgan
Stanley‟s 5.3% market share of IB fees, as well as its industry-leading growth rate of 19%,
places the IB in the „star‟ quadrant of the BCG matrix (Exhibit 13b).

II.D.4 Strategic Positioning - Value and Cost Drivers and VRIO Analysis
In order to assess the strategic positioning of BofA and its primary competitors in CB and IB, an
analysis of their value drivers and cost drivers must be conducted, in addition to the review of
organizational resources and capabilities within the VRIO framework.

Analysis of BofA‟s value chain, value drivers, and cost drivers (Exhibit 14b-c) reveal that the
focal firm has a host of sustained competitive advantages (SCAs) in internal resources and
capabilities, which in turn feed the value (and cost) drivers that highlight the firm‟s strategic
position. BofA only reaches parity with the industry in terms of its IT offerings and access
convenience factor, while finding itself at a disadvantage in terms of risk management,
government relations (political savvy), and customer service. While a number of its value (and
cost) drivers may not be rare or hard to imitate, that does not prevent BofA from leveraging these
assets into its positioning strategy. A more detailed analysis for BofA is covered in Section III.
D.3, p.17.

JPMorgan Chase - Strategic Positioning
In reviewing JPMC‟s value and cost drivers (Exhibit 15a-b) we can see that it has adopted a mix
of cost leadership and broad differentiation strategy within its CB units, while targeting a
focused differentiation strategy in IB. The CB focus helps build the „easy one-stop shop‟
competitive advantage, which is further emphasized by integrating access to products in an easy,
usable manner. In addition to this broad differentiation advantage, JPMC provides cost
leadership positioning through credit cards that offer high levels of cash back, low interest and
high points for consumers and businesses. This array of credit cards to match benefits to
customer behavior shows how JPMC uses customization to build its competitive position.
Similar to its CB arm, its IB segment uses its diverse product offering to differentiate itself as an
institution that caters to all needs. In addition, its large internal capital base allows it to provide
larger loans to customers while bringing down its cost of capital.

22

The VRIO analysis for JPMC (Exhibit 15c) shows that it has SCAs in its broad product line and
ability to cross-sell, its relatively lower cost of capital (due to large internal asset base), its ability
to create innovative products that match to customer benefit preferences and/or behavior, and its
extensive leveraging of technology (multiple access and management platforms) in a usable
fashion.

Citigroup – Strategic Positioning
Much like its CB competitors, CG‟s value chain, value and cost drivers point to a positioning
strategy of broad differentiation with some „me-too‟ cost leadership (Exhibit 16a-b). Value
drivers include a broad line of CB products to meet customer needs as well as a unified
technology platform across products and digital channels to facilitate access and usability. A
stronger focus on providing products in emerging markets (e.g. China, S.E. Asia) has proven
lucrative, as growth in the Western CB markets has atrophied.

CG‟s VRIO analysis (Exhibit 16c) shows that its widespread international presence is a
sustained competitive advantage for the firm. With a footprint that includes banking products
and services in 160 countries through 16,000 offices worldwide29 and investments in large banks
such as KorAm Bank (S. Korea), Bank of Overseas Chinese, and Banamex (Mexico) 30, CG can
leverage its organization know-how of financial product delivery across worldwide economies of
scale. However, the diversified product line and integrated systems platform themselves only
provide CG with parity as compared to equally capable competitors.

Wells Fargo – Strategic Positioning
WF‟s value and cost drivers (Exhibit 17a-b) indicate that its Wholesale and Community banking
business units employ a broad differentiation strategy, though some elements of cost leadership
are present. WF‟s competitive position derives partially from its strong corporate reputation,
with the WF brand placing #13 globally31 and ranking the highest in Forrester‟s 2010 Customer
Advocacy rankings among large CB competitors.32 This strong reputation dovetails with other
capabilities that provide WF a SCA according to the VRIO framework (Exhibit 17c). SCAs
include a very loyal customer base as well as a high cross-sell ratio (6.02 products per
household).33 The broad and diversified product line is the value driver that enables this cross-

23

selling capability, and as WF‟s value chain shows, is a pervasive organizational value that is
leveraged across the entire firm. WF‟s conservative approach to real estate lending was an
outcome of its strong risk management processes, a capability that provides a temporary
competitive advantage. The firm also leverages technology to deliver its products and services,
though this only provides parity with other large CB competitors.

Goldman Sachs – Strategic Positioning
The analysis of Goldman Sachs‟ value and cost drivers shows that the firm positions itself with a
focused differentiation strategy (Exhibit 18a-b). Like its rival investment houses, Goldman
focuses on large corporations, institutions, and sovereign government customers with its
financial services products. However, it positions itself as a more experienced and investment-
client-focused firm that has consistently focused on IB products. Goldman leverages these value
drivers to differentiate itself from newly-formed CB/IB financial supermarkets that don‟t have
established histories as combined companies with split allegiances.

