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Bank of America is an international bank which has branches in America and other parts of the world such as Canada, Middle East, Europe, Asia, Africa and Latin America. This bank has more than 18,000 ATMs with its users totaling nearly to 30million. Bank of America has more than 5,900 retail banking offices serving about 58 million customers. It is headquartered in Charlotte, N.C. Bank of America. Offers range of banking and non banking financial services and products. These include deposits, global card services, home loans & insurance, global banking, global markets and global wealth & investment management. Brian T. Moynihan is the President and Chief Executive Officer to this Bank. (Bank of America 2010)
Income and expenses
Income to Bank of America is usually derived from card service, service charges, investment and brokerage services, equity investment income, mortgage banking income, insurance income, and gains on sales of debt securities. The bank expenses includes payment to personnel, occupancy, equipment, marketing, professional fees, amortization of intangibles, data processing , telecommunications, mergers and restructuring charges, and other general operating charges. The noninterest expenses (before merger and restructuring charges ($ million)) were 66,992, 40,594, 37114, 34,988 and 28,269, 2009, 2008, 2007, 2006, 2005 respectively. Net income was (in $ million) 6,276, 4,008, 14, 982, 21,111, 16447 in 2009, 2008 and 2007, 2006, and 2005 respectively. In 2009 this bank reported a net income of $6.3 billion. This was a 50% increase as compared to that of 2008. During this year the bank faced a high credit costs which according to financial report 2009 amounted to $49 billion. The bank has also been fostering mergers and acquisition. In 2008 bank of America embarked on acquisition of Merrill Lynch of which according to annual report 2009 Merrill Lynch transition is progressing on schedule and under budget. As per above figures, macroeconomic policies attributed to changes in bank income includes the fiscal and monetary policies. Increase in income in 2009 can be attributed to expansionary fiscal and monetary policies employed by various governments in an effort to counter the financial crisis effects. Increase in government spending, and reduction in interest rates positively affect the bank income. Reduction in interest rate increase loans requests from the bank customers which is a source of its income. Increase in government spending stimulates economic growth and investments. It also increases the employment to households as well as their income. This will increase their savings with bank and consequently the banks ability to create credit. (Bank 2010; Persson 1994)
Bank of America assets include federal funds and securities borrowed or purchased under agreements to resell, trading account assets, and debt securities. It liabilities includes deposits, share holder equities, federal funds purchased and securities loaned or sold under agreements to repurchase, trading account liabilities, commercial papers, other short term borrowings, and long term debts. Bank of America assets were (millions at the year end) $1,291,803, $1,459, 737, $1,715,746, $1, 817,973, $2,223,299 in 2005, 2006, 2007, 2008, and 2009 respectively. This shows that the bank assets have been increasing. Total liabilities in 2009 and 2008 were (in million average balance) $2,437,517 and $ 1,843,979. Total deposits were (millions at the year end) $805,177, $882,997, and $991,611 in 2007, 2008, and 2009 respectively. The deposit with the bank has also been increasing since 2007 to date. Total loans and leases were ($ millions at the year end) 876,344, $931, 446, and $900,128 in 2007, 2008 and 2009 respectively. This shows that the bank ability to offer loans has been increasing since 2007. Its lending has also been increasing. Monetary policies such as open market operations greatly influence bank’s federal funds and securities borrowed or purchased under agreements to resell (asset) and federal funds purchased and securities loaned or sold under agreements to repurchase (liability); which both affects its assets and liabilities. (Bank of America 2010; Scott 2007)
As defined in the annual report (2009 p 61), liquidity risk is ‘potential inability to meet contractual and contingent financial obligations, on or off-balance sheet, as they come due’.
Risks to Bank of America can be categorized into credit, market, liquidity compliance and operational ones. This bank faces and responds to risks associated with competitive environment, customer preferences, business cycles, product obsolescence, business strategy execution, regulatory environment and other reputation risks. High strategic risks are high due to changing regulatory and customer environments. Social instability and currency fluctuations also are source of risk to this bank. Part of these risks is associated with fiscal and monetary policies. Increase in prices may force the government to increase interest rates in an effort to ensure prices are checked. Such practices will increase cost of borrowing and investors will shy away from borrowing from Bank of America and other banks. Low interest rates also discourage savings since the returns are low. This will also affect the bank’s ability to create credit. This bank has been in an effort to minimize its risks following the recent economic crisis. It has been modifying most of its loans so as to match the growing needs of their customers. The bank has also started focusing on small and medium-sized businesses. According to financial report 2009, the bank lent total of $16 billion to these businesses and intend to increase this lending this year by $5 billion. The bank also oversaw modification of 60,000 small business card loans. This allows renegotiation of loans and reduces number of defaulted loans. This strategy has made the targeted customers become loyal advocates for the bank. Bank of America has also made investments to boost its income. Additionally, this bank has a strong experienced leadership, from the board members to the employees. Many board members have vast knowledge as far as economic environment, banking sectors, market environment and financial matters are concerned. This ensures that decisions made by the top management are more informed, strategic and minimize risks involved in banking business. (Bank of America 2010; Taylor 1999)
The Bank of America board and management is the regulatory body to all branches in overseas. It is the one that approves all policies that governs the operations of these branches. Branch management has to adhere to these plans and seek the best way to implement them (Bank of America 2010.)
6. Share price
The market price (closing) for bank of America share was (in $) 15.06, 14.08 and 41.26, 53.39, 46.15 in 2009, 2008, and 2007, 2006 and 2005 respectively. The book value for was 21.48, 27.77, 32.09, 29.70 and 25.32 in 2009, 2008 and 2007, 2006 and 2005 in that order. Reduction in share price as from 2005 can be associated with financial crisis and economic downturns whose effects were great during 2006, 2007, 2008 and 2009 and affected the share price of Bank of America. Policies to increase investors’ confidence such as increase in demand through government spending increases banks loans to investors, its profits and consequently its share price.
Sources of funds
Sources of fund to bank of America are from equity share, deposits, income from investment, issue of commercial papers, short term borrowings and borrowings from the federal reserves and so on. Monetary policies such as discount rates by federal government, the open market operations, the fiscal policies which increase households’ income and ability of the public sector to invest in bank’s equity greatly influences Bank of America sources of fund.(bank of America 2010; Persson 1994)
Management of Bank of America has a role to establish and maintain enough internal control as far as the reporting is concerned. These banks also follows accounting standards set by accounting bodies such as FASB-GAAP and the international accounting board(IAS)-IFRS.(ban of America 2010)
9. Moral hazards created
Bank of America is accused of limiting its employment to minority. It is also accused of discriminating against low net worth clients. It is also accused of hiking interests’ rate on credit card customers even without notifying the customers. This is a deceptive and unfair practice.
12. Depositor protection
As other bank, Bank of America holds compulsory deposits with federal reserves as a form of protection to depositors. It also holds reserves against the customers’ deposits. The requirement reserves and compulsory deposits policies greatly influences this.(Bank of America 2010)
The reserve policies are determined by the board based on the analysis of the potential cash flows and debt maturities. The bank also considers their funding sources as well as asset profile in setting up the reserve policy. (Bank of America 2010)
Macroeconomic policies employed by government have both negative and positive effects on Bank of America. The financial health to Bank of America has been changing due to a number of economic conditions with the recent financial crisis greatly affecting this bank.