Early on, the managers of legacy FleetBoston Financial recognized that Brian Moynihan was special. He was put into a fast tracking managerial system allowing him to head a series of that bank's major divisions. This continued after Bank of America bought Fleet in 2004. The result is that Mr. Moynihan has a deep understanding of how every aspect of banking functions. He has a good sense of what works and what does not.
This knowledge, combined with a keen intellect, allowed him to achieve the almost impossible when he took over as CEO of Bank of America in 2010 in what arguably were the darkest days in the bank's almost two hundred years of existence. Moynihan's strengths were made evident in the last 5 years.
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He was successful in gradually ridding the bank of the worst of its litigation woes, albeit at a high cost. He rebuilt the company's capital. He pared down over 70 businesses and portfolios. He facilitated the bank's move into the international markets, broadening its reach, and he aided in building the company's investment-banking prowess. He is meeting with significant success in dramatically lowering the cost of running the business.
He achieved these goals despite immense pressure from numerous outside sources including numerous agencies of the United States government, states, the private sector, and the press. He also had to reshape a management team known as the "North Carolina mafia" inherited from his predecessors Hugh McColl and Ken Lewis. It is hard to imagine that any other CEO in the U.S. has ever dealt with such enormous stress from outside sources so successfully.
Based on his efforts the bank is in the strongest position that it has held in more than a decade. It has more common equity than any other company in the United States. It has more than $1.1 trillion in deposits. Through its Merrill Lynch subsidiary, the bank controls over $2.5 trillion in investment dollars.
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The bank has so much capital and liquidity that if it sold all of its assets and paid off all of it liabilities it would be left with a pile of cash.Stated differently, 100 percent of the bank's capital is backed by cash and some U.S. government guaranteed liquidity. When viewed solely from the standpoint of money, the bank is an enormous powerhouse so big and so cash rich that only a small number of companies in this country are equal to it, and a much smaller number of banks can match its condition.
Cash is more critical in a bank than it is in other companies. This is because money is the raw material that a bank uses to "manufacture" its products. If a bank has a large amount of excess liquidity, which Bank of America does, it is likely to be able to build profitable products and drive its earnings higher.
The bank is now involved in a controversial set of governance decisions. Mr. Moynihan is both CEO and chairman. The CFO has been asked to step aside. The head of human resources has been tapped to deal with the Federal Reserve's stress test. Heads of some divisions have been changed and more changes are likely. This is not bad – it's good. The bank's main challenges today are no longer associated with solving problems. Today's challenges are to build revenues. This is a different skill set and it requires a different set of managers. Mr. Moynihan is again making the right decisions to take his company to the next level.
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Brian Moynihan is the right guy — and Bank of America is the right stock.
In 2009 and late 2011, when this stock was selling in the $5 range, my view was that this was a $35 stock. It will not get there in a 12 month or even a 24-month period. It is still my view, however, that it will get there.
Outlook
Commentary by Richard X. Bove, an equity research analyst at Rafferty Capital Markets and the author of "Guardians of Prosperity: Why America Needs Big Banks" (2013).