Goldman‟s VRIO (Exhibit 18c) shows that its SCAs emerge from superior M&A capabilities, a
strong reputation, an enviable company culture, extensive political connections, and a history of
financial product innovation. In addition, Goldman‟s innovation with financial products such as
block trades and financial derivatives34 has provided differentiation and sustained competitive
advantage.

Morgan Stanley – Strategic Positioning
Morgan Stanley‟s analysis reveals a focused differentiation strategy within the IB industry, as it
has shed nearly all of its retail businesses to focus on its wealthiest clients and institutions.35
Morgan Stanley value drivers (Exhibit 19a) include having the largest brokerage force in the
industry with 18,50036, as well as a lion‟s share of the top-performing financial advisors (by
assets) as ranked by Barron‟s magazine. 37 A significant input cost driver (Exhibit 19b) for
Morgan Stanley is its reliance on short-term borrowing for capital, as compared with competitors
who have a larger internal asset bases due to deposits from their CB operations.38 In addition,
expenses in its Asset Management business are cost drivers, with CEO James Gorman focusing
on increasing margins from the current 9% to 20% through cost cutting and job cuts.39

24

In the context of the VRIO framework (Exhibit 19c), Morgan Stanley provides a SCA in the
depth and quality of its brokerage analyst capabilities, though its IB focus and technological
resources only provide it with parity against rivals.

II.D.5 Value - Cost
There are two primary considerations that make an analysis of customer willingness to pay/value
creation in the CB and IB industries very difficult to assess. The first is that each industry
contains hundreds of financial products that provide varying degrees of value. The second is that
the differences in customer willingness to pay across primary BofA competitors, particularly in
CB, are difficult to assess quantitatively.

Commercial Banking Value – Cost Methodology
Deposits (checking accounts), credit cards, and business loans were used as a proxy for all CB
products. Based on an average monthly checking account fee of $20 (Exhibit 20a) and an
average US salary of $41,673 in 201040, the total percentage of salary paid by consumers to
maintain a checking account (not including other fees such as overdraft) is approximately 0.58%.
This compares with an average of 2.5% fee paid to cash a check through a check-cashing only
service.41 In addition to interest rate benefits, there is value created in the convenience of more-
widespread ATMs, as well as the decreased risk of not needing to carry an entire paycheck in
cash in one‟s pocket.

In regards to credit cards, customers pay an average of approximately 16% interest annually on
standard bank-issued credit cards (Exhibit 20a). This stands in stark contrast to usurious rates
of interest on one of the next „best‟ non-bank options – payday loans – which can range from
212% for a one-month loan to 911% for a one-week loan.42
For small or mid-size businesses, loans can range from a 3-4% spread over prime for an SBA
loan (Exhibit 20a) to the mid-teens spread over prime for standard business loans, which equates
to a range of 6.25% to approximately 20%. However, this compares to the 30% or more that
non-bank “Merchant Cash Advance” providers charge business for varying sizes of cash
advances (from $5,000 to over $1M).43

25

While certain non-bank services may be used more than others as substitutes for banking
services based on convenience and fees, we will determine the general willingness to pay for CB
services as an average of these three non-bank offering fee rates (2.5%, ~212%, 30%) – an
equivalent of 81.5%.

Based on an analysis of CB profit margins for the four primary competitors, we find that the
average profit margin is approximately 48% for 2010 (Exhibit 20b). According to these
calculations, the value captured by CB customers is approximately 33.5% above the price
charged by banks.

Given the relatively similar price and fee structure for the three CB proxy products across the
four competitors and the difficulty in quantifying the value of different value drivers (e.g. good
online customer experience vs. a bad experience), we will need to use a measurement of market
share as a proxy for the overall attractiveness and value of one CB‟s offerings over others.
According to Exhibit 5, BofA has a combined market share of 43% across the three proxy CB
products.

As BofA is the CB market leader in aggregate across these products, we will assume its
customers capture the full 33.5% willingness to pay over price. For other competitors with lesser
aggregate market shares, their percentage share will be divided over 43% and multiplied by the
33.5% willingness to pay. See Exhibit 20c for CB competitor V-C. The methodology outlined
in Exhibit 20a-b was applied to all.

JPMorgan Chase: Commercial Banking Value – Cost
JPMC value drivers such as broad product offering („one stop shop‟), widespread physical and
virtual product access channels, and customized product offerings – e.g. credit card reward
programs to match customer behavior – all align with its customers‟ willingness to pay and
customer surplus/value capture.

