Business Environment and the Analysis of the Financial Health of Bank of America Corporation - Essay Example

Bank of America – Business Analysis Table of Contents Overview 2 Business Summary of Bank of America Corporation 2 Prevalent Economic and Business Environment 3 Review of the Financial Statements of the Bank of America Corporation 3 Financial Performance Overview of Bank of America Corporation 6 Impact of Globalization on BAC’s Business Strategies 8 Analysis of Bank of America Corporation in Comparison to JPMorgan and Citigroup 8 Products or Services 8 Best Practices and Operational Processes 9 Technological Advantages 9 Financial Health 11 References 13 Bank of America Corporation 15 Citigroup Inc. 18 JPMorgan Chase & Co. 20 Bank of America – Business Analysis Overview The study accentuates on business environment and the analysis of the financial health of Bank of America Corporation (BAC). The study discusses the viability, steadiness as well as the profitability of BAC by reviewing its financial statements and evaluates it with the financial performances of two other comparables in the same industry. The comparable companies chosen for the study are JPMorgan Chase & Co (JPM) and Citigroup Inc (C). The study also includes a review of BAC’s best practices, operational processes, products and technological advantages in comparison to that of JPM and Citigroup. The study also discusses the impact of globalization on the business strategies of BAC. Business Summary of Bank of America Corporation The Bank of America Corporation is a Delaware Corporation in addition to being a ‘bank holding company’ as well as a financial holding company. It is headquartered at Charlotte in North California. BAC provides a varying array of banking as well as non banking financial products and services all over the United States in addition to certain overseas markets, through their banking and non banking subsidiaries. BAC functions in six business divisions, namely, Deposits, Global Commercial Banking, Global Card Services, Global Banking & Markets, Home Loans & Insurance, and Global Wealth & Investment Management. As of December 2010, BAC operates in all the states of the United States of America and 40 other countries across the world. BAC caters around 80% of the population of the United States through their retail banking segment (Bank of America, 2010). Prevalent Economic and Business Environment The business environment and the markets in which the BAC carries out its business are dynamically influenced by the developments in the economies of the US and other countries. In the year 2010, the worldwide economy continued to recuperate, though the growth was not even across the various regions. The US, the UK and the Europe showed modest growth, while the countries like China, Brazil and India demonstrated rapid expansion. The US economy started to improve in the beginning of 2010 as a result of reasonable development in consumption level as well as inventory rebuilding in the nation. However, the growth slowed down in the mid of 2010 as a result of the escalation of the financial calamity in Europe. Nevertheless, notwithstanding the modest economic augmentation in 2010, BAC generated free cash flows worth $1.5 trillion from their non financial businesses as a result of their vigilant financial practices in the business. Furthermore, the credit quality of bank loans improved considerably in the year 2010 and the continuous economic revival enhanced the atmosphere for bank lending. Since the later part of 2010, bank commercial as well as industrial loans amplified, illustrating augmented loan demand as a result of stronger production and capital spending in addition to inventory building (Bank of America, 2010). Review of the Financial Statements of the Bank of America Corporation The review of the balance sheet of BAC reveals that the total assets of the corporation were $2.3 trillion as of the year ending 2010, which was an increase of 2% as compared to that of 2009. During the same period, the total liabilities of BAC also increased by 2% and rose to $2 trillion. In the year 2010, BAC implemented a fresh consolidation regulation that resulted in the desegregation and integration of certain entities in the consolidated balance sheet of BAC. These entities such as credit card trusts and multi seller conduits among others were not formerly recorded in BAC’s consolidated balance sheet. The implementation of the fresh consolidation regulation resulted in a net increase in the assets by an amount of $100.4 billion and also in the growth of total liabilities by an amount of $106.7 billion. This value of the total liabilities included long-term debt worth $84.4 billion. The shareholder’s equity of BAC for the year 2010 also decreased by $3.2 billion as against that of 2009. The decrease was primarily due to