I have owned shares of Bank of America (BAC) for a while now (review the original article here). At $5.17/share, I felt that it was a pretty good risk/reward play, based on the actions that were being taken to clean up its balance sheet, and shed much of those debts and toxic assets that had drained the life from the bank.
I actually moved the stock from my risk basket to my core portfolio, and we added it to our "Team Alpha" portfolio as well (review this recent article). None of this means that the bank is now completely healthy, and the stock is a slam dunk. To be clear, this is still a risk stock, but in my opinion, it is at the crossroads of a major breakout.
Selling The Merrill Lynch Non-USA Wealth Management Division
The bearish argument is quite clear; BAC has failed again and now it needs to dump this division to raise some more cash. I cannot subscribe to this, simply because I see this as yet another move by Brian Moynihan to rid Bank of America of assets that have not produced, have cost too much to run, and face regulatory challenges outside of the USA to make it even more difficult for banks to profit within this business segment.
Back in July, Bank of America announced its intentions to further reduce costs by another $3 billion. As noted in this Reuters article:
"Bank of America Corp said it plans to slash costs by $3 billion annually in commercial lending, investment banking and wealth management, becoming the latest big bank to take aim at expenses as revenue falls in most of their businesses."
Moynihan has repeatedly stated that his intentions were to streamline the bank, focus on core businesses and eliminate costs, overlaps, and underperforming divisions.
Even its work force has been cut by roughly 5%, or about 1/3 of its goal by the end of 2014, but the move being made now is an enormous deal. Not only will it bring in about $2 billion in cash to BAC, but it will slash costs by eliminating a division that has been under enormous pressure.
As noted here the deal has been approved and completed.
"The Swiss bank Julius Baer agreed on Monday to buy the private banking operations outside the United States of Bank of America Merrill Lynch, in a deal that will increase the European firm's assets under management by 40 percent."
This deal will net Bank of America roughly $1.5 billion in cash.
Merrill manages about $80 billion in assets overseas, but with new regulations on the horizon, it makes perfect sense for Bank of America to unload this division and cut the "bull" so to speak.
"Bank of America Chief Executive Officer Brian T. Moynihan, whose firm is the second-biggest U.S. lender by assets, has unloaded foreign businesses to focus on selling more services to existing customers. He has sold more than $50 billion in assets and businesses since taking over in 2010, including Canadian and European credit-card units, to bolster capital before stricter international rules take effect."
This just might be the tip of the iceberg, as far as the wealth management business here in the USA, as well. Major banks have been notified to make some major changes to fortify themselves in the event of any future financial calamity. Please refer to this exclusive article for details.
As far as I am concerned, Bank of America has now just about "announced" that the Merrill division in the USA could be dumped. That's obviously just a guess, but I think I could be right since the current deal with Julius Baer has opened the door. Why shouldn't they dump it all, and become a "real" bank again? Is it so terrible to make money by lending, and by charging for services, and by leading the technological advances in the world of banking?
Gee, a huge bank being a bank. What a novel idea.
Some Fast Facts
The book value of Bank of America has nearly doubled in 5 years.
The share price has dropped to about 0.38 of book value.
Revenue growth has almost returned to 2009 levels.
Gross profit margins are at 5 year highs.
I think you can get the picture now. Bank of America has been cleaning up its act, in spite of the headwinds it has faced from the fiscal mess and housing crisis. I think Moynihan has done an absolutely amazing job of bringing BAC back to life.
Would it be a total shock if this stock was selling for $20.00/share? Not to me. I think it could see that share price sooner than later folks.
Just my opinion, based on the facts.
Disclosure: I am long BAC.