JPMC has an aggregate market share of 36.1% across CB products, as outlined in (Exhibit 5).
Dividing this market share by 43% (the aggregate market share for leader BofA) and multiplying

26

by the 33.5% willingness to pay, we can see that JPMC buyer surplus is approximately 28.1% -
as shown in Exhibit 20c. As such, the JPMC CB aggregate operating cost is $25.86 billion, the
aggregate firm surplus is $29 billion, and the aggregate buyer surplus is $7.3 billion.

Citigroup: Commercial Banking Value – Cost
CG value drivers such as broad product offering, „me-too‟ product integration and (particularly)
its international presence and delivery know-how all inform its customers‟ willingness to pay.
It was determined that CG has an aggregate market share of 39.5% across CB products, as
outlined in Exhibit 5. Dividing this market share by 43% (the aggregate market share for leader
BofA) and multiplying by the 33.5% willingness to pay, we can see that CG buyer surplus is
approximately 30.8% as shown in Exhibit 20c. As such, the CG CB aggregate operating cost is
$24.5 billion, the aggregate firm surplus is $23.8 billion, and the aggregate buyer surplus is $7.5
billion.

Wells Fargo: Commercial Banking Value
WF value drivers such as its high brand reputation, loyal customer base due to high degree of
cross-sell (~6 products per household), and its innovative technological offerings all inform its
customers‟ willingness to pay.

It was determined that WF has an aggregate market share of 24.4% in CB products, as outlined
in Exhibit 5. Dividing this market share by 43% (the aggregate market share for leader BofA)
and multiplying by the 33.5% willingness to pay, we can see that WF buyer surplus is
approximately 19.0% as shown in Exhibit 20c. As such, the WF CB aggregate operating cost is
$41.3 billion, the aggregate firm surplus is $35.6 billion, and the aggregate buyer surplus is $7.9
billion.

Investment Banking Value – Cost Methodology
The customer value derived from IB services is more difficult to quantify, as perceived customer
value rests more on intangible factors such as experience, specialization, innovation, and
reputation than on quantitative factors. In addition, the lack of good substitutes or alternatives to
IB services makes willingness to pay more difficult to measures.

27

While exact customer value capture measures may be difficult to derive and precise willingness
to pay measurements elusive due to no clear „second-best‟ option, a relative scale of value
capture can be formed by measuring three key factors 44: industry experience, experience with
large transaction size, and strong relationship management skills.

In regards to industry experience and large transaction (deal) size analysis, we will use a
combination of Q3 2009 and Q3 2010 M&A deal data as measure of relative performance. In
terms of strong relationship management, the number of financial advisors each bank has on the
Barron‟s „Top 100‟ Financial Advisors list for 2011 was used as a proxy. This attests to an
organization‟s ability to hire and/or train good relationship managers.45 See Exhibit 21a for
methodology.

While BofA placed 2nd in customer relationships, its smaller number and value of M&A deals
between 2009 and 2010 placed it in „tier 2‟while Morgan Stanley lies in „tier 1‟. Per Exhibit
21b, BofA‟s cost for IB services was approximately $31.6 billion while the firm surplus was
$13.5 billion.

JPMorgan Chase: Investment Banking Value – Cost
JPMC‟s broad investment product offering as well as its large internal asset base from
Commercial Banking deposits are key value drivers to the IB‟s total economic contribution.
Based on JPMC‟s middle-of-the-road M&A deal size and deal volume, and the
underrepresentation in the list of top 100 financial advisors (Exhibit 21a), JPMC was ranked a
„tier 2‟ for IB buyer surplus creation. In line with Exhibit 21b, JPMC‟s cost for IB services was
approximately $35.3 billion and firm surplus was more than $14.5 billion.

Goldman Sachs: Value – Cost Framework
Goldman Sachs‟ long-term industry experience, history of (derivative) product innovation, and
stellar reputation are key value drivers that contribute to the firm‟s total economic contribution.
Based on Goldman‟s relatively high M&A deal size, somewhat variable deal volume, and
absence from Barron‟s 2011 list of top 100 financial advisors (Exhibit 21a), Goldman was

28

ranked a „tier 2‟ for IB buyer surplus creation. In line with Exhibit 21b, Goldman‟s cost for IB
services was approximately $25.2 billion and firm surplus was nearly $14 billion.

Morgan Stanley: Value – Cost Framework
Morgan Stanley‟s largest-in-industry brokerage force (18,500), impressive representation on
Barron‟s 2011 list of top 100 financial advisors (37 of top 100) (Exhibit 21a), and its industry
accolades that include best Equity Bank and best M&A Bank46 are important value drivers that
contribute to its value creation and firm/buyer surplus.