expenses worth $12.4 billion owing to goodwill impairment as well as the effect of the implementation of the fresh consolidation guidance (Bank of America, 2010). The review of the cash flows of BAC reveals that the cash and cash equivalents of the corporation declined by an amount of $12.9 billion during 2010 owing to the reimbursement and maturities of long-term debt as well as purchases of available for sales (AFS) securities. The cash from operating activities of BAC was $82.6 billion in 2010 as against $129.7 billion in the year 2009. This was because of the decline in the credit losses provision, reductions in the trading as well as derivative assets and the expenses due to the goodwill impairment. In the year 2010, BAC’s cash from financing activities of $65.4 billion, illustrated that the decline in the long-term debt owing to maturities were more than the issuance of new debts during the period. The net cash worth $30.3 billion were utilized in investment activities, which largely included the purchases of AFS debt securities (Bank of America, 2010). Financial Performance Overview of Bank of America Corporation In the year 2010, BAC generated a net loss worth $2.2 billion as against a net income worth $6.3 billion in the year 2009. This is because the 2010 financial results of BAC included goodwill impairment expenses of $12.4 billion, which consisted of non-cash as well as non-tax deductible goodwill impairment expenses of $10.4 billion and $2 billion in Global Card Services and Home Loans & Insurance divisions respectively. Nevertheless, apart from the goodwill impairment expenses, the corporation earned a net income of $10,162 million in 2010 as against $6,276 million in 2009. The revenue of BAC amounted to $111,390 million in 2010, which was a decrease of 7.9% as compared to revenue worth $120,944 million in 2009 (Bank of America, 2010). The performance of the six business divisions of BAC in 2010 was lower than that of 2009. The net income from the Deposits division of BAC in 2010 reduced from the previous year owing to the decrease in the revenue value as well as the increment in the noninterest expenditure of the corporation. The net loss of BAC from its Global Card Services division also increased for the period due to the high value of goodwill impairment expenses recognized in 2010. The revenue of the corporation from the Global Card Services division decreased during 2010 as against the previous year due to the lower loan levels and the diminished interest as well as fee earnings owing to the execution of the Credit Card Accountability Responsibility and Disclosure (CARD) Act. BAC’s net loss from its Home Loan & Insurance division amplified in 2010 as compared to 2009 as a result of the goodwill impairment expenses worth $2 billion in addition to the raise in the provisions for warranties and representations. The Global Commercial Banking segment of Bank of America generated a higher net income in 2010 as compared to 2009 owing to the lesser credit expenses. The net income from the Global Banking & Markets and the Global Wealth & Investment Management divisions of BAC also reduced in 2010 as compared to 2009 were driven by inferior sales and elevated noninterest expenditures as well as reduction in the net interest and noninterest proceeds of the corporation (Bank of America, 2010). The net interest income of BAC augmented by an amount of $4.3 billion to $52.7 billion for the year 2010 in comparison to that of 2009. The increase in interest income was owing to the effect of deposit pricing as well as the implementation of latest consolidation regulation in addition to the shift of the clients to more liquid products. The increase was however offset to some extent by the inferior commercial as well as consumer loan levels in addition to lower interest rates on the core and the trading assets. The noninterest income of BAC reduced by $13.8 billion and amounted to $58.7 billion in the year 2010 in comparison to $72.5 billion in the year 2009. The decrease in the non interest income was mainly due to the decline in the mortgage banking income and reduction in the equity investment income of the corporation. The noninterest expenditure of BAC also amplified by an amount of $16.4 billion and amounted to $83.1 billion for 2010 in comparison to 2009. The raise in the noninterest expenditure was due to the goodwill impairment expenses recognized in the year 2010 (Bank of America, 2010). The capital ratios of BAC improved in the year 2010 as compared to 2009. The capital ratios of a bank indicate the proportion of its capital in comparison to its risk-weighted assets. The tier 1 common equity ratio of BAC enhanced from 7.81% in 2009 to 8.6% in 2010. The tier 1 capital of BAC increased from 10.4% to 11.24% at the end of 2010, while its total capital ratio also improved from 14.66% in 2009 