Bank of America’s investor day: quite a stretch
Rupak Ghose
Having attended hundreds of investor days over the years, I am used to listening to management teams talk about how unique their franchise is, how they have won market share, that this is all sustainable and there are big opportunities out there.
Bank of America may have gone 14 years without having an investor day, but it knew the form.
Beyond the corporate speak and the expected references to top three market shares, cross-selling and – of course – GenAI adoption, there were some interesting new disclosures and details of where those running BofA’s investment bank plan to focus.
In the global markets business – which has been through a notable turnaround in recent years – BofA is looking to increase revenues to US$27bn, pretax margins to 40% and returns on capital to 15% over the medium term (from US$22bn of revenues, 36% pretax margins and 12.4% returns on capital in 2024). In global corporate and investment banking, the medium-term target is a mid-single-digit revenue growth with at least 50bp–100bp of market share gains.
There were five specific areas that stood out to me as key to the execution of this strategy.
First, expanding BofA’s buyside footprint. New co-president Jim DeMare highlighted that market share gains in the global markets business have been bigger with institutional buyside clients than with corporate clients in recent years, and that the trend will continue.
He noted that since 2019, the bank’s FICC and equities institutional wallet share had grown by 230bp and 290bp, respectively – ahead of a 50bp growth in corporate wallet share.
The medium-term target for the global markets business is underpinned by a target of US$3bn of additional revenues from institutional clients. Key areas of upside include EMEA and Asia Pacific equities and EMEA macro trading. The challenge for BofA is that, while its US equities business has the natural advantage of flows from the huge Merrill Lynch wealth management operation, that is not the case elsewhere.
Second, like JP Morgan and Citigroup, BofA generates a lot of deals and trading flow from its corporate banking relationships. It may be growing slower than the global markets business, but it is still crucial to the overall growth story.
Some 40% of BofA’s corporate clients hedge foreign exchange and interest rate exposure or trade other products through its global markets business. DeMare is targeting adding US$1bn of revenues from corporate clients, and I assume this crosses over with the EMEA macro trading plans. But large European banks with resurgent revenues and share prices are unlikely to be retreating anytime soon. They will defend their home turf.
BofA’s investment banking market share overall is just over 6% but with corporate clients it is in second place with a 9.3% market share. It has set a medium-term target of more cross-selling to take this to 12%–14%.
Third, BofA’s deals strength is focused on DCM and its ambitions of being in the top three in global M&A or ECM on a consistent basis is a tall order.
BofA highlighted its US activism and defence advisory franchise, recent strength in mega cap deals and leadership on the financing side of M&A transactions. But with a weaker presence in technology dealmaking than the likes of Morgan Stanley, and its IPO market share materially lagging that in follow-on equity issuance and convertibles, it feels like achieving top three consistently in ECM and M&A is very much a stretch target.
Fourth is US middle-markets investment banking. Matthew Koder, the president of global corporate and investment banking, provided some interesting statistics. He estimates that this area is around 20% and 35% of the global and US investment banking fee pool, respectively. This is much more than I had expected. Since 2019, BofA has almost doubled its number of US middle-market investment banking clients and increased its market share by 87bp to 6.8%, giving it a number three position.
Finally, lending within the markets business has been a key growth area but also raises questions around potential risks, whether in the form of an Archegos-type blowup or something going horribly wrong in the private credit world.
DeMare gave granular disclosure. Since 2019, the bank’s lending to the non-depository financial institutions segment has grown at a 17% CAGR to US$176bn. He believes this growth has been in line with peers.
The growth of hedge fund financing has been a big theme across Wall Street banks, but BofA’s mix is slightly different to the likes of Goldman Sachs and Morgan Stanley. Only 17% of this US$176bn of global markets lending came from traditional prime financing in areas like public equities, with 31% from consumer credit secured by auto loans, 30% from corporate loans including private credit and another 22% from lending secured on residential mortgages.
DeMare was keen to highlight how low risk he thought this loan portfolio was. It is highly diversified with no single exposure being more than 1% of the loan book. There is also a predominance of senior or secured loans to prime customers and a track record of very low losses.
The investor day gave some additional details of BofA’s recent successes and opportunities. It was a decent story. It can certainly hold its own in debt markets. But in other areas, notably ECM, M&A and the trading businesses, it has a long way to go before being considered in the same league as JP Morgan or Goldman. If the ambitions set out by DeMare and Koder are achieved, it will be getting there. But that’s an almighty “if”.
Rupak Ghose is a corporate adviser and former financials research analyst. Read his Substack blog here