Executive summary
This paper gives a chronological history of the Bank of America particularly related to its formation and current position as far as the financial market is concerned. It also looks at the parameters that the bank uses to determine its success. These parameters are earnings per share and bottom-line objective (profitability).The paper also describes the business model adopted by Bank of America to ensure efficiency and effectiveness in its operations in both the domestic market and global market.
The paper also gives a description of the country of importance to Bank of America, in this case, Pakistan and its economic trend of the past five years. It gives an overview of the state of the market and economic conditions in the aforementioned country and how it provides opportunity to the company in the financial sector.
The forecasted economic conditions are also detailed in this report to enable the company adopt correct strategies and actions that can enable it succeed in the ever dynamic financial market. The specific conditions have been highlighted in this paper and an insight of their impact on the company’s operations.
The paper finalises by giving the most probable actions by the Bank of America to counter the risks identified. These actions touch on the social, environmental and ethics areas, which are perceived to be effective.
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Macroeconomic Analysis
Company profile
The history of Bank of America dates back to nearly 200 years ago when the Paris Treaty formally recognised the independence of the Americans, consequently abolishing the British prohibition against America-owned Banks. Moses Michael Hayes, together with other Boston leaders took advantage of this freedom and formed Massachusetts Bank, a predecessor of Bank of America. The bank started its operations in the year 1784 with a branch in Maryland that later embarked on providing financial services to farmers including deposit taking at an interest. The bank is headquartered in Charlotte, North Carolina. The bank introduced BankAmericard in the year 1958.This was the first licensed generally accepted user card across all other banks in the United States.In 1998,
NationsBank acquired the Bank of America; however, the company never changed its name. This enabled the creation of a coast –to- coast retail banking franchise. In 2004, with its objective of extending its market share throughout the northeast and beyond, the bank purchased FleetBoston Financial. The Bank of America did again extended its market share and operations in the subsequent years by buying MBNA in 2006, Countrywide in 2008 and Merrill Lynch in 2009.
Below is a chronological table of key events in the history of Bank of America
Date Event
- September 1783 -Moses Michael Hayes, together with other Boston leaders, founded the Massachusetts Bank, a predecessor of Bank of America.
- 1784 -The bank opened its doors for its customers.
- 1804 -The bank opens a branch in Maryland to serve the farmers by accepting deposits from them and paying interest on deposits to customers.
- 1958 -The bank introduced BankAmericard that was licensed and generally accepted credit card across all the banks in America.
- 1998 -Bank of America is acquired by Nationsbank, but still retains it original name
- 2004- Bank of Africa acquires FleetBoston Financial to extend its presence in the northeast.
- 2006 -Bank of America acquires MNBA
- 2008- The bank enters into an agreement rescue deal to buy Countrywide.
- 2009 -Merrill Lynch is acquired by Bank of America at a cost of $ 50 bn
Bank of America’s business model
The bank has a simple business model that incorporates mergers and acquisitions, together with a combination of related consumer products and services that it offers.
These series of acquisitions and mergers, which is one of its business models, has made the Bank to grow outside of its home state and also enabled it expand the breadth of its products and services to the customers across the world. The bank has combined consumer products, consumer banking and small business into one business line, and also incorporating Premier Banking into the Wealth and investment Management organisation so as to simplify its business model to achieve efficiency in operations.
Bank of America’s measure of success
The bank measures its success through returns to its shareholders (Earnings per share) and the amount of profit it makes compared to the other largest 25 Public US Banks such as JPMorgan Chase, Citigroup Inc., and Wells Fargo &Co. According to SNL Financial (2014) the comparison of the fourth quarter of 2013 in terms of EPS performance of the 25 largest public US banks, Bank of America managed to move to the second position behind JPMorgan Chase.
The Bank’s country of importance
The Bank of America intends to expand its presence in the Asian market particularly in Pakistan. After divesting in China, the company hopes to return to the Asian continent to still fulfil its vision of being a global financial product and service provider. Banking sector plays a pivotal role in the economic development and financial growth of a country, as a result, rapid changes has been observed in the banking sector of Pakistan for over 62 years. Initially, Pakistan had inadequate capital and indecision due to some underlying calamities both in the political and socioeconomic arena.
The favourable amendments which were made to the State of Bank of Pakistan Act 1956, has led to tremendous improvement of this industry as it encouraged the private sector to set up financial institutions and banks. The monetary policy of Pakistan is in the hands of an independent central bank that keeps the objectives of financial stability, price stability and growth at the forefront. It is committed to adopt a monetary policy that keeps inflation under check. Interest and exchange rates are market determined and credit allocation decisions are left to individual banks based on objective measures but guided by prudential regulations.
With the success of Bank of America being pegged on profitability, a closer look at the relationship between profitability and economic growth of Pakistan, shows a positive trend. This favourable macroeconomic variable (economic growth) is evidenced by the massive investment by banks in this country so as to meet the financial needs of their customers. Pakistan’s investment growth rate rose to 23% in the 2007 fiscal year, despite having lagged at approximately 18.6% in the preceding three years. This show a 4.4% growth in investment/GDP ratio. Similarly, there has been a significant growth in the foreign capital inflows, cumulatively estimated to be approximately $13.5bn over this period, with the banking sector contributing $2.7 billion.