Morgan Stanley was ranked the only „tier 1‟ IB for buyer surplus imparting it incrementally
higher buyer value creation than its competitors. In line with Exhibit 21b, Morgan Stanley‟s cost
for IB services was approximately $24 billion and firm surplus was $7.8 billion.

II.D.6 Comparative Financial Analysis
In 2011, BofA has consistently been reporting quarterly net losses resulting in poor profitability
ratios. The legacy mortgage costs incurred due to its acquisition of Countrywide Financial
Company in 2009 has been a major contributor to this performance. In fact, the net losses
47
resulting from the mortgage-lending segment were close to $10 billion alone by the third
quarter in 2011. Despite this, a closer look at the capital ratios for BofA indicates that the
company is still fundamentally strong with the four of the six business segments including
investment banking posting healthy profits. In the short term, the BofA management team will
face a tough challenge of successfully resolving its mortgage crisis while maintaining the
fundamental health of the company and making it profitable for shareholders.

A detailed ratio performance analysis was done in Exhibit 22a-c. The interest coverage ratio in
terms of EBIT and EBITDA of 2.6 ~2.7 is nearly 45% lower than the industry average. This is a
clear indication that BofA is struggling to generate enough operating cash to meet its interest
expense liabilities as compared to the industry. Over the last 4 years, the financial crisis and
certain bad investments by BofA, e.g. the acquisition of Countrywide, have resulted in this ratio
being even lower.

29

The debt to capital ratio is consistent across all banks and the industry as a whole. This makes
sense given the fact that the interest income for BofA is also nearly 50%. This is an indication of
very high similarity in the capital structure of the banks.
Traditionally, as a rule of thumb, firms strive to achieve a ratio of 1.5 on their return on assets.
However, BofA happens to be the only bank to have a negative ROA. The industry average is
1.3%. The nearly $8 billion net losses resulting from the mortgage segment of BofA in 2010 is
responsible for pulling this ratio lower. The profitability of BofA in its entirety depends on a
successful resolution of the risky mortgages it acquired with the acquisition of Countrywide. A
negative ROA over a period of time often indicates that the business segment or the company as
a whole needs to file for bankruptcy as it is no longer able to generate income on its assets for its
shareholders.

Using similar reasoning, the return on equity of -0.78% is also lower than the industry average of
nearly 13%. This will prove highly detrimental for BofA in attracting potential investors in the
near future. The notable exception is Berkshire Hathaway, which is investing $5 billion in BofA.
BofA has a superior management at the top of its hierarchy which has the capability to steer
BofA clear of the recent mortgage crisis since the acquisition of Countrywide Financial
Corporation. As a result, BofA continues to remain one of the premier banks in the US even
though the ROA and the ROE ratios suggest otherwise.

An investor may be misguided by the Price to Book ratio of 0.25 for BofA. However, in the case
of BofA, it is more indicative of poor firm performance resulting in a low number when
compared to 0.71 for the industry. Like the other profitability ratios, a low number for Price to
Book can be attributed to BofA consistently posting losses in every quarter in 2011.

A lower Price/Earnings ratio of 5.27 for BofA as compared to that of 8.21 for the industry
indicates investor‟s hesitance in investing in BofA. They are willing to pay much less per dollar
in earnings as compared to its top ten competitors. This ratio could be argued to have been lower
than the current level. However, the current level indicates that the investors still believe that the
strength upper management has the capabilities to turn the company around to pre-2009 levels of
profitability.

30

II. D.7 Implications of Competitor Analysis
Our competitive analysis demonstrates that the industry continues to operate in a maturity phase
and confirms this trend on account of its propensity for mass consolidation and little product and
services differentiation. Industry players are in parity with each other and offer similar products
and services, IT platforms, extensive global presence and over 100 years of experience. Due to
the financial crisis, banks are cutting costs and layoffs are happening at the majority of key firms.
Primary competitors have smaller amount of debt comparing to BofA and lower cost to revenue
ratios. In order to stay competitive, BofA has to reduce outstanding debts and significantly cut its
costs.

II. E. Intra-Industry Analysis

II. E.1 Stage of Industry Evolution
Though the recent financial crisis put the industry into a stage of temporary shakeout, financial
services remains mature in its life cycle. Because the industry has undergone dramatic
consolidation and product offerings and services are commoditized, superior customer service
and convenience in this industry can leverage significant economic benefits. While attempts to
regain reputation are ongoing, financial institutions have been forced to innovate on attributes
that are important to their customers. Quality, ease of use, convenient delivery channels and
flawless execution are among the strongest drivers.48

II. E.2 Strategic Groups Analysis
On account of their high percentage of firm revenue, emphasis on customer service, quality, and
wide breath of product offerings, CB and IB are considered to be strategic areas where a firm can
differentiate from its competitors.

