Bank of America has been raising market capital starting January 2010 and continued to build reserves. BAC has had $128 billion of common equity and the ability to retain earnings and manage the balance sheet like it has done the last six quarters. For the last quarter, BAC has taken a $20 billion charge to put more mortgage stuff behind.
Moynihan said BAC is trying their best and keeps driving customer-driven business. In the second quarter, BAC has grown checking accounts, deposits and investment fees, and the wealth management business keeps making money. Five of six businesses are making profits currently. He would keep selling non-core businesses, and BAC has sold 23 businesses for the last six quarters and helped itself by raising capital levels and reserves.
For the call with Fairholme Capital, Moynihan said he set this call up because Fairholme is the major shareholder in the company and deserves with the amount of stock they have to know what’s going on. He’s inviting media and negative questions.
BAC has the capital to meet the requirements of Basel III. It has the goal at the end of 2012 to be 6.5 to 7%; the minimum would be 3.5%. There are two or three issues holding BAC back: mortgage issues, and second, will it result in raising capital and BAC has managed the mortgage issues well without raising capital. If you believe the American economy is going slower, most people will see Bank of America suffer. As the economy has slowed down and not gotten better in the last four or five month, BAC has gotten better because the change was made two or three years ago. Portfolios are in much better shape going into this no-growth environment or low-growth environment than last time.
The worry is whether we are entering a double dip recession. Are we? Moynihan doesn't see that in BAC customer data. BAC’s July 2011 spending versus July 2010 is up 5% on plastic and credit cards. He doesn't see the consumer spending down, gas prices and core consumer spending not as robust as he’d like it but keep moving forward. The middle market companies are very strong and capable, having great capital and the cash is huge. The bank has more deposits come in from the core and commercial customers.
However, the bank still has to grind out earnings. How would he do that? By controlling the costs. Reality is customers are free to deposit and the bank pays no interest and the rate environment is lower. The bank has been in this environment several months and adjusted down. Rate net margin is coming down. Moynihan believes that we've seen the bottom. The market predicted it would fail until 2013. So what is he doing? By taking out the cost. BAC took out branches in the second quarter and said last spring the bank has taken out 750 overall. With reduction in costs and more customers through checking accounts, the bank always needs to grind out the earnings. It’s not fun but it is how the bank must operate in the current banking environment.
Currently, loans are put on higher credit quality than has been seen in a long time. The issue is the underwriting standards because we're all still working through the excesses of an industry; the underwriting standards are pretty tight. By giving credit out, we can't dry the economy. BAC would give credit out as the economy grows to support growth. It can't give credit to people who don't have solid businesses. There's demands for loans in other places but not the United States, hopefully this will stimulate growth and be a better lending environment.
Besides, the bank has a plan b, selling 23 businesses for the last six quarters and optimizing the balance sheet. The regulatory assets versus regular assets are 10 percentage points higher than BAC peers largely because the banks are still optimizing Merrill Lynch and optimizing the system.
Below is the link to CNBC interview: