Is Bank of America on Life Support?

 | Jan 26, 2016 | 3:00 PM EST
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If the current economic trajectory for global recession holds, and I think it will, one of the victims is going to be Bank of America (BAC). And it probably won't survive.

This is not because of any changes with respect to the company's business strategy. It's because no changes have been made.

Since the Lehman-era crisis, Bank of America has been dealing with legacy issues, buying loan business by offering much lower interest rates to institutional borrowers on commercial and industrial (C&I) loans than the other money centers