The investment significantly empowers the bank to build a strong position in the market. The upgrading that has taken place in Pakistan’s credit worthiness by S&P and Moody’s between 2000 and 2007, incorporation of Pakistan in the emerging markets by the Economist in London and other emerging market indices are an indication of the growing importance of Pakistan’s economy.
Changes in key macroeconomic indicators 2003/04-2008/09
| Macroeconomic Indicator | June 2004 | June 2009 | Change in the Indicator |
|---|---|---|---|
| GDP Growth Rate | 3.1% | 7.0% | Positive |
| Inflation | 3.5% | 7.8% | Negative |
| Fiscal Deficit/GDP | -4.3% | -4.3% | None |
| Current Account/GDP | 3.8% | -4.9% | Negative |
| Public Debt/GDP | 82.91% | 55.7% | Positive |
| External Debt/GDP | 46.6% | 27.8% | Positive |
| Rupees-Dollar Parity | Depreciating | Stable | Positive |
| Foreign Exchange Reserves | US $6.4bn | US$16.5bn | Positive |
| Poverty Incidence | 34% | 24% | Positive |
Another crucial macroeconomic variable is the interest rates. State Bank of Pakistan has, in the past two years, applied an expansionary strategy for reduce interest rates. The policy rates have drastically been reduced to 9.5 percent in 2013 from 13.5 percent in 2011 through reduction of 400 basis point cumulatively. These changes positively affect the bank’s operations as more people will be willing to apply for credit and loans hence increasing the bank’s revenue from interest income. An increased access to loans due to reduced interest rates translates to high interest income that consequently improves the profitability of the Bank, a key measure of its success.
The significance of profitability of a bank such as Bank of America is usually valued at both the micro and macro stages of economy. On the micro level, profit is indispensable condition of cutthroat banking institution and the resource of funds, especially during a period of fierce competition in the financial market. While on the macro level, a viable, profitable and promising banking sector is better capable to overcome negative conditions and distress and consequently, leads a strong economic system. The table below shows some of the macroeconomic conditions and risks and opportunities associated with each of them.
Growth in GDP Indicates increased/potential market for the company. The increased market might to stiff competition as a result of attraction of new entrants.
- Static global inflation rate Stability in the market growth Unimproved company performance or success.
- Shift in customer trend May lead to increased business operation. Might result into decline in business operations.
- Set of economic conditions in 2014
The following are the sets of economic conditions expected to prevail in 2014:
- An outlook of the market in 2014 by BofA Merrill Lynch Global Research shows that a rising value of the U.S. dollar, rising rates, as well as rising rate volatility will impact negatively on the world financial institutions and markets as the credit cycle also diverges.
- The United States of America and global economic GDP growth is expected to improve in 2014.It is approximated that the U.S GDP will accelerate to 2.6 percent. This is due to the fiscal austerity measures taken by the government and pent-up demand for capital goods.
- The global inflation rate is also anticipated to stabilise at 3 percent. However, this is not the case to emerging markets as this rate is expected to rise from 4.7 percent in 2013 to 5.3 percent in 2014.Similarly, the ongoing improvement of the U.S economy is expected to increase the real estate value by 5 percent.
- A shift in the market is also expected in 2014, with each market outperforming the other: stocks over bonds, developed market over emerging markets, real estate over commodities, cyclical over defensives and high yield over investment grade. Similarly, an institutional reverse is expected in 2014, whereby institutional investors such as insurers, central banks, insurers, sovereign wealth funds and also U.S. pension funds would to selling stocks and buying bonds.
All these macroeconomic conditions pose both risk and opportunities to the financial institutions, including Bank of America.
Implications of the economic conditions to the Bank of America’s performance
As aforementioned, the rising interest rates and increasing value of the U.S. dollar in the foreign markets will impact negatively on the Bank of America and other financial institutions. This is because fewer customers will be willing and/or able to access the financial products, especially the loans and therefore leading to a reduction in the company’s revenue. This will affect the company’s performance in terms of profits earned in the coming first quarter of 2014.
The expected rise in global economic GDP gives some reprieve to financial institutions. The growth in GDP reveals increased economic activities in the various countries of the world including Pakistan. This in turn shows that most customers including institutional investors will be willing and actually able to source for funds from financial institutions and at the same time deposit with these banks as they keep their businesses in operation. It is believed that growth in economy entails expansion of economic activities such as businesses, manufacturing industries and other forms of commercial activities. All these needs some source of finance as well as a custodian of their cash, not forgetting some technical advisory services that form the core businesses of financial institutions.
Actions to be taken to counter risks posed by the economic conditions
The expected increase in the global inflation rate poses a risk to the financial markets. This risk will be countered by the financial institution through social forums in which they are expected to educate the customers and potential customers on the correct and valuable investment ventures and the risk associated with each investment venture as well as how to curb these risks.
Similarly, the company has set aside $50 million to be used in the coming ten years to fast track a low-carbon economy through investing, lending capital market activity and addressing its own environmental impact. This will ensure that cost push inflation to most of investor companies as a result of levies by government to counter environmental damage is reduced.
In addition to the above measures, the company intends to ensure that they sensitize their customers on ethical ways of doing business and the benefits associated with it in order reduce penalties as a result of not acting ethically.
