Bank of America Falls, Bank of China Rises



Bank of America Center
in Charlotte

 Bank of America, BOA or BAC, is the largest US bank with a total asset in 2010 of $2.3 trillion.  The bank, started in California more than 100 years ago, has climbed steadily riding the strong tide of American Century.  BOA today is a global financial powerhouse with business in more than 150 countries.  The bank holds close to 15% of all deposits in US that is close to $1 trillion.  Its 2008 acquisition of Merrill Lynch made BOA the world largest wealth manager and a major player in the investment banking industry.  However, the acquisition of Countrywide Financial, the country’s largest home loan lender in 2008, has brought BOA misfortunes and troubles ever since.  American’s worst mortgage disaster pushed Countrywide Financial to the brink of bankruptcy even before the merger.  Bad loans and the corresponding huge investment derivatives during the peak of the financial crisis in US almost completely destroyed Bank of America, only saved by the government bailout.

The rise of USA in the American Century had grown BOA into the 2^nd largest bank in the world (Citibank was No. 1), a position it had held many years before 2008, with a peak market value of more than $220 billion.  The fall of US economy during the 2007-2008 worst financial crisis hits banks the hardest.  BOA’s market value plunged to around $50 billion at the bottom of the crisis.  That was with the addition of both Merrill Lynch and Countrywide Financial.  Not surprisingly, it has dropped to No. 9 from No. 2 in the top bank list. 

Change in Market Value and Bank Ranking for Bank of America and Bank of China

BOA had been rising along the America rising in the last century.  It also falls along with the decline of America today.

The top 10 largest shareholders of BOA include Corporations, Hedge Funds, Banks and Mutual Funds.  All top shareholders are holding a relatively small portion of the bank, however, the combined share of top 10 largest shareholders is less than 22%.

Top Shareholders of BOA

	Holder	Shares	%
1	STATE STREET CORPORATION	422,744,582	4.21
2	VANGUARD GROUP, INC. (THE)	354,099,395	3.53
3	BlackRock Institutional Trust Company, N.A.	273,292,183	2.72
4	FMR LLC	243,472,279	2.43
5	PAULSON & COMPANY, INC.	167,794,229	1.67
6	JP MORGAN CHASE & COMPANY	158,233,124	1.58
7	PRICE (T.ROWE) ASSOCIATES INC	156,747,924	1.56
8	Capital World Investors	140,766,540	1.4
9	AXA	135,781,108	1.35
10	Bank of New York Mellon Corporation	129,353,229	1.29

Bank of China Tower
in Hong Kong

Bank of China, BOC, is the smallest of the Big Four state-owned commercial banks in China, after Industry and Commercial Bank of China - ICBC, Construction Bank of China – CBC , and Agriculture Bank of China - ABC.  BOC is the 2^nd largest lender in China overall and has operations in 27 countries, the most international business among Chinese banks, with a revenue of $40.3 billion on asset of $1.5 billion.  After its IPO in both Hong Kong Stock Exchange, H Share, and Shanghai Stock Exchange, A Share, in July 2006, BOC climbed to the No. 6 largest bank in the world (ICBC – No. 1, CBC – No. 2, ABC – No.5), a ranking it holds until today.  Obviously, the rising of Chinese banks corresponds to the rapid rise of Chinese economy.  State is the largest shareholder for BOC – 67.5%, followed by other state enterprises.  Hong Kong tycoon Li Ka-shing and two Asia banks also hold a small portion of the bank, less than 2% combined.

Top Shareholders of BOC

	Holder	Shares	%
1	SAFE Investment - A Share	171,412,138,186	67.53
2	Hong Kong Central - H Share	71,041,739,156	27.99
3	Li Ka-shing - H Share	2,566,790,989	1.01
4	Asia Development Bank - H Share	506,679,102	0.2
5	Bank of Tokyo - Mitsubish UFJ - H Share	473,052,000	0.19
6	Li Ka-shing Foundation - H Share	350,000,000	0.14
7	China Life - A Share	421,727,885	0.17
8	China Aluminum - A Share	90,909,000	0.04
9	Shenhua Group Limited - A Share	90,909,000	0.04
10	China Southern Electric Grid - A Share	90,909,000	0.04

BOA’s current business is truly global.  The combined revenue of its global credit cards, global banking, and global investment is more than 73% of its total revenue.  Majority of BOC’s business, on the other hand, is primarily from home loans and banking deposits, totaling more than 82% of its total revenue.  Both of these have benefited heavily from China’s fast economic growth and booming real estate market.  Housing price in China’s major cities such as Beijing, Shanghai, etc., are more expansive than those in most US cities today.  While both banking asset and revenue of Bank of American are about double the size of those for Bank of China, the market value of BOA is nevertheless almost 30% less.