Threats and Opportunities Overview
Both strategic groups face a number of threats and opportunities from competition within the
industry and through external forces. Today, threats to CB and IB come from lack of customer
demand, slow recovery of economic conditions, and tightened government regulations. Future
opportunities lie in development of delivery channels thus firms will have to maintain a
geographic and virtual balance between branch and ATM locations, online presence, and mobile
applications in order to maintain customer expectations.49

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Threats
Today, customers remain sensitive to big bank changes. IBs are seen as the root cause of the
financial crisis and CBs are undergoing turbulent times because of government policies like the
Opt-In Regulation50 and the Dodd-Frank Act51, which have shaken firm revenue streams and
consequently garnered reaction in the form of fee hikes. But threats to these strategic groups
have not stopped with government regulations and consumers. For CBs, regional banks, credit
unions, and thrifts, which are not affected by the revenue threats that Dodd-Frank poses for big
banks, have made rapid shifts in their marketing strategies to target potential “switchers” in order
to gain big bank patronage. Service offerings like “switch kits” and pay back incentives are
tactical moves, which have made some recent traction.52 For IBs, online investment and asset
management options are also gaining strength.

Opportunities
As consumers are looking for convenience, ease of use, and access to a wide breathe of products
and services, future opportunities lie in development of delivery channels. As basic banking
transactions in branch locations are projected to increase by 3% from 2010 to 201553, advisory
and investment services, relationship management, applying for complex products like
mortgages and loans, and general problem solving use is expected to rise.54 Online and mobile
application development across commercial and investment banking will also be key.
Improvements in online customer service, ease of bill pay and transactional use will not only
appease customer demand, but will provide a focused, cross-marketing opportunity to target sell
other products to consumers in an optimized platform.

Mobility Barriers
Mobility barriers are not an issue in this industry. Since financial institutions offer the same
products and services and have an existing customer base, the opportunity to cross-sell makes
switching the balance of their business from one strategic group to another easy.

Evaluation of BofA’s Competitive Position
Speculation can be made that changes to BofA‟s competitive position prior and after
implementing cost cutting changes will be slight because of its massive size and dominating

32

presence in the industry. As it stands, at the business level in CB, BofA services the mass
market and is broadly differentiated with a uniqueness perceived by its customer. In IB, BofA
services the narrow market and is focus differentiated with a uniqueness perceived by customer.
As Phase I of the Project New BAC rolls out, it can be assumed that this will have a negative
impact on its customer service and perhaps narrow its offerings. At most, BofA will shift
slightly down and left from its position in Exhibit 8.

II. E.3 Other Competitive Dynamics
Other competitive dynamics that must be considered as threatening is the emergence of CB is the
popularity of online-only banks such as PayPal, ING Direct and Smarty Pig. These firms are
particularly dangerous to retail channels where customers make up 45% of revenue. 55 These
platforms, which provide basic retail services, have little overhead, and relatively low barriers to
entry, are gaining steam amongst frustrated consumers who are looking for an alternative.

II. F. Threats and Opportunities

II. F.1 Emerging Threats and Opportunities
Emerging threats and opportunities are discussed in Sections II. B-D, p.12 and F2, p.33.

II. F.2 Threats and Opportunities Implications for Strategy
Given that CB and IB are heavily regulated by government regulations, economic conditions,
and are at the mercy of customer demand, CB and IB must continue to work on developing their
delivery channels to cater to the customer. Since quality, ease of use, convenient delivery
channels, and flawless execution are among the strongest drivers, strategy must continue to be
built around these assets in order to remain competitive.

II. G. Summary of External Analysis
The financial services industry has experienced turbulent times since the financial crisis. As
government regulations and policies continue to have a major impact on industry operations and
guidelines, firms continue to struggle in order to meet regulatory, consumer and shareholder
expectations while also remaining profitable.

On account of the size and complexity of key players, the scope of this analysis considers CB
and IB business segments, as they are considered strategic groups on account of their importance

33

to customers and share of firm revenue generation. Firms compete in these segments depending
on the given product, service, or geographic region for roughly the same customer segments and
share parity on most levels, though they have a few unique value drivers. As a result, most firms
share similar results across financial performance ratios, customer service polls, and in operating
practices.