to 15.77% in 2010. The tier 1 leverage ratio of BAC improved slightly from 6.88% in 2009 to 7.21% at the end of 2010. This indicates that the Bank of America Corporation had successfully maintained the regulatory requirements of the Basel framework (Bank of America, 2010). Impact of Globalization on BAC’s Business Strategies As a result of globalization, the business strategy of BAC was to expand geographically by means of acquisitions in the United States as well as overseas franchise building. It developed into being leader in most of the retail banking divisions such as deposits, credit cards and mortgages among others. BAC had focused on acquisitions that enhanced their revenues and increased their market share considerably as well. The major acquisitions of BAC since 2006 were MBNA, US Trust Corp, LaSalle Bank, Countrywide Financial and Merrill Lynch. These acquisitions benefitted BAC in terms of synergic advantages, geographic expansion, growing market share and leading market position (Bank of America, 2010). Analysis of Bank of America Corporation in Comparison to JPMorgan and Citigroup Products or Services BAC, JPMorgan and Citigroup provide an extensive range of diversified products and services to their clients. The major offerings of these companies comprise of consumer finance, retail banking products and services, retirement services, wealth management, mortgage lending, investment banking, cash management, working capital management, trade finance, commercial banking, and private banking products and services among others. In addition BAC and JPMorgan also provide M&A advisory services, IPO assistance and treasury solutions to their corporate clients (Bank of America, 2010; JPMorgan Chase & Co., 2010; Citigroup, 2010). Best Practices and Operational Processes Corporate customers cannot manage their global cash management necessities with the service of a solitary bank. BAC and JPMorgan meet these requirements with their own and their associate banks’ networks. They have more nations serviced by their associate banks’ offices than by their individual branches. Citigroup had integrated all their electronic banking, treasury as well as cash management services on to a sole platform known as Citi Direct BE (Euro Money, 2010). Technological Advantages JPMorgan made innovation in the process of sending notifications to their clients by developing a ‘two-way text alert’ system. This system enabled the clients to reply back to the organization’s text so as to shift funds between accounts and hence assisted in evading overdraft fees. Citigroup had applied a customized prepaid solution strategy for their corporate clients as per their distinctive payment challenges. This prepaid service by Citigroup enhanced the financial as well as operational competence of their clients and hence became very popular. Though BAC, like any other global organization, relies on technological processes, it has not yet developed any significant technological advantage over the other companies (Euro Money, 2010). Financial Health For the assessment of the financial health of BAC in comparison to Citigroup and JPMorgan, the financial ratios of the three companies on the basis of the latest 12 months data (July 2010 - June 2011) were analyzed. As of June 2011, the operating profit margin of BAC was 3.2%, while that of JPM and Citi were 37.4% and 35.2% respectively. The ratio of the EBIT to the interest expense signifies the interest coverage of an organization. The interest coverage of BAC as of June 2011 was 0.2, while that of JPM and Citi were 3.1 and 1.5 respectively (Forbes, 2011a; Forbes, 2011b; Forbes, 2011c). Thus, it can be observed that BAC’s operating profits is much lower than the other two companies and that BAC is comparatively more burdened by its interest expenses. The ratio of total assets to total shareholder’s equity of BAC for the similar period was 11, whereas those of JPM and Citi were 12.8 and 11.1 respectively. The long term-debt to equity and the total debt to equity ratios of BAC for the mentioned period were 2.08 and 2.32 respectively. The long term-debt to equity and the total debt to equity ratios for Citi were 2 and 2.42 respectively and that of JPM were 1.59 and 2.06. This indicates that all the three companies are considerably leveraged. The return on assets of BAC was -0.7%, while those of Citi and JPM were 0.5% and 0.9% respectively. The returns on invested capital of BAC, Citi and JPM as of June 2011, were -2.4%, 1.9% and 4.4% respectively (Forbes, 2011a; Forbes, 2011b; Forbes, 2011c). The book values per share of BAC, Citi and JPM for the period were $20.29, $60.33, and $44.9 respectively, while their Price to Book Value ratios for the same period were 0.31, 0.43 and 0.72 respectively. The share prices of BAC, Citi and JPM as on October 6, 2011 were $6.28, $26.02 and $32.38 