In the 3^rd quarter of 2010, Bank of China made a net profit of $4.3 billion with a remarkable annual growth rate of 30.8%.  Bank of America, on the contrary, had a net loss of $7.5 billion.  This was almost solely due to a huge goodwill impairment charge of $10.4 billion, in order to comply with US’s new financial bill and regulations.

In the past six months, stock price of BOA has plunged again from $19.8 to around $11, a drop of more than 40%, wiping out a market value of $71 billion for the bank.  In comparison, Wells Fargo Bank and JP Morgan Bank both declined only about 15% for the same period.

What are the depressing pressures and factors behind this significant plunge in stock price of Bank of America? 

First of all, “do not fight against the FED”, the most depressing pressure obviously comes from Obama government.  Obama won the 08 Election by redirecting voter’s attention from Iraqi War to the poor US economy.  It was the financial crisis that helped Obama and Democrats to win the White House and both Houses.  Once in power, Obama constantly condemned banks in order to maintain his popularity among anger-growing voters.  The Democrats in House and Senate pressed vigorously to pass the notorious financial bill that will severally limit the banking business and weaken their overall financial strength through big government regulations.  If that is not enough, Obama dictated Elizabeth Warren, who hates banks in all her life, to lead the new consumer protection agency created from the financial bill.  Moreover, the US Treasure has kept a significant holding in Citibank’s common shares and has been selling these shares in the open market very slowly for a long period of time.  By doing this, the Obama administration can firmly control the depression of banks and
 financials, making the bank
hatred into real bleeding.

Secondly, in spite of its huge size, Bank of America has always been outside the “elite” banking circle around the Manhattan’s Wall Streets.  From its early start in California to the current location in North Carolina, Bank of America is always out of the US’s financial center.  However, its grass root and steady expansion are more representative of Americans than many others inside the financial center.  BOA has been constantly facing the fierce competitions from the joint allies of the “central” financial firms, all waiting to take BOA’s top spot.

In addition, Brian Moynihan, the new CEO who replaced Ken Lewis early this year, needs a cool feet treatment, no matter how experience he had been with the banking industry.  He must catch and mast the pace of the business, implementing his new growth strategies.  Ken Lewis has been a legendary CEO for Bank of America.  He has orchestrated numerous large acquisitions during his tenure, growing BOA to a world top bank.  Can and will Brian Moynihan do the same for BOA?  

Only time will tell.

These depressive actions from politicians, regulators and competitions have attracted big hedge funds to short the BOA stock repeatedly.  In many cases, one has to suspect that the Democrats and Obama government officials must have worked together with the hedge funds to collaborate the shorting sales.  Whenever there was encouraging development from the banking industry, the Obama government and Democrat congresses would find or create something bad for them, bonus “scandal”, Goldman Saks subpoena, financial regulation legislation, and the most recent foreclosure paperwork flaws, just name a few.  Almost every bad exposure has been perfectly timed to bring down the bank. 

For Bank of China, the government, as its largest shareholder, has strict regulations on the banking industry, in order to avoid bank’s own bad loan disaster and a repeat of mortgage crisis that has sunken US and world economy two years ago.  Fundamentally, however, the state, business and the Chinese people all push the banks to thrive and success.  When banks, including Bank of China, thrive, so does the Chinese economy.

How to jump start the Bank of America? 

One quick way is to sell a major portion of the company to Bank of China.  The sale will provide badly needed cashes to enhance BOA’s fund reserve and bring China’s booming economy into the staggering US market.  In fact, BOA and other US major banks such as Citibank, Morgan Stanley and Goldman Sachs, all hold major share of Chinese major banks.  However, it is very doubtful that the government, politicians and regular Americans have the real guts to swallow a Chinese banking takeover.  Although everyone will benefit from the sale, it does not sound good in America at this moment.  Maybe Americans need a major change in their altitudes. 

When Bank of America thrives, so does the American economy!