III. INTERNAL ANALYSIS
III.A. Business Definition and Mission
BofA is a multinational banking and financial service corporation that provides investment
banking, wealth management and other services.56 It is currently the second largest bank holding
company in the United States by assets ($2.2B), 57 and is the fourth largest bank in the US
by market capitalization ($58.59B).58

Its purpose is “to make opportunity possible for our customers and clients at every stage of their
financial lives”. 59 BofA‟s objectives are to serve its three customer groups, offer all of its
capabilities in the US and its investment capabilities worldwide, provide products and services
on an integrated basis to meet customer and client needs, and create long-term relationships that
grow over time while providing value to customers.60 According to its 2010 Annual Report,
BofA aims to maintain its strategy by “staying customer focused, maintaining a fortress balance
sheet, pursuing operational excellence, delivering on its shareholder return model, cleaning up
legacy issues, and being the best place for people to work”.61

III.B. Organization Structure, Controls and Values

III.B.1 Organization Structure
Headquartered in Charlotte, North Carolina, BofA currently operates regionally throughout the
US and in 40 countries.62 BofA‟s organizational structure is broken into two main subsidiaries;
Merrill Lynch & Co. Inc. and NB Holdings Corporation (Exhibit 23). Major operating
subsidiaries of Merrill Lynch include commodities, capital services, government securities, and
international. NB Holdings includes global card services, commercial and retail banking.63

34

III.B.2 Employee Controls, Values, and Ethics
While appraisal methods differ across lines of business, the firm monitors employee performance
through annual 360 Performance Reviews. BofA also trains personnel annually on its Code of
Ethics. Included in the document are its core values to: “deliver for our customers, clients and
shareholders, trust in our team, embrace the power of our people, act responsibly, and promote
opportunity”.64 As stated in the BofA 2010 Annual Report, “… [W]e has developed employee
incentive, reward and recognition programs that align with our customer experience goals.”65

Though BofA has received criticism in the media since the financial crisis, overall it can be
assumed, because of the current awards and accolades that it has received, that the company is
well aligned with the core values that it puts forth. Honors such as, World’s Most Admired
Companies, Top 50 Companies for Diversity, and Top 200 of the Global 2000, demonstrates that
BofA supports its people and fosters a safe, ethical environment in which to work.66

III.C. BofA – Strategic Position Definition

III.C.1 BofA - Corporate Level Strategy

Business Portfolio
BofA‟s business portfolio under CB includes Deposits, Global Card Services, Home Loans and
Insurance, and Global Commercial Banking. The CB scope of product offerings includes a
portfolio targeted to mass-market consumers and small-to-mid size businesses:
1. The Deposits group offers products and services that represent traditional retail banking
offerings; these include checking, savings, money market accounts, and CDs and IRAs.
2. Global Card Services is a leading credit card issuer in the US and provides consumer
and business cards, consumer lending, and international credit/debit cards.
3. Home Loans and Insurance provides consumer real-estate products, including first-lien
home mortgages, home equity loans and lines of credit, and insurance-related products
Global Commercial Banking offers customer lending-related products, working capital
management, commercial loans, and asset-based lending.
BofA IB provides a portfolio geared towards large corporations, institutions, and high-net-worth
individuals:

35

1. The Global Banking and Markets group caters to the financial needs of institutional clients.
2. The Global Wealth and Investment Management unit provides investment and other
banking services to affluent individuals and institutions.67

Corporate Strategy
In the context of Rumelt‟s framework, it is clear that BofA employs a related constrained
corporate strategy. BofA competes in the CB and IB markets within the financial services
industry; however, neither aggregation of business units comprises greater than 70% of BofA
revenues, with CB garnering 54% and IB representing 41%.68 (Exhibit 24).

BofA has shares linkages and attributes between the CB and IB business units. This sharing is
evident in BofA‟s focus on an integrated customer experience across products and services,
customer segments, and generally through its servicing channels. Integration extends to its
operations, where shared technological platforms, training that promotes cross-selling, and
operational efficiencies across management attest to the cross-functional nature of the firm.

This high integration and linkage between business units was prevalent before the large-scale
cost-cutting measures, and will continue after these measures have been implemented. Project
New BAC will not affect BofA‟s core businesses and need for broad integrated product suites
and customer service support. In fact, even tighter integration of operations and business
linkages will likely be needed to drive the operational efficiencies that will allow cost-cutting
savings to be realized with minimal impact to the customer experience.

Recent Merger / Acquisition / Divestment Activity
BofA has made significant acquisitions with MBNA (2005), Countrywide Financial (2007), and
Merrill Lynch (2008) in the past six years.

