How Important Is Wealth Management For Bank of America’s Stock?

Bank of America (NYSE: BAC) is the second-largest U.S. bank after JPMorgan and offers consumer banking, credit cards, commercial banking, investment banking, sales & trading, and wealth management services. Trefis details the key components of Bank of America’s Revenues in an interactive dashboard, along with our forecast for 2019-2020. While the Wealth Management business has added $1.7 billion over the last three years (22% of the $7.6 billion added to the top line over the period), it is set to add just $100 million of the $600 million in expected revenue growth over 2019-2020. Further, this business is a key focus area for the bank and has seen sizable growth over the last 10 years from $7.8 billion in 2008 to $19.3 in 2018.

Notably, Bank of America’s Consumer Banking business is the highest contributing segment and is expected to contribute $38.2 billion (42%) to Bank of America’s 2019 revenues of $91.2 billion – which is almost twice Wealth Management’s revenues share of 21.5%. You can make changes to our forecast for individual revenue streams in the dashboard to arrive at your own forecast for Bank of America’s Revenues.

What To Expect From Bank of America’s Revenues?

• Although Bank of America’s Total Revenue has grown 9% from $83.7 billion in 2016 to $91.2 billion in 2018, we expect the growth to slow down over 2019-2020.
• The bank would add about $800 million over 2019-2020, which would be driven by gains of about $600 million from Consumer Banking, $400 million from Corporate & Commercial Banking, $100 million from Wealth Management and a reduction in losses for the All Other division by $1 billion, partially offset by $1.2 billion drop in Sales & Trading.
• Overall, total revenues are expected to cross $92 billion by 2020.

Details about how trends in Bank of America revenues compare with peers Citigroup, JPMorgan and Wells Fargo are available in our interactive dashboard.

(A) Although Wealth Management revenues have grown at an average annual rate of 5% over the last two years, we expect it to struggle over the subsequent years.

• This segment provides a variety of customized banking, investment and brokerage services to meet the needs of individuals and institutions.
• It consists of two primary businesses: Merrill Lynch Global Wealth Management (MLGWM) and Bank of America Private Bank.
• Wealth Management revenues have grown 10% over the last 2 years, from $17.6 billion in 2016 to $19.3 billion in 2018. This could be attributed to a 10% increase in fee revenue coupled with a 9% growth in net interest income.
• Although fee revenue has increased over the last two years, we expect the growth to slow down in 2019 due to lower fees as % of client balance.
• Fees as % of client balance are further expected to drop in the subsequent year and restrict the fee income to $12.9 billion in 2020.
• Net Interest Income has improved over the last 2 years due to growth in outstanding wealth management loans. However, we expect the loans to grow at a meager pace in the subsequent years, which coupled with lower net interest margins will keep the net interest income figure around $6.5 billion over 2019 and 2020.
• Overall, wealth management revenues are likely to increase from $19.3 billion in 2018 to $19.4 billion by 2020

(B) Consumer Banking Revenues are expected to add $600 million over 2019-2020.

• It consists of Deposits and Consumer Lending sub-segments and offers credit, banking, and investment products and services to consumers and small businesses.
• The segment has grown 18% over the last 2 years, from $31.7 billion in 2016 to $37.5 billion in 2018. Further, we expect consumer banking to grow 2% y-o-y in 2019, before recording a marginal decrease in the subsequent year.
• Overall, the segment revenues are expected to cross $38.1 billion by 2020 – up by $600 million from the 2018 level.

(C) Corporate & Commercial Banking Revenues are expected to add $400 million over 2019-2020

• It includes services like commercial loans, trade finance, asset-based lending, and Capital Management & Treasury Solutions among others.
• Corporate & Commercial Banking revenues have increased 8% from $15.2 billion in 2016 to $16.5 billion in 2018, and are expected to cross $16.9 billion by 2020.

Our interactive dashboard for Bank of America details what is driving changes in revenues for Bank of America’s Consumer Banking and Corporate & Commercial Banking divisions.

(D) Sales & Trading revenues have fluctuated over the last three years due to volatile market conditions. We expect it to drop by 6% in 2019 due to a weak bond market scenario.

• It offers sales and trading services to institutional clients across fixed-income, credit, currency, commodity and equity businesses.
• The segment revenues are expected to decrease 9% over 2019-2020, driven by a 6% drop in FICC (fixed income, currency, and commodity) trading coupled with a 9% decline in equity trading revenues from the exceptionally strong levels seen in 2018.
• Overall, the segment revenues are expected to reduce from $13.7 billion in 2018 to $12.5 billion by 2020 – a decrease of $1.2 billion

(E) Advisory & Underwriting revenues are very sensitive to global M&A scenario and debt capital markets. It has shown high volatility over the last three years

• It offers Financial Advisory and Debt & Equity Underwriting services.
• The segment revenues grew 16% y-o-y in 2017 due to a 33% jump in M&A advisory revenues. However, it dropped 12% in 2018 due to challenging market conditions in the second half of the year.
• Further, we expect it to increase by 3% in 2019 due to growth in M&A advisory revenues, before decreasing by 3.5% in the subsequent year.
• Overall, the segment revenues are expected to cross $5.5 billion by 2020, which is at the same level as the 2018 figure.

(F) All Other segment has negligible impact on Bank of America’s total revenues.

• This segment represents the firm’s Global Principal Investments, Corporate Investments and Strategic Investments division.
• We expect it to increase from -$1.3 billion in 2018 to -$0.4 billion by 2020.

Trefis estimates Bank of America’s stock (shows cash and valuation analysis) to have a fair value of $35, which is slightly below the current market price (Our price estimate takes into account Bank of America’s earnings release for the third quarter).

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