BofA long-term profit forecast cheers investors
Bank of America Corp
Bank of America lost more than $1.3 billion before taxes in 2010 and is still suffering from losses on mortgages made during the height of the mortgage boom.
We are still eating large costs, Chief Executive Brian Moynihan said on Tuesday at the biggest U.S. bank's first investor day since 2007.
But in a few years, those costs will fade and the bank should be able to make $35 billion to $40 billion of pretax profit a year, he said.
The profit forecast was higher than some investors had expected and the bank's shares rose 4.7 percent to $14.69, helping to push up the overall market.
The bank reiterated plans to raise its dividend in the second half of 2011, pending regulatory approval.
Investors also breathed a sigh of relief when Moynihan said he was not interested in major acquisitions.
Bank of America was built through a series of acquisitions over decades. In 2008, then-CEO Kenneth Lewis acquired Countrywide Financial Corp, raising the bank's mortgage assets just as the financial crisis was intensifying.
No acquisitions, a dividend increase, cost reductions -- sounds like a formula for a more profitable bank, said Marshall Front, chairman and chief investment officer at Front Barnett Associates in Chicago. Front Barnett owns Bank of America shares.
Wealth management could be one of units that drives Bank of America's growth. Wealth chief Sallie Krawcheck forecast revenue growth of 6 percent to 7 percent for the unit and said she expects pretax margins to increase to 20 percent as expenses from merging with Merrill Lynch decrease.
At the end of 2010, the wealth unit had a pretax profit margin of 14.6 percent.
Moynihan is pushing employees to sell more products to the bank's customers. The bank also hopes to grow by offering more services outside the United States and by attracting more domestic customers to its wealth management business.
It will be hard for the bank to improve its performance over the next few years. Cutting costs -- a standard lever for boosting profitability -- will be particularly difficult.
There is a limit to which cost cuts can improve your earnings, said Malcolm Polley, chief investment officer of Stewart Capital Advisors, which has $1 billion under management. It's a short-term fix.
Asset growth is another way that banks increase profits, but Moynihan said Bank of America does not expect to grow its assets in the next five years.
Moynihan, 51, who took over as CEO from Lewis in January 2010, has had a tough time convincing investors that he has a plan to restore the bank to consistent profitability.
Bank of America projects results from most of its business divisions will return to normal in 2012 and 2013.
But Polley called that a pipe dream and said the economy must first improve.
Overall, Bank of America expects to generate up to $30 billion in excess capital by 2013 and 2014. Moynihan said the additional capital would be returned to shareholders through share buybacks and special cash dividends, in addition to the planned increases in the quarterly dividend.
Moynihan said the bank's efficiency ratio -- expenses relative to operating revenue -- was too high. The ratio stood at 62 percent in 2010. Long term, he said he hoped to get it down to 55 percent or lower.
The CEO spoke to an audience of about 300 investors and analysts in the Plaza Hotel ballroom. Applause was muted when he took the stage but heartier by the end of the investor day.
(Reporting by Joe Rauch; writing by Clare Baldwin and Dan Wilchins; Editing by John Wallace, Bernard Orr and Ted Kerr)
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