Bank of America Corp.'s chief executive acknowledged in perhaps the starkest terms yet that for the country's largest bank, innovation may now be less important than remediation.
As keynote speaker at a financial services investor conference it sponsored Tuesday, Chief Executive Officer Brian Moynihan portrayed Bank of America as a chastened company that had sworn off significant acquisitions — and anything else that would distract the lender from its customer-focused business lines.
"Our job as management is to take this franchise, no matter how it was built … and deliver for our customers and you the shareholders," he said.
Though Moynihan declared B of A has "the best franchise in the business" and that its new back-to-basics strategy can produce a stable return on equity in "the low teens," he spent much of the speech and subsequent question-and-answer session describing B of A's plans to extricate itself from woes related to the financial crisis and acquisitions.
Moynihan said that Bank of America would set an example for the banking industry on post-crisis adaptation: It wants to work with state and federal officials to improve its mortgage-servicing and modification efforts. It will continue shedding extraneous businesses, and is committed to improving transparency in consumer banking. And when growth returns, Moynihan pledged, the company won't get into unproductive, margin-killing wars for market share.
"I think they're trying to take the most positive stand possible," said Paul Miller, managing director of FBR Capital Markets. Moynihan "can't grow this bank anymore, and they have to change the strategic management to get away from M&A and get into running a well-oiled company. They're doing that, but it doesn't happen overnight."
As Moynihan acknowledged, improving performance in the current environment won't be easy. The Basel III capital rules will force the company to hold "excess capital" in low-yielding, liquid investments like Treasury bonds. Asked by an investor if he believed that Bank of America would be able to pass on the cost of holding that capital through price increases, Moynihan said no.
"I wouldn't hold out hopes that we can price this all through," he said, citing the competition Bank of America and its peers face from nonbank financial institutions.
But Moynihan paired bad news with an appeal to win investors back. He repeatedly stressed that Bank of America would return capital to investors in as large a quantity as possible. (Bank of America's stock has fallen 21% this year, compared with an 8% increase in the KBW Bank Index.)
"In a company like Bank of America, where we're not going to be doing any acquisitions, all that capital is going to come back to you," he said. "Anything over [regulatory capital limits], that's yours."
While Bank of America believes it's seen the worst fallout from the credit crisis, and reported improved credit metrics in the third quarter, Moynihan acknowledged that putting both foreclosures and forced mortgage repurchases behind it would take a frustratingly long time.
"We're in the fourth full year of working through this," he said, pinning the troubles all the way back to the peak of the market. "We still have a lot to do. … It will take us two-plus years to get through the aftermath."
Moynihan gave a blunt appraisal of the troubles in the servicing industry, acknowledging that the entire mortgage servicing system was under great strain.
It is Bank of America's duty to "do the best we can" to produce a better framework for modifications, he said.
"We have some ideas, the attorneys general have some ideas, and I'm sure the agencies have some ideas," he said, adding that Bank of America was open to cooperating with any entity trying to improve the process. "We've got to get those things streamlined, because there's still a lot of people going through the process every day."
Absent from the talk was the feisty tone that Bank of America took when discussing investor repurchase requests a month ago, when Moynihan described disgruntled mortgage-backed securities investors as akin to Chevy buyers complaining about not receiving sports car performance.
"At the end of the day, we'll pay for the things that Countrywide did," he said, referring to the storied and sullied mortgage lender B of A acquired two years ago.
Yet he also reiterated that Bank of America would not cave in to investor requests simply to put disputes behind it.
"We continue to believe the issue here is with us for the next couple of years, but we believe it is manageable," he said.
FBR's Miller interpreted Moynihan's comments on repurchases as walking a fine line between convincing shareholders that the suits don't pose a long-term threat to Bank of America while at the same time taking them seriously.
"They can't come out and say it, but it's going to be very difficult" for investors to win these lawsuits, said Miller, who has recently been devoting his time to studying representation and warranty issues for servicers. "It's going to be loan by loan, and those lawsuits are going to be very exhaustive for the other side."
Moynihan also took a conciliatory tone on consumer regulations. While giving a nod to industry frustrations that the rules have "changed, then changed again," he said that Bank of America was committed to the premise of making its products more transparent.
"Overall, our industry needs to become a simpler place for the broad majority of customers we serve," he said. "If not, we'll continue to have additional regulation, and more litigation, and more turbulence."
Bank of America, he said, was prepared to set an example.
"We need to be clear and more direct in our pricing to consumers. At the same time, we have to be profitable for our shareholders. We are confident customers will pay us for the value that we provide."
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