BofA’s Moynihan Says ‘New Normal’ in Retail Banking Won’t Be as Profitable

By Hugh Son and Maryellen Tighe - Nov 16, 2011 5:26 AM GMT+0700

Bank of America Corp. (BAC) Chief Executive Officer Brian T. Moynihan said that slow economic growth and new regulations mean that the “new normal” in retail banking won’t be as profitable as before.

The second-biggest U.S. lender by deposits is cutting costs and seeking to sell more services to existing clients to adjust, Moynihan said today at a conference in New York. The Charlotte, North Carolina-based company loses money doing business with many households at its consumer-banking operation, he said.

“It’s going to be a smaller platform, it won’t be quite the same as it was at Bank of America and around the industry,” Moynihan, 52, said at the conference. “We have 42 million retail customers, many of those don’t contribute or overcome their cost-to-serve.”

Bank of America and JPMorgan Chase & Co. (JPM), the biggest U.S. lender, and No. 3-ranked Wells Fargo & Co. are seeking ways to replace revenue after regulators limited debit-card fees and overdraft charges. A plan by Bank of America to charge debit- card users $5 a month was abandoned, and Moynihan said that managers “learned from the experience.”

The CEO’s strategy is to broaden relationships with its 8 million so-called preferred clients, who have about three- quarters of the unit’s deposits and are 1.5 times as profitable as the retail group. The bank gives these clients incentives by removing monthly service fees on checking accounts for those who use a Bank of America credit card, mortgage or Merrill Lynch brokerage account.

Profit Decline

“What happens to those people who don’t have a lot of money at the bank?” asked Anton Schutz, president of Mendon Capital Advisors Corp., in an interview today with Bloomberg Radio’s Pimm Fox. “The bank’s going to ask for a fee in return for providing a service.”

Profit at the deposits unit slipped 33 percent to $1.05 billion in the nine months ended Sept. 30. Checking account services cost the industry about $300 annually per person, said Bart Narter, a senior banking analyst at consulting firm Celent. Most depositors with less than $3,000 aren’t profitable for banks without fees including overdraft charges, he said.

“Much of the profitability is going to involve a lower expense base and a deeper wallet share per customer,” Moynihan said. The company is also focusing on serving small businesses and added 500 bankers in this area in 2011 and seeks to hire 1,000 more next year, he said.

Federal Reserve governors and regional presidents projected that gross domestic product, adjusted for inflation, will rise by 2.5 percent to 2.9 percent next year, compared with a range of 3.3 percent to 3.7 percent from the prior forecasts in June.

Job Cuts

Moynihan aims to cut about $5 billion in annual costs by the end of 2013, mostly by trimming about 30,000 jobs in retail banking and support operations. Even with the changes, consumer banking is unlikely to return to earlier profits, the firm said today in a slideshow presentation.

Moynihan’s initiative, dubbed Project New BAC, is now examining areas including global markets, commercial banking and corporate banking for cost-cutting. Those businesses have lower headcount than the retail units.

The CEO is selling businesses and assets to comply with new capital rules that require a bigger buffer against losses. The company lost more than half its market value this year on concern that expenses from faulty mortgages may force it to issue new stock. The firm rose 8 cents to $6.13 at 4 p.m. New York time.

Moynihan, who took over at the start of 2010 from Kenneth D. Lewis, said the bank is ahead of schedule on plans to bolster its balance sheet and meet new international standards. The company will reduce its $399 billion in long-term debt by at least $70 billion by the end of 2013, he said.

‘Bouncing Along’

Housing prices have stabilized and are “bouncing along a bottom” as the market clears a backlog of unsold homes and foreclosures, Moynihan said. Delinquencies are coming down in Bank of America’s portfolio, he said.

Moynihan has repeatedly told investors the bank wanted to avoid a share sale that would dilute their holdings. This month, the lender disclosed it may issue as many as 400 million common shares and $3 billion of senior notes to buy back preferred securities that have declined in value.

The bank said yesterday it would divest most of its remaining stake, or about 10.4 billion shares, in China Construction Bank Corp. this month after selling about 13 billion shares in August to bolster capital.

To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Maryellen Tighe in New York at mtighe6@bloomberg.net.

To contact the editor responsible for this story: Rick Green at rgreen18@bloomberg.net