Bank of America Looks to a 1950s Strategy for Growth

Shortly after Brian Moynihan took the helm of Bank of America (BofA) at the start of 2010, the giant lender suffered successive waves of huge, potentially fatal losses on its stricken mortgage portfolio. From the start, Moynihan championed a highly conservative strategy of growing with the bank’s current customers instead of courting risky new ones. The idea was to attract more business from the folks who already banked mainly with BofA, and let go of the customers who got their mortgage, and deposited their paychecks, at the cross-town competitor. If revenues grew with the overall economy, costs remained flat, and BofA avoided the steep credit losses that plagued it in the past––specifically by sticking with those reliable customers, Moynihan claimed, it could become a money machine.

Essentially, he advocated a return the 1950s style, bedrock banking that had been highly successful prior to the financial crisis, and he said, could rise again. Judging from the third quarter results that Moynihan announced on October 13, what he calls “responsible growth” is finally succeeding, and could be on the cusp of succeeding in a spectacular fashion. Here are key takeaways from the financials and earnings call.

Moynihan has shown that he is a demon on expenses. He has shrunk the branch network, lowered headcount, and promoted digital banking that has radically lowered the cost of everyday transactions. For example, from Q3 2016 to Q3 2017, total expenses dropped by 2.2% to $13.1 billion. Revenues rose just 1% because of a decline in trading, but because costs fell and expense for bad loans improved, BofA’s net income jumped 12%. That combination of moderate revenue growth, few bad loans, and falling costs provides what Moynihan most prizes, “operating leverage” that propels earnings far faster than revenues.

BofA’s biggest business is consumer banking, comprising its branch network and credit card franchise. Its principal strength is its gigantic, low cost base of deposits, cash primarily sitting in checking accounts. On average, BofA pays just 0.04% on each dollar of those funds; it is those “sticky,” incredibly cheap balances that attract its biggest shareholder: Warren Buffett’s Berkshire Hathaway. Both the deposit base and the loan portfolio are now growing briskly, generating big operating leverage. In the third quarter, revenues showed year over year growth of 9.2%, and costs dropped 2%, driving pre-tax income almost 14% higher.

Rising interest rates are poised to swell the consumer bank’s profits. BofA reckons that every 1 point increase in short-term rates drives an extra $3.2 billion in pre-tax income. So revenues should keep growing, and operating leverage should continue to get stronger as Moynihan fulfills his pledge to drive down costs well into next year. He plans to hold the expense line steady thereafter as loans and interest income keep growing.

For the first three quarters of 2017, BofA earned $15.7 billion. On an annualized basis, that $21billion is getting close to the performance that Moynihan predicted in 2011—albeit many years late. But BofA is still trailing its two main rivals, Wells Fargo and JP Morgan Chase. Despite a downtick in Q3, Wells’ quarterly earnings have outpaced BofA’s. And for the first nine months of the year, JP Morgan booked net profits of $20.3 billion, 29% more than BofA. Hence, BofA still has plenty of catching up to do. However, what is impressive is how far the bank has already come, and the potential of deploying an incredibly low cost deposit base––think of manufacturer with minimal cost-of-goods-sold––in a time of rising loans and rates.

In fact, BofA recently reached a milestone even its most loyal supporters could not have predicted. Its $271 billion market cap narrowly exceeds that of Wells Fargo, which held a seemingly insurmountable lead just eighteen months ago. Wells championed a go-go sales strategy that backfired. Meanwhile, BofA just kept plodding. Moynihan is proving that building an old-fashioned plodder––updated for the digital age––might just be the way to go.


  1. Fortune
  2. – The Motley Fool

Egg Wars: A Glut of Cheap Eggs is Hurting the Cage-Free Movement

One of the most dramatic changes in the American food production system is now underway in the egg industry. Significant numbers of big restaurants and grocers have committed to using cage-free eggs exclusively, setting up the industry for a broad transformation. The problem, critics say, is that while the industry is preparing to flood the market with cage-free product, what consumers still overwhelmingly choose to buy are the cheaper, battery-farmed options. Farmers stepped up to provide cage-free products, but buyers have not materialized in the anticipated numbers—or anything close.

