Bank of America

The Bank of America Corporation (BofA or BoA) is an American global investment bank
and financial services holding company with it’s main base of operations in Charlotte, North
Carolina. The bank was established in San Francisco and acquired by NationsBank of
Charlotte in 1998, when it took on its present incarnation. Behind JPMorgan Chase, it is the
second-largest bank in the United States of America and the eighth largest bank across the
globe. It is a part of the 'Big Four' - a quadrumvirate of the largest banking institutions in the
United States. It is responsible for servicing 10.73% of American bank deposits, in cutthroat
competition with Citigroup, JP Morgan Chase, and Wells Fargo.
In 175 countries, it serves individuals, small and medium businesses, and global corporations.
The bank’s product and service segments include banking, investment, asset management,
and risk management. BOA serves 59 million customers in the United States alone through
6000 retail banking branches, 18000 ATMs, and online banking. It had $ 1.7 trillion in total
consolidated assets, $785 million in deposits, $ 163 billion in stockholders' equity as of June
30, 2008, and a market capitalisation fluctuating at around $180 billion.
From 2003 to 2006, Bank of America's business and financial performance was excellent,
with interest income growing at 19% compounded annual growth rate (CAGR), non-interest
income rising at a 27.6% (CAGR), and net income more than doubling. Loans and leases
dispersed climbed at 22.3% *CAGR during the same time period, while deposits grew at 18.3
percent.
This sound corporate performance was aided by the Federal Reserve's low interest rate policy
from 2001 to 2004, when the interest rate was slashed from 6% to 0.75 percent in December
2002. After the Dot-com bubble burst, the Federal Reserve was keen to boost economic
development by encouraging Americans to lend more.
There was a long period of time where interest rates were constant until they were gradually
increased from June 2004 to June 2007. The increase in interest rates caused a spike in the
floating rate of mortgages; at the time, many Americans weren't in a financial position to
service their mortgages, especially the subprime market and Adjustable-Rate Mortgages
(ARMs).
The prior lenient lending standards resulted in a significant number of non - performing loans
and home-borrowers defaulting, depressing home prices across the country. The high level of
non-performing loans and home foreclosures hit all savings and loans, banks, and financial
institutions with mortgage exposure, including investment banks that securitize mortgages
into MBSs.
Notwithstanding the problems in the housing and mortgage industries, Bank of America
acquired Countrywide Financial for a sum of $2.5 billion. Countrywide was the largest
mortgage broker in the United States. In 2007, it had $408 billion in loan originations and a
$1.5 trillion service portfolio with 9 million mortgages. BoA contended that acquiring
Countrywide would cement their position as the nation's leading consumer lender. Due to the
downturn of the housing market and the exponential rise of NPLs, Bank of America's net
income decreased 29% y-o-y in 2007 due to an increase in provisions paired with a fall in
interest and non-interest revenue.
 Net income fell 58% in the first half of 2008 compared to the first half of 2007, attributable
to a tripling of the allowance for credit losses and a fall in non-interest income (Figure 1).

Figure 1: Bank of America Income Statement and Financial Ratios 2003 - mid 2008

Meanwhile, non-performing assets quadrupled during the first and second halves of 2007 and
2008, going up from 0.32% to 1.13% (Figure 2). BoA’s market capitalisation dropped
precipitously from $217 billion in mid-2007 to $106 billion in mid-2008. The return on
average assets for the bank declined from 1.44% to 0.53% within the same timeframe. A
similar trend can be observed in the case of the earnings per share and return on average
common stockholders’ equity from $2.47 to $0.96 for the former and a fall from $16.86
million to $6.06 million for the latter.
The slowdown of Bank of America's operational processes was also reflected in the stock
price traded on the NYSE; after rising from $ 40/share to $ 55/share between January 2004
and late 2006, the stock price of BoA recorded a decline to $ 18/share. In September 2008, it
ranged between $25 and $40 per share.
Bank of America’s long-term debt holdings shot up by 31% within the course of a year from
the 30th of June. The proportion of non-performing loans of the total loans and leases more
than tripled from 0.30% to 1.06% by mid-2008. Allowances for credit losses were nearly
doubled due to the increasing number of credit defaults, putting greater stress on the financial
performance of the corporation.