Bank of America (BAC) has been transitioning its revenue stream from less profitable divisions to higher margin businesses. Brian Moynihan plans to add an additional 1,000 small business bankers as a push to gain market share in the segment.
BofA has been cutting back in segments such as investment banking, which continue to take a hit due to the lack of deal flow. BofA believes that as a recovery takes foot, small business will be able to take advantage of that as well. BofA's plans to finance these corporations will yield solid interest rates, while minimizing risks.
BofA has been trying to increase it's net interest margins, which are lower than that of Wells Fargo (WFC), JPMorgan (JPM), and Citigroup (C).
This move by BofA shows its committed to focusing on higher margin areas that are seeing incredible signs of life. BofA has also significantly cut back on their mortgages division by laying off a large portion of the workforce.
While JPM has also doing strongly with small business owners, they still have a large investment banking unit that can cause some risk problems such as the massive trading loss that occurred.
BofA along with Wells Fargo, Citigroup, and JPMorgan are part of a $20 billion program that increases lending to small business owners. So why is BofA a better bet than the rest of these banks?
Well for one since BofA has had a tougher time maintaining profitability, its stock price has been depressed. Any sign of profitability on a major segment such as small businesses would help the company increases its bottom line.
So how much of an increase will BofA see to its bottom line?
Well a typical rate for a small business loan over a $100,000 can go from 6% - 7%. BofA is cutting back on the mortgage business, where they are getting 3.75% for a 30-year mortgage. At a 6% rate for small business financing, they are getting an additional 225 basis points by focusing their efforts on that segment. Of course, BofA is not going to stop giving out mortgages, but its good to know they are cutting back on it.
I believe BofA is in a better position by focusing their efforts on this segment. While the other major banks still have a major portion of their revenue coming from investment banking, BofA is trying to eliminate that risk.
By trading at .37x book, the market believes that there are plenty of toxic assets on its balance sheet. However, as the bank continues to transition from toxic assets to more profitable ones. I believe BAC is a great buy with this recent development.
Disclosure: I am long BAC.