respectively (Forbes, 2011a; Forbes, 2011b; Forbes, 2011c). It can be observed that the shares of all the three companies are trading in the stock exchange at a much lower price in comparison to their book values. The free cash flow per share of BAC as of June 2011 was $9.31, while those of JPM and Citi were $0.05 and $-0.78 respectively (Forbes, 2011a; Forbes, 2011b; Forbes, 2011c). This signifies that BAC is more competent than the other two comparable companies in terms of its capacity to pay debts and dividends as well as facilitation of business growth. It can be observed that the BAC’s share price is considerably less than the comparable companies, but its free cash flow per share is much higher in comparison to Citigroup and JPMorgan. Therefore, it is likely that the BAC’s share value would rise in the future because superior value of free cash flow per share indicates that the earnings per share of the corporation should potentially be elevated as well. The analysis of the previous five years financial statements of the three organizations reveal that the financial performance of BAC was comparatively lower than that of JPMorgan, however BAC’s financial performance was much better than Citigroup (Forbes, 2011a; Forbes, 2011b; Forbes, 2011c). References Bank of America, (2010). 2010 Annual Report. Retrieved from http://thomson.mobular.net/thomson/7/3171/4426/ Citigroup, (2010). Citi 2010 Annual Report. Retrieved from http://www.citigroup.com/citi/fin/data/ar10c_en.pdf Euro Money, (2010). The 2010 guide to Technology in Treasury Management. Retrieved from http://www.euromoney.com/images//502/74409/TTM10_PROOF1.pdf Forbes, (2011a). Bank of America Corp. Retrieved from http://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=BAC Forbes, (2011b). Citigroup Inc. Retrieved from http://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=C Forbes, (2011c). JPMorgan Chase & Co. Retrieved from http://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=JPM JPMorgan Chase & Co. (2010). 2010 Annual Report. Retrieved from http://files.shareholder.com/downloads/ONE/1212915036x0x457318/18a5e671-35e1-42d9-a9cd-d5acc7f87c7c/2010_JPMC_AnnualReport.pdf Appendices Bank of America Corporation Ratios Calculated on the Basis of Latest 12 Months Data Latest Full Context Quarter Ending Date 2011/6 EBIT Margin 3.2% EBITDA Margin -10.8% Pre-Tax Profit Margin -17.4% Interest Coverage 0.2 Leverage Ratio 11.0 Asset Turnover 0.0 Revenue to Assets 0.0 Return on Invested Capital -2.4% Return on Assets -0.7% Debt/Common Equity Ratio 2.08 Price/Book Ratio (Price/Equity) 0.30 Book Value per Share $20.29 Total Debt/ Equity 2.32 Long-Term Debt to Total Capital 0.66 Cash Flow per Share $-1.64 Free Cash Flow per Share $9.31 Tangible Book Value per Share $11.12 Price/Cash Flow Ratio -3.7 Price/Free Cash Flow Ratio 0.7 Price/Tangible Book Ratio 0.55 5-Year Averages Return on Equity 5.4% Return on Assets 0.5% Return on Invested Capital 1.8% Pre-Tax Profit Margin 9.5% Post-Tax Profit Margin 6.9% Net Profit Margin (Total Operations) 6.9% Debt/Equity Ratio 1.83 Total Debt/Equity Ratio 2.58 Citigroup Inc. Latest Full Context Quarter Ending Date 2011/06 EBIT Margin 35.2% EBITDA Margin 37.4% Pre-Tax Profit Margin 12.1% Interest Coverage 1.5 Leverage Ratio 11.1 Asset Turnover 0.1 Revenue to Assets 0.1 ROE from Total Operations 5.8% Return on Invested Capital 1.9% Return on Assets 0.5% Debt/Common Equity Ratio 2.00 Price/Book Ratio (Price/Equity) 0.42 Book Value per Share $60.33 Total Debt/ Equity 2.42 Long-Term Debt to Total Capital 0.67 Cash Flow per Share $3.49 Free Cash Flow per Share $-0.78 Tangible Book Value per Share $47.31 Price/Cash Flow Ratio 7.3 Price/Free Cash Flow Ratio -32.9 Price/Tangible Book Ratio 0.54 5-Year Averages Return on Equity 1.1% Return on Assets 0.1% Return on Invested Capital 0.3% Pre-Tax Profit Margin -2.6% Post-Tax Profit Margin 0.4% Net Profit Margin (Total Operations) 1.1% Debt/Equity Ratio 2.94 Total Debt/Equity Ratio 3.78 JPMorgan Chase & Co. Latest Full Context Quarter Ending Date 2011/06 EBIT Margin 37.4% EBITDA Margin 37.4% Pre-Tax Profit Margin 25.4% Interest Coverage 3.1 Leverage Ratio 12.8 Asset Turnover 0.1 Revenue to Assets 0.1 ROE from Total Operations 11.6% Return on Invested Capital 4.4% Return on Assets 0.9% Debt/Common Equity Ratio 1.59 Price/Book Ratio (Price/Equity) 0.67 Book Value per Share $44.90 Total Debt/ Equity 2.06 Long-Term Debt to Total Capital 0.60 Cash Flow per Share $4.99 Free Cash Flow per Share $0.05 Tangible Book Value per Share $28.28 Price/Cash Flow Ratio 6.0 Price/Free Cash Flow Ratio 605.4 Price/Tangible Book Ratio 1.06 5-Year Averages Return on Equity 8.9% Return on Assets 0.7% Return on Invested Capital 2.9% Pre-Tax Profit Margin 15.8% Post-Tax Profit Margin 11.3% Net Profit Margin (Total Operations) 11.4% Debt/Equity Ratio 2.03 Total Debt/Equity Ratio 2.29 Read More