“It’s been bad,” said Marcus Rust, chief executive officer of Seymour, Indiana-based Rose Acre Farms Inc., the second-largest U.S. egg producer. The company spent $250 million over four years to upgrade conditions; today about 20% of its hens are cage free. And now, Rust said, “we are shutting our construction program down.” The whole industry is slowly climbing out of a period of losses, which sets up a sort of chicken-and-egg predicament. Many farmers are too strapped at the moment to build facilities they may need in a few years, when—some skeptics say if—big buyers make good on their cage-free promises. “Few are in a hurry to make the transition,” said Jesse Laflamme, CEO of Pete and Gerry’s Organics in Monroe, New Hampshire. Farmers are not sure which way to turn or how fast. “It’s going to be turbulent.”

The cage-free revolution looked big not long ago. Eggs from hens that are not so cooped up taste better by some accounts. They are also a salve for shoppers interested in more-humane treatment of the animals that stock supermarkets. A cage-free bird is not exactly allowed to run wild in the open but does get more room. At Rose Acre, she has 144 square inches of space, while a squeezed sister in a traditional setting is confined to 67 square inches. Consumer sentiment seemed clear.

Then came the glut, and now the regular variety is too cheap for many to resist. A dozen cage-free large brown eggs cost as much as $2.99 in the Midwest last week, for example, while a carton of Grade AA white conventional eggs went for as little as 39 cents, according to the U.S. Department of Agriculture. That “higher-price gap,” as Cal-Maine Foods Inc. CEO Dolph Baker called it, has cut into specialty-egg demand. The company, the largest U.S. egg producer, said earlier this month it is adjusting its cage-free output accordingly.

The egg oversupply built up after the 2015 avian-flu outbreak killed tens of millions of chickens, sent prices soaring and spurred aggressive restocking. At the same time, some producers started expanding hens’ living quarters. A California law that year required eggs sold in the state to be laid by chickens whose confinement allows them to lie down, stand up, extend their limbs and turn around. McDonald’s and Wal-Mart said they’d aim to make the cage-free shift by 2025. Others in the business of acquiring wholesale eggs set similar goals.

Some pledgers, such as food-service providers Sodexo Inc. and Aramark, are well along the way to completely converting to cage-free for eggs in shells in the U.S., according to the advocacy group Compassion in World Farming. It said in a recent report that others, including Marriott International Inc. and Walt Disney Co., have not made public how they are progressing. McDonald’s, which buys around 2 billion eggs every year in the U.S., is on track to meet its 2025 mark, the company said. Eggs purchased in the U.S. by Disney’s parks, resorts and cruise line are cage-free, the company said. Wal-Mart and Marriott have not commented on their progress.

The cage-free population may continue topping demand through at least 2020, according to government and industry estimates. By 2026, the U.S. would need some 223 million cage-free hens to meet all the commitments, up from less than 50 million now. The cost to get there could be more than $4 billion, said Sam Kaufman, director of pre-construction services for Summit Livestock Facilities, which built some of Rose Acre’s bigger barns. The producer, which started turning a profit in September after 15 months in the red, is finishing work on these types of barns in Indiana and Arizona and mothballing another Arizona project, Rust, the CEO, said. Then it will wait, for as long as it takes. “We are going to be in a holding mode until retail pays a warranted price.”


  1. – Bloomberg
  2. –

The Good News Is . . .

Good News

  • The Commerce Department said retail sales rose 1.6% percent in September. It was the biggest increase in 2 ½ years. Vehicle sales, reflecting replacement demand following Hurricanes Harvey and Irma, surged 3.6%. Gasoline sales, up 5.8%, were also a factor, reflecting the spike in pump prices following Harvey. Even after stripping out autos and gas, retail sales still managed a very strong 0.5% gain. Restaurants were a key positive segment, jumping 0.8% in the month to reverse a run of weakness in prior months. Two possible hurricane-related gains are grocery stores, up 1.0% in the month, and building materials which spiked 2.1%.
  • Domino’s Pizza, Inc., a leading global pizza delivery franchise company, reported earnings of $1.27 per share, an increase of 32.3% over year-earlier earnings of $0.96 per share. The firm’s earnings topped the consensus estimate of analysts by $0.04. The company reported revenues of $643.4 million, an increase of 13.6%. Management attributed the results to strong same-store sales growth, both domestically and internationally.
  • The German chemical giant Bayer said that it had agreed to sell parts of its crop science business to BASF for $7 billion. The deal comes as Bayer looks to pave the way for regulatory approval of its $56 billion purchase of its American rival Monsanto, which it lined up last year. BASF is using the opportunity to acquire highly attractive assets in key row crops and markets, according to Kurt Bock, the company’s chairman. The acquisition should be a strategic complement to BASF’s well-established and successful crop protection business as well as its activities in biotechnology. The Bayer-Monsanto combination continues the trend of rapid consolidation in the seed and agrochemical sector.