In line with the ally vs. acquire framework outlined by Dyer, Kale, and Singh69, the acquisition
of MBNA70 made sense from BofA‟s strategic business perspective. The reciprocal synergies
and redundant resources between the two firms (BofA also had a credit card division) point
clearly towards acquisition, as does the high level of competition for resources (credit card

36

users). In addition, the medium-to-low degree of market uncertainty – consumers were
continuing to use their credit cards more extensively – also directs BofA to an acquisition
strategy. BofA was able to leverage the customer base resources from MBNA to pursue
economies of scale (operations efficiency) and economies of scope (increase affinity credit card
offerings). In addition, applying Michael Porter‟s Diversification framework shows that both the
attractiveness test and better-off test were satisfied as both high credit card industry profits and a
stronger competitive advantage in the credit card market could bring continual value to BofA
over the long term.71

The Countrywide acquisition initially appeared to offer many benefits. The reciprocal synergies
and redundant resources borne of both companies originating in consumer mortgages, as well as
the medium-to-low degree of market certainty for mortgages at the time of all point to a strategy
of acquiring or merging. While it could be argued that the soft resources of Countrywide (e.g.
workforce) may be partially lost in merging the two companies, synergy did exist in the hard
resources of back office technological synergies. In addition, the acquisition would allow BofA
to leverage Countrywide‟s capabilities in mortgage servicing to its own captive mortgage
portfolio.72

Finally, BofA‟s 2008 acquisition of the Merrill Lynch brokerage was a unique situation where
the US government may have nudged BofA to acquire Merrill Lynch on the same day that
Lehman Brothers collapsed into bankruptcy to help it avoid the same fate.73 Synergies did exist
between the two firms, as BofA would be able to offer Merrill‟s retail brokerage services to its
own customers as well as fill out BofA‟s investment banking and asset management services,
which were relatively weak as compared to Merrill‟s offerings.74 Aside from leveraging these
resources and capabilities that Merrill brought to BofA, the large extent of redundant resources
(primarily employees and technological infrastructure) also pointed towards an acquisition
strategy, with operational efficiencies manifested through cost-cutting measures such as
layoffs. 75 The Porter framework for diversification value-add was also satisfied through the
better-off test, with Merrill Lynch integration bringing a competitive advantage to BofA‟s CB. 76
This advantage was evident on the customer side through increased product and service offering,
as well as internally through cost-lowering by sharing of activities in the value chain.

37

Recent Alliances / Partnership / Joint Venture Activity
Its membership in the Global ATM Alliance beginning in 200277, as well as a joint venture with
First Data Corp. in 2009 to build a „next generation‟ payments company are two of BofA‟s more
recent partnerships.78

The Global ATM Alliance, formed with other international banks, allows for customers of
member banks to use debit cards at member banks‟ ATMs internationally without operator fees
or international ATM fees (aside from currency conversion). 79 According to Walker‟s
partnership motivations, the advantages of the ATM alliance structure are that BofA can provide
expanded market access for customers to international ATMs while also avoiding the fixed entry
costs of establishing its own international ATM network (cost reduction). 80

In 2009, BofA created a joint venture with First Data Corp called, “BofA Merchant Services”, to
provide “next generation” payment solutions to businesses. The suite of products offered
includes credit and debit cards, as well as e-commerce payments and mobile commerce
technology solutions.81 In the context of the Walker partnership framework, BofA‟s motivation
stems from technology transfer and development provided by First Data Corp.82 This technology
positioning strategy by BofA includes an investment of significant financial and technical
resources, which will allow existing BofA merchants to benefit from the payment technology
offered by First Data.83

III.C.2 Business Level Strategy
Business Level Strategy - Commercial Banking
The four business units that comprise BofA CB employ a mix of cost-leadership and broad
differentiation business-level strategies in its operations and targets consumers and small-to-mid
size business. This focus is evidenced by the fact that BofA serves nearly 57 million consumers
in the US with its Deposit products and 12% with US small businesses.84 In addition, BofA is #2
in credit card issuance in the US as well as the #1 provider of commercial and industrial loans to
small and mid-size business.85 BofA serves these markets through multiple channels including
physical bank branches, virtual phone and web/mobile interfaces, and through third-party
services (e.g. mortgage servicing).

38

The cost-leadership element of the CB business-level strategy is evident in the product pricing
structure for the CB product suite (Exhibit 5). Among its primary competitors, BofA has the
lowest average monthly fee for checking accounts ($15), is tied for lowest average credit card
rate (~16%), and has an equivalent Commercial and Industrial Loan Rate range (~3-4%) as
competitors. While BofA displays cost leadership amongst primary competitors, it is not the
cheapest provider of financial products in the overall industry; institutions such as small regional
banks and credit unions routinely provide lower-cost or free basic banking services.

