Oligopoly brief: Bank of America
Bank of America, it appears, will be one of the few large US banks relatively unscathed by the mortgage meltdown. And that's no accident. Unlike its chief rivals, Citigroup and JPMorgan Chase, BoA has concentrated on offering fundamental retail banking more than on high-flying (and we now see, incredibly risky) finance.
A recent Forbes article ("Money For The Masses," 10/01/07) discusses the company's strategy of concentrating on capturing a every large slice of the consumer banking market and concentrating heavily on the US domestic market. As the article puts it:
Blanketing the nation, the bank has more domestic outlets (5,700) than its two largest competitors--five times as many as Citi and twice as many as JPMorgan Chase. Let those giants strive to be first in investment banking or international expansion; BoA would rather conquer Middle America. BoA gets 56% of its revenue from consumer banking, Citi and Chase more like 40%.
In fact, BoA is so solid that it s now moving back into the subprime market with a $2 billion bailout of the largest subprime lender, Countrywide. A risky move? Not according to the Forbes article:
The mortgage lender, desperate for capital, agreed to terms very favorable to BoA: For its $2 billion the bank got preferred shares convertible into common worth $2.4 billion at the time of the transaction and paying twice as much in dividends as the common. Countrywide's share price has dipped a bit since then, but BoA is still sitting on a paper profit.
While BoA is second among US banks to Citigroup in assets, it is far ahead in:
- retail deposits (be far the biggest of all (and almost five times bigger than Citigroup)
- ATMs (Twice as big as its nearest rival, and almost six times bigger than Citicorp)
- Credit card balances (#1, and 50% bigger than Citigroup)
Bank of America has evolved through a series of acquisitions, into the most widespread of US banks, with branches in 31 states The company has had success in doing what all banks claim but few succeed in, that is, selling an array of services to the same customer (mortgages, loans, credit cards, checking, savings, etc.) It has worked heavily on making its branches user-friendly, borrowing features form successful retailers for making consumers feel comfortable.
While BoA has been a serial acquirer, it may now have to depend entirely on organic growth or look abroad. That's because federal banking regulations stipulate that a bank can't go over 10% of all domestic deposits through an acquisition. As the article points out, "BoA is uncomfortably close to the 10% ceiling."
History: Bank of America has a complex history. The real foundation of the bank is a North-Carolina-based bank named NationsBank (with origins back to 1974), NationsBank grew rapidly in the 1980s and 1990s with such acquisitions as First Republic Bank (Texas), C&S/Sovran Bank (Georgia), Maryland National Bank, Bank South (Georgia), Boatmen's Bancshares (Missouri), and Barnett Bank(Florida).
In 1998, NationsBank acquired San Francisco-based Bank America (founded in 1904), and took a version of name. That bank was the result of a number of acquisitions including SeaFirstBank (Washington State), Security Pacific (California), and Continental Illinois Bank and Trust. At the time of the deal between NationsBank and BankAmerica, they were two of the largest US banks already.
After the establishment of Bank of America, r the following acquisitions took place:
- 2004, National Processing Company, A Kentucky -based company that processes MasterCard and Visa transactions ($1.4 billion)
- 2004, FleetBoston Financial, New England's largest bank, itself the result of the consolidation of several big banks ($47 billion)
- 2005, MBNA, the leading issuers of credit cards in the US ($35 billion)
- 2006, The United States Trust Company, which manages money for mutual funds. ($3.3 billion)
- 2007, LaSalle Bank, the North American divisions of Dutch bank ABN Amro, and a major Chicago-based bank ($21 billion)
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