The Desperation Of BofA And The 5 Banks That Will Benefit

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 |  Includes: BAC, BBT, C, FITB, HBAN, PNC, RF
by: Brian Nichols

By now everyone knows that Bank of America (NYSE:BAC) is charging its customers $5 per month for a debit card fee. Since this news was announced there has been an outrage from the bank's customers who are furious at BofA CEO Brian Moynihan for the changes that have been implemented. From an investor's point of view the question that we should be asking is, how much will this change either help or hurt the company? And will this change affect other banks that are relevant within Bank of America's most concentrated regions?

Bank of America is now implementing a $5 charge for debit card usage after new regulations cap how much banks can charge when a customer uses a debit or credit card. I must admit, this seems like a move of desperation from a bank that has been under heavy scrutiny over the last several months. But there have been several rumors that Bank of America, the largest consumer bank in America, is attempting to transition its identity from consumer banking to commercial bank. So although I see it as a moment of desperation, it may be a strategic decision to change the company's future. However, I believe it's likely that the customer reaction will be more severe than BofA expects and could negatively impact its financial health versus improving its efficiency.

I am torn by this implemented change by Bank of America; on one side I believe it's a needed change for profitability, but on the other side I believe it will financially hurt the bank or destroy what little bit of credibility that is left. One stipulation of this new charge is that if a customer has $20,000 in combined balances or a mortgage, then the fee will be waved. This means the company is targeting low-income customers, with reasons unknown, maybe the company believes that if a customer is not willing to pay $5 a month then it does not want the customer's business. And while we do not know the full affects of the bank's decision we can conclude that there will be angry customers that are more than willing to attack the bank and its new fees.

Through change.org, a highly publicized petition was started in which 212,551, as of the time this was written, have already signed. The petition points out the wrongdoings of the bank in an attempt to persuade management to reverse their decision. One thing I have noticed by reading the comments of those who have signed the petition is that while a large percentage of these individuals are low income and use financial distress as a reason for their decision, there are still several individuals who most would consider financially secure, or comfortable, that are outraged by this attempt to raise profits.

The petition states, "The American people bailed out Bank of America during a financial crisis the banks helped create." In addition, the petition also mentions that BofA paid zero dollars in federal income tax last year, which further adds to the frustration of the bank's customers. Therefore, when you stop and look at the situation through the eyes of the customer, this decision seems wrong and simply desperate by Bank of America CEO Brian Moynihan.

I can't imagine being in Brian Moynihan's shoes; he is dealing with an unbelievable amount of pressure from unhappy shareholders that are demanding results. Yet, I don't believe that his decisions have been morally acceptable or beneficial to a company in such financial distress that is directly impacted by a bad economy. Most of the bank's problems arise from a bad economy, we can point out all of the individual issues that are present, but just about every problem within the bank can be traced back to economic weakness such as high unemployment, mortgage crisis, and defaults on loans.

Yet, I along with many others, believe that BofA is not making moves to better the U.S. economy nor itself, which is unfortunate considering that it has one of the strongest influences on the economy because of its presence within the financial industry. Over the last few months the bank has fired 1000s of employees and is believed to lay-off as many as 30,000 during the next few years, along with closing hundreds of branches. This, along with its new policy to charge $5 a month for customers to use their own money, presents CEO Brian Moynihan's recipe for success, in a nutshell.

The changes that BofA has made over the last few months may be good for investors, but it's bad for the economy. When a bank takes more money from customers that do not have the additional income it hurts the customer. And when the country's largest bank has plans to fire as many as 30,000 employees it does not help the economy but rather contributes to the crisis that is unemployment. The problem is that BofA has no idea how customers will react to these new charges and if the immediate response is any indication then investors should realize that this policy may not be the answer to its financial struggles, but could worsen the financial health of this bank.

It's simple math that if you fire a large number of employees and close several branches then customers have to be downsized as well. I believe this was the intention of BofA, to downsize this segment of its business, and since it doesn't want to lose its most wealthy customers, it's attacking the low income customers. The American people already have a skeptical view of banks, they don't like them and believe that banks take their money. For many banks this is the case, including BofA, which has now significantly decreased the benefits of banking with BofA.

The bank is now closing branches, so it's not quite as convenient, and it's firing employees, therefore, its customer service can't be as good, and it's charging customers to use their money during a time of economic uncertainty. These changes don't only affect the less fortunate but the wealthy as well, who have spoken out in regards to BofA's decisions, and I believe this desperate attempt to post a profit will ultimately lead to a much larger percentage of lost customers than what the banks expects.