However, BofA also employs a broad differentiation strategy to distinguish itself from these
rivals by offering a diversified suite of integrated products, services, and customer support.
Through both acquisitions and organic internal product line extensions, BofA leverages its
breadth of product offerings as a competitive advantage. BofA promotes the convenience of
accessing and managing products through a single interface be it virtual or physical. A large
product breadth also allows BofA to provide financial products and services that more optimally
meets its customers‟ needs than other financial institutions with more limited product portfolios.

In terms of the BCG matrix, it is clear that BofA‟s CB can be classified as a „cash cow‟, as it has
high market share (many products are #1 in its category) but a negative growth rate of -15%.86
Given this, BofA should look to allocate capital from CB units to a „star‟ or „question mark‟
business unit as the higher growth rate promises greater upside return potential (Exhibit 25a).

Business Level Strategy - Investment Banking
BofA business units classified as IB pursue a focused differentiation business-level strategy. The
IB portfolio targets a focused customer segment that includes large corporations, institutions, and
high-net-worth individuals through the same physical and virtual channels as CB. However,
BofA provides higher levels of personalized relationship banker service as well as a product and
technology support staff dedicated solely to IB clients.

In the IB market, BofA‟s differentiation strategy focuses on promoting its extensive experience,
product breadth and depth, existing relationships with other corporations, and effective strategic
consultation as a unique package of offerings that competitors cannot imitate. 87 BofA‟s IB

39

strategy can be classified as a „star‟ within the BCG matrix. It commands the #2 position for
market share for investment banking services in the US while maintaining a 15% growth rate,
among the highest for IBs. As such, IB should be allocated funds from the CB segment to help
fuel overall corporate revenue growth (Exhibit 25b).

Business Level Strategy Fit with Corporate Strategy
BofA‟s business-level strategies for its CB and IB segments fit closely with its overarching
related-constrained corporate strategy. Business level strategies that focus on providing broad
and integrated suites of product offerings alongside seamless customer service inform the
corporate level strategy, where strong linkages and attributes between business units mean that
CB customers can easily incorporate IB services into its relationship with BofA. BofA supports
this integrated experience through employee cross-training, internal business processes that
support and reward cross selling, and bank-wide technology platform integration to remove
operational obstacles to providing this integrated customer experience.88

Business Level Strategy Change Based on Strategic Move
BofA‟s strategic cost cutting move to preserve its market position and overall business viability
may have an effect on its business-level strategy. If BofA selects mass layoffs, this could affect
the „seamless‟ and integrated customer experience, as the customer service staff will be
significantly decreased.

Conversely, a partial or complete divestiture of a particular product or department, such as the
ailing consumer mortgage unit, could impact the broad product suite offering that is core to
BofA‟s value proposition to customers. This product or service offering gap would impair
BofA‟s business-level strategy for either CB or IB, and would effectively decrease the value
provided to customers by either business unit.

While it is unlikely that BofA will decimate any internal business unit or resource group that is
central to its value proposition and competitive advantage, cost-cutting measures that impact
critical resources and capabilities will likely erode customer value creation to some degree.

40

III.C.3 Resources and Capability Level
BofA Value – Cost (V-C) Profile
The resources and capabilities that provide BofA with sustained competitive advantage include a
strong brand valuation, a large and loyal customer base, a large capital asset base, and a large and
strong investment analyst workforce (Exhibit 14a).

The strong brand valuation and large/loyal customer base resources are critical in building BofA
value drivers that include serving 50% of US households and 12% of US small businesses, as
well as the #2 ranking in credit card issuing in the US. The loyal customer base is a resource that
engages in a virtuous cycle with the product breadth and diversity value driver. The loyal
customer base also drives network externalities, as BofA customers can easily transfer funds to
other BofA customers, which may incentivize families or business partners to entice others to
join BofA for this reason.

In addition, while IT capabilities only provide BofA with parity alongside competitors, it
supports the online banking and bill pay technology value drivers, which in turn increases the
convenience and cross-product integration value drivers. For BofA, this results in 55% less
attrition for online banking customers and 80% reductions in attrition for online bill pay
customers.89

The large capital asset base, a resource derived from the large number of consumer deposits held
in CB, contributes to the broad product offerings and product customization value drivers in both
CB and IB. The large base of internal capital helps BofA provide more creative and/or larger
loans to businesses and corporations without having to dip into the external capital markets. This
means BofA can structure products in innovative ways or provide very large loans and still
achieve requisite profitability - options that an IB-only may not be able to offer due to higher
costs of capital.

The strong BofA investment analyst workforce, ranked #3 by IBIS Investment Banking research
in 201090, clearly enables the IB product quality and customer retention value drivers, as well as
the brand reputation, personalized consulting, and product customization value drivers. BofA‟s

41

Bank of America's "Project New BAC" - For Good or for Bad?

Bank of America's "Project New BAC" - For Good or for Bad?

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