Bank of America Corporation is a universal bank with serious bulge bracket ambitions for its global corporate and investment banking division, which accounts for about a fifth of the group’s earnings. Ken Lewis tells Geraldine Lambe that he believes the bank will be one of the five or six “survivors” on a world scale by the end of the decade.Many believe that softly-spoken, self-effacing Ken Lewis is the man who can deliver on Bank of America Corporation’s (BAC) ambitions. BAC has already made notable market share gains across a number of debt products and is targeting improvements in equities and mergers and acquisitions.
Mr Lewis’s style may be less abrasive than that of his predecessor, Hugh McColl, but few doubt that he is a man of considerable mettle with a will of iron to match. Following the McColl years of acquisition and growth, he has taken on the job of methodically whipping the bank’s balance sheet back into shape by shrinking its loans and assets and aggressively trimming costs. He has injected new buzzwords into the company ethos: focus and discipline. “If one thing is iron-clad, it is that there will be only one culture and one set of values in the bank,” he says. “Our associates either accept that or choose to work somewhere else.”
Part of that focus means that the global corporate and investment banking (GCIB) division is targeting specific product areas. Mr Lewis says BAC is not trying to be all things to all people; under-performing or over-reaching parts of the business have been, or will be, offloaded.
Specifically, BAC has shut its European equities business and its Brazilian and Argentine investment banking operations. Japanese investment banking operations have been halved. Analysts estimate these cuts could save more than $100m annually. BAC has also exited businesses such as consumer finance, car leasing and sub-prime real estate lending. The added advantage, says Mr Lewis, is that when BAC is held up against its competitors, it is more of an “apples to apples comparison”.
He believes that the natural way to extend and deepen BAC’s franchise is to continue to build its debt capital markets business. “As we extend credit, it is logical for us to raise credit as well.” That said, in common with many other lending banks, its corporate loan book, which has been slashed from its $99bn peak to $54bn, is only open to corporates that offer a profitable relationship.
“After the NationsBank merger we realised that we had a very big presence, with major company relationships around the world. In the US, naturally, we are very strong: 92% of Fortune 500 companies say they deal with us and two thirds of them say we are their lead bank. We are focusing on that two thirds – they have the most loyal and the most multi-faceted relationship with us – and we can extend that model outside of the US.”
Profitability and efficiency are persistent themes in any discussion with Mr Lewis. BAC strictly monitors and measures all the capital allocations, revenues and resources related to each client transaction, to ensure that each business line and each deal achieves standalone profitability. “We consider the relationship and assess total profitability but we expect a deal to at least meet a hurdle rate on our cost of capital,” says Mr Lewis.
Corporate relationships
Corporate customers have had to accept this new, tougher lending regime or take their business elsewhere. If a relationship was not profitable for the bank, it approached the corporate in question to ask if it was willing to “work with BAC” to improve things. BAC says only a few notable names refused to review the situation and transferred their major lending relationship to another bank – Wal-Mart being one of them.
This careful bean-counting has paid off, Mr Lewis believes, in BAC being one of the most efficient large banks, in spite of its heavy retail infrastructure. Analyst consensus is that earnings per share will rise from $5.91 in 2002 to $6.84 this year. So why is that not more clearly reflected in its price-earnings multiple, which is 12? “I ask the shareholders that at every general meeting,” he says. “Luckily, what they focus on is the rise in our share price. Having said that, I am not happy with the multiples but I think that our performance against others will cause it to be reconsidered.”
The benefits of cutting costs and increasing productivity notwithstanding, Mr Lewis knows that he has some way to go to build up GCIB. Some analysts still question whether BAC will be able to convert its good relationship base into serious investment banking revenues. Last year, the GCIB division contributed $9bn of the bank’s $35bn revenues and Mr Lewis says that the percentage split is likely to continue along a similar line, even as he grows the division. “It will continue to be dwarfed by the huge retail organisation,” he says.
The division’s progress so far should not be underestimated, particularly in selected areas: Thomson Financial ranks it first in interest rate derivatives and number two behind JP Morgan in syndicated finance. In 2002, BAC estimated that the division captured 6.6% of US issuer investment bank fees, up from 3.9% in 1999. Bulge bracket status is not out of reach but equities and M&A still lag too far behind – although, according to Dealogic, the bank has moved from 20th to 11th in the US M&A league tables.
Lower credit risk
The division has reduced its credit risk by cutting its loans outstanding since August 2000. In the same period, its unfunded commitments have been cut to $116bn from $160bn and emerging market exposures have been reduced from $19bn in September 1998 to $8bn. “The fewer tall trees you have, the less can fall on you,” says Mr Lewis.
Mr Lewis’s goals include taking his tightly run operation to Europe and elsewhere. If BAC wants to compete consistently with the top investment banking players, it needs the same sort of global presence that they possess. But he says that is more likely to be achieved through organic growth than acquisition – and laughingly declines to comment on the rumours that BAC is eying up Barclays, whose debt-focused wholesale operation and strong retail presence would sit happily with BAC’s model.
Mr Lewis acknowledges that what the bank has been lacking in Europe is people with “credibility” in the marketplace but says that the slew of recent hirings gives it a strong foundation on which to build. In March and April, it buttressed its European DCM group with new heads of financial institution and corporate origination (Hany Kamel from Merrill Lynch and JC Perrig from CSFB, respectively), for example. “We are now getting calls from people who two years ago wouldn’t have considered us,” he says.
Wider vision
Naturally, Mr Lewis’s vision reaches beyond GCIB to encompasses the bank’s continuing efforts to bolster the retail side of the business and to build a strong asset management capability. He has implemented Six Sigma, a 1990s system to improve manufacturing processes and quality – to bring “customer metrics up”, he says – by increasing client satisfaction at the same time as reducing errors. “We do better as a company when we have quantitative goals to measure ourselves against.” BAC has worked hard to develop its debit card business, has five million customers using internet banking and two million customers using its bill-paying facility.
Asset management is seen as a key element of the bank’s strategy because of the synergies to be gained by overlaying it on BAC’s US platform. Early on in his stewardship in 2000, Mr Lewis pushed for the acquisition of the 50% of Marsico Capital Management that BAC did not already own. Further acquisitions are possibly on the cards “but not at the prices previously paid”, he says. Equally, a US purchase is more likely at the moment than one in Europe.
Mr Lewis clearly believes that BAC is beginning to take on the world-beating shape that he envisages. The traumas of the difficult Barnett Banks acquisition in 1998 and the NationsBank-BAC merger later in the same year are well behind him. “There is a three-year pattern to a post-merger organisation,” he says. “The first year is a blur, the second year is when things start to come together and by the third year you should be firing on all cylinders. We have had our years of coming together and are entirely focused now.”
Career history:
2000: chairman, president and chief executive officer, BAC
1999: president and chief operating officer of BAC
1990: president of consumer and commercial banking
1988: president of the bank’s Texas bank
1986: president of the bank’s Florida bank
1983: middle market group executive
1979: senior vice president and manager of the bank’s US Department
1977: appointed manager of NCNB’s International Banking Corporation
1969: joined NCNB (predecessor to NationsBank and Bank of America) as a credit analyst, went on to serve as a corporate banking officer and Western Area director in the US department.