Bank of America has a presence in just about every state in America, although some states have more branches. Below is a chart that shows the top 10 states in which Bank of America operates, and how many cities the bank has branches within each state.

State Number of Cities
California 493
New Jersey 286
New York 250
Florida 250
Texas 237
Massachusetts 229
Michigan 163
Illinois 150
Maryland 136
Washington 121
Click to enlarge

Bank of America has at least one branch in 2,315 cities within 10 states. Although BofA is relevant in most areas within the United States, the majority of its branches are located in these ten states. Therefore, we can conclude that the number of unhappy customers will most likely be higher in these areas of the country.

It's my personal belief that regional banks will experience the highest level of success as a result of new policies set forth by Bank of America. Global institutions such as Citigroup (NYSE:C) may be forced to implement similar changes, although not as severe and with the global economy suffering to such a high degree, banks are making changes that affect its customers. However, banks that operate within strong regions of the country are not forced into this situation because their success is not affected by the global economy but rather the region in which they serve.

Below is a chart of five companies that I believe will benefit from the recent changes at Bank of America. The chart shows the name of the company and each company's presence within Bank of America's most important areas in America. I have already charted Bank of America's most crucial states, but now you will see the relevance of 5 regional banks within these states. Each of the regional banks are profitable, have a strong operational presence, and offer free checking to its customers.

Regions Financial (NYSE:RF) Texas, Illinois, Florida, Massachusetts
PNC Financial (NYSE:PNC) Maryland, Michigan, New Jersey, New York, Texas, Florida
BB&T Corporations (NYSE:BBT) Florida, Maryland, Texas, Virginia
Fifth Third Bancorp (NASDAQ:FITB) Florida, Illinois, Michigan
Huntington Bancshares (NASDAQ:HBAN) Michigan, Florida
Click to enlarge

As I said, I expect each of these companies to benefit from Bank of America's new policies. Bank of America will lose a substantial amount of customers due to its new charges, in an attempt to post a profit. And I believe that these 5 companies, which have a strong presence, will gain new customers, and although each company is profitable and should experience success, I believe that one of the regional banks will benefit the most.

PNC Financial Corporation (PNC) has branches in 6 of Bank of America's top 10 locations. The bank offers free checking along with monthly refunds on debit charges, meaning that if a customer withdraws money at Bank of America and is charged then PNC will refund the charge. Benefits such as this, along with its convenience in location, could result in new customers for the institution. And although I believe that PNC offers the best incentives, I am confident that each of these 5 banks will experience some level of success from angry Bank of America customers within its respective region.

The level of impact from the $5 monthly charge is debatable as some believe it will have little impact while others believe the opposite. I believe the impact will be much more than BofA expects and that CEO Brian Moynihan is appearing desperate. I could not imagine the pressure and scrutiny that Moynihan is feeling, but it's to be expected; he is receiving total compensation of nearly $6.5 million along with several other executives earning this level of income. Yet, the company creates new charges for its customers and fires employees while several executives make millions per year. Bank of America is an institution that is crucial to our economic health by being the largest bank in America with a historic emphasis in personal banking.

I fear the changes that executives have made will not result with the impact in which they believe, but rather continue to anger customers and drive their business elsewhere. BofA has received an overwhelming amount of negative publicity forcing the CEO to answer tough questions by always engaging in damage control just to keep the stock from crashing. This company is making very little progress and by firing employees, closing branches, and implementing a fee that is unnecessary for its competitors I believe it will soon be the end for BofA CEO Brian Moynihan.

Customers are angry, investors are fed up, and 1,657 additional BofA customers signed the petition since I began this article. The belief that these changes will not drastically affect this company is absurd especially when there are multiple banks within the same region offering a much better service. I believe that this could be the beginning of the end for Bank of America's CEO Brian Moynihan and the financial institution's reign as the dominant power of consumer banking. Yet it could be the beginning of additional success for regional banks that are more than willing to accept what Bank of America no longer wants.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PNC, HBAN over the next 72 hours.

Additional disclosure: The top ten states were obtained from Bank of America's website. The information regarding the five regional banks were obtained from each of bank's website then compared to the U.S. Bank database. As with any investment, due diligence is required. The opinions in this article are not intended to be used to make a particular investment or follow a particular strategy.