Bank of America’s Wealth Management Revenues Likely To Stagnate Over The Next Three Years?

by Trefis Team
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Since the economic downturn, Bank of America (NYSE:BAC) has transformed itself from a traditional loans-and-deposits bank mainly relying on consumer banking to a balanced bank with a sizable wealth management and investment banking business. Trefis has analyzed trends in Bank of America’s Wealth Management business since 2006 in an interactive dashboard, along with our expectations over the next three years. While wealth management will remain the second-largest operating division for the U.S. banking giants over the foreseeable future, we expect industry headwinds to weigh on wealth management revenues over the next three years.

Trefis estimates Bank of America’s valuation to be $33 per share, which is 10% higher than the current market price, and incorporates changes to our forecast following Bank of America’s earnings release earlier this month. Additionally, you can see more Trefis data for financial services companies here.

How Have Bank of America’s Revenues Changed Over The Last Decade And What’s The Forecast?

  • Consumer banking is the single largest contributor to Bank of America’s top line, and has dominated its revenue charts over the last decade (2009-18). The average revenue share of consumer banking was 42 % over this period.
  • Securities trading revenues have consistently decreased over the last decade as the bank reduced its reliance on this segment and shifted its focus towards Wealth Management to drive growth.
  • Bank of America’s Wealth Management revenues have almost tripled since 2006 thanks to the bank’s acquisition of Merrill Lynch at the peak of the downturn. This helped the division’s revenue share jump from 10% in 2006 to over 21% in 2018.
  • We expect Bank of America’s total revenues to grow at an average annual rate of 1.6% and cross $95 billion by 2021.

How Has Bank of America’s Wealth Management Fee Evolved Over The Last Decade and What’s The Forecast?

  • Fee income from wealth management has increased from below $4 billion in 2006 to $13 billion in 2018. However, it is expected to remain largely level over coming years due to a decline in fees %.
  • Fees as a % of client assets nudged higher over 2006-15 and averaged around 0.51%. However, increased competition in the global wealth management industry weighed on fees as a % of client assets, with the figure shrinking from 0.54% in 2015 to 0.48% in 2017.
  • The figure jumped to 0.53% in 2018 due to the slump in asset valuation in December 2018, and Trefis expects the figure to normalize to 0.47% in 2019 before declining gradually to 0.45% by 2021.

How Has Net Interest Income From Wealth Management Changed and What’s The Forecast?

  • Net Interest Income decreased from $6 billion in 2009 to $5.5 billion in 2015, before increasing to $6.3 billion in 2018. It was mainly driven by a drop in net interest yield, partially offset by growth in wealth management loans over 2009-2015. Further, we expect it to cross $6.7 billion by 2021.
  • Net Interest Yield has decreased for most of the last decade due to the impact of the prolonged low interest-rate environment between 2009 and 2015. While interest rates have improved over the last few years, stiff competition in the wealth management industry has kept the yield figure low.
  • Notably, average wealth management loans have grown by 65% over the last decade and are expected to reach $175 billion in the next three years.

Overall, wealth management revenues have grown with an average annual rate of 2% over the last decade, from $16.1 billion in 2009 to $19.3 billion in 2018. However, we expect it to decline slightly over coming years.

How Does Bank of America’s Wealth Management Business Compare With its Peers?

  • The five largest banks in the world in terms of their wealth management operations are UBS, Bank of America, Morgan Stanley, Credit Suisse and JPMorgan (in decreasing order of client assets)
  • Focusing on the three largest U.S. wealth managers, Morgan Stanley is the one with most dependence on wealth management segment (43% of total revenues in 2018), followed by Bank of America (21% of total revenues in 2018) and JPMorgan (13% of total revenues in 2018).
  • Although Morgan Stanley grew with a CAGR of 7% over the last decade (highest among its peers), Bank of America topped the revenue chart with average annual revenue of 17.5 billion.
  • Further, Bank of America fared better than its peers in terms of wealth management fees, with an average annual figure of $11.6 billion. However, it was JPMorgan which grew this revenue component the fastest with a CAGR of 5.8% over the 10-year period 2009-18.
  • Notably, Morgan Stanley has seen a 6.5x increase in net interest income over the last decade, which is the highest among its peers, and can be attributed to its focus on increasing traditional banking services to wealth management clients.
  • Also, Bank of America recorded the highest average net interest income of $5.9 billion over the same period.

Per Trefis, Bank of America’s Revenues (shows key revenue components) for full-year 2019 are expected to cross $92 billion – leading to an EPS figure of $2.85. This EPS coupled with a P/E multiple of 11.7x, works out to a price estimate of $33 for Bank of America’s stock (shows cash and valuation analysis), which is 20% above the current market price.

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