  1. – Bloomberg
  2. – CNBC
  3. – Domino’s Pizza Inc.
  4. – New York Times Dealbook

Planning Tips

Guide to “Safe Havens” for Cash

Whenever the stock market gets rattled, panicky investors flee to the relatively greener pastures of fixed-income investments. Not only are returns relatively predictable, but some of these securities have tax advantages, and they usually are less risky than stocks. The trade-off, of course, is that in lowering risk exposure, investors are likely to see lower returns over the long run. That may be fine if your goal is to preserve capital and maintain a steady flow of interest income. Be sure to consult with your financial advisor to determine which investments are most suitable for your situation.

Certificates of deposit – Certificates of deposit, or CDs, are federally insured time deposits with specific maturity dates that can range from several weeks to several years. Because these are “time deposits,” you cannot withdraw the money for a specified period of time without penalty. The financial institution pays you interest at regular intervals. Once the CD matures, you get your original principal back plus any accrued interest. CDs are considered safe investments. However, they do carry reinvestment risk — the risk that when interest rates fall, investors will earn less when they reinvest principal and interest in new CDs with lower rates. CDs are not as liquid as savings accounts or money market accounts because you tie up your money until the CD reaches maturity—often for months or years. It is possible to get at your money sooner, but generally you’ll pay a penalty.

T-bills, Treasury notes, Treasury bonds – Treasury bills, or T-bills, are short-term debt instruments the U.S. government issues to raise money to pay for projects and pay its debts. Maturities of T-bills range from a few days to 52 weeks. T-bills technically are not interest-bearing. They are sold at a discount from their face value, but when they mature, the government pays you full face value. Treasury securities are considered virtually risk-free because they are backed by the full faith and credit of the U.S. government. However, the value of securities fluctuates, depending on whether interest rates are up or down. In a rising rate environment, existing bonds lose their allure because investors can get a higher return from newly issued bonds. Therefore, if you try to sell your bond before maturity, you may experience a capital loss. Treasuries also are subject to inflation pressures. If the interest rate of the security is not as high as inflation, investors lose purchasing power. Because they mature quickly, the risk of holding T-bills is not as great as with longer-term T-notes or Treasury bonds. Treasury notes, or T-notes, are issued in terms of two, three, five, seven and 10 years and pay interest every six months until they mature. Treasury bonds are issued with 30-year maturities and pay interest every six months. They are sold at auction four times a year: in February, May, August and November.

Government bond funds – Government bond funds are mutual funds that invest in debt securities issued by the U.S. government and its agencies. The funds invest in debt instruments such as T-bills, T-notes, T-bonds and mortgage-backed securities issued by government-sponsored enterprises such as Fannie Mae and Freddie Mac. Funds that invest in government debt instruments are considered to be among the safest investments because the securities are backed by the faith and credit of the U.S. government. However, like other mutual funds, the fund itself is not government-backed and is subject to risks — namely interest rate fluctuations and inflation. If interest rates rise, bond prices decline, and if interest rates decline, bond prices rise. Interest rate risk is greater for long-term bonds.

Municipal bond funds – Municipal bond funds invest in a number of different municipal bonds, or munis, issued by state and local governments. Earned interest generally is free of federal income taxes and also may be exempt from state and local taxes. Individual bonds carry the risk of default, meaning the issuer becomes unable to make further income or principal payments. Cities and states don’t go bankrupt often, but it can happen. Bonds also may be callable, meaning the issuer returns principal and retires the bond before the bond’s maturity date. This results in a loss of future interest payments to the investor.

Short-term corporate bond funds – Short-term corporate bond funds invest in bonds that corporations issue. Short-term bonds have an average maturity of one to five years. As is the case with other bond funds, short-term corporate bond funds are not FDIC-insured. Investment-grade short-term bond funds can reward investors with higher returns than municipal bonds or Treasuries. But along with the greater reward comes greater risk. There is always the chance that companies will have their credit rating downgraded or run into financial trouble and default on the bonds.


  1. – Investopedia
  2. –
  3. – Bankrate
  4. – Wall Street Journal
  5. – Forbes