Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long Ideas

Bank of America and the Uncertain Future of Consumer Banking

The uncertain future of Bank of America (NYSE: BAC) is threatened by the changing nature of consumer banking. The biggest menace to BOA’s survival is technological progress and recent advances that call its whole business model into question.

Two recent developments poise a direct threat to traditional banks like BAC. The first is Marcus, Goldman Sachs’ (NYSE: GS) artificial intelligence driven online platform. Unlike earlier efforts such as Lending Club, Marcus is backed by a major investment bank and its’ lending decisions have no human involvement.

Instead Marcus’s algorithms decide whether to issue a consumer a debt consolidation loan directly. The platform can make almost instant loan decisions and it is a direct entrance into BOA’s bread and butter business: consumer lending.

Another threat is JPMorgan Chase’s (NYSE: JPM) Contract Intelligence or COIN. Bloomberg reported that COIN has been able to replace 360,000 work hours done by lawyers on commercial lending documents. That makes Chase more efficient and competitive with Bank of America.

Not be outdone BOA plans to add an AI chatbot called Erica to its app in an attempt to help customers make loan decisions, CNBC reported. Erica is apparently designed to sell products to customers through its advice.

Another threat comes from Wells Fargo (NYSE: WFC) which has created an artificial intelligence solutions team headed by Steve Ellis, The Charlotte Business Journal reported. The team is designed to counter Goldman Sachs which has hired 9,000 computer engineers to transform itself into a tech platform similar to Alphabet (NASDAQ: GOOG).

The Problem at Bank of America

Such technological competition is a major threat to BOA which has been struggling to main its revenues. Those revenues fell by $2 billion during 2016, dropping from $83.53 billion in December 2015 to $81.53 billion a year later.

Despite that Bank of America has seen its income grow over significantly indicating a very profitable business model. The net income has grown from $5.52 billion in December 2014 to $16.19 billion in December 2015 to $16.56 billion in December 2016. That gave BOA a profit margin of 23.49% despite a free cash flow of -$8.356 billion.

More importantly Bank of America has the resources to take advantage of next generation technologies. It reported $157.60 billion in cash and short-term investments, $32.98 billion in cash from financing and $18.31 billion in cash from operations on December 31, 2016. Although the bank has less float than last year; it reported $167.1 billion in cash and short term investments at the end of 2015.

This gave Bank of America $2.188 trillion in assets with $1.92 trillion in liabilities. That makes BOA a pretty good value investment and a tech investment because it is making some moves into banking futures.

Bank of America’s Bright Future

BOA is taking an important step into banking’s future by opening new branches that have no employees. That extends the customer service capabilities while reducing expenses.

The bank plans to build 50 to 60 of the branches where customers will communicate with employees via video conferencing and bank via ATMs, Fox Business reported. Another money saving feature is that the new branches will be one third the size of older banks which saves on real estate costs.

To make way for the next generation banks, BOA plans to close 50 to 60 existing branches to reduce employment costs. Whether customers will accept the arrangement remains to be seen but it is an interesting experiment.

B of A is Still a Value Investment

This makes B of A a value investment as well as a gamble on the future of consumer banking. BOA, currently offers shareholders a dividend of 7.5¢ a share which was paid on March 1, 2017 and a return on equity of 6.9% on December 31, 2016.

A more important number here is the share price, Bank of America was trading at $25.34 a share on March 10, 2017. That makes it a true value and shows us why Buffett likes it.

If you’re looking for a low cost investment in finance’s future that has few risks, BOA would be a good choice. It might have a bright future despite the revenue losses.

Disclosure: Please be advised that your friendly neighborhood blogger owns a few shares of BAC.