Today Bank of America (BAC) CEO, Brian Moynihan, announced the company was preparing to lay off as many as 16,000 employees before the end of the year. Bank of America is currently the largest employer in the U.S. banking industry. However, such a reduction in head count would give it a smaller workforce than J.P. Morgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC). According to the Wall Street Journal:
The reductions for the final six months of the year, outlined in a document given to top management, are part of a larger effort to retool Bank of America into a leaner and more focused enterprise. The plan is designed to make the company take less risk, generate more revenue out of existing customers and use an investment banking operation inherited from Merrill Lynch & Co. to become a major deal maker around the world. On Main Street, the refocused company will have fewer branches and a smaller mortgage operation, the document shows.
Unlike his predecessors who embarked on unbridled expansion, since taking over the CEO position in 2010, Moynihan has jettisoned "non-core" businesses such as private equity and insurance, and redefined the company's strategy on a go-forward basis. The announced job cuts appear to be a continuation of Moynihan's attempt to relay his vision for Bank of America to the market. The announcement also comes on the heels of news that American Airlines (OTCQB:AAMRQ) notified over 11,000 workers of the potential for job cuts, and Goldman Sachs (GS) is scaling back its two-year analyst program. In reality, Bank of America's contractionary efforts began just after the financial crisis; a Treasury Department study on lending by TARP recipient banks revealed that from October 2009 to February 2010, Bank of America reduced its new loan volume by over 20%. A reduction in new loan volume by other TARP recipient banks like J.P. Morgan Chase, and Wells Fargo gave credence to the theory that said banks were hoarding cash savings generated from TARP funds in order to stave off the next recession.
The announcement in job cuts comes amid a consistent decline in Bank of America's revenues and earnings. From 2009 to 2011, net revenue declined from $119.6 billion to $93.5 billion. Meanwhile, net income declined from $6.3 billion to $1.4 billion over that same period. Moreover, the "Bank of America story" seems to be getting hit from various sides. While it has reduced its exposure to the vagaries of private equity and making bets with its own capital, it has also forgone the revenue and earnings generated from those businesses during more buoyant times. Moreover, the company is facing stiff headwinds from the U.S. economy - in June the GOP even accused President Obama of having a John McCain Moment and not understanding the depths of the current economic crisis. By aligning its prospects with Merrill Lynch, Bank of America's future earnings are even more uncertain; the unending call for a return to Glass Steagall and a separation of commercial banking and investment banking provides a cloud over Moynihan's vision. Limited to capital raising and M&A advisory, Merrill Lynch's earnings are further exposed to the vagaries of an economy whose vital signs continue to deteriorate, and "The Pain Ahead":
Big ticket items like housing and autos drive the economy. The Fed initiated its Quantitative Easing program in the fourth quarter of 2008. Yet housing starts have been flat since that period; starts were 906 thousand in 2008 and ranged from 554 thousand to 609 thousand from 2009 to 2011. Auto sales were 13.5 million in 2008, reached a trough of 10.6 million in 2009 and rebounded to 13 million in 2011. But they still pale in comparison to the roughly 17 million just prior to the financial crisis.
For the avoidance of doubt, I am bearish on investment banks whose earnings going forward will mirror the declining U.S. economy. In particular, I recommend avoiding Bank of America until it can right size its cost structure to better match its declining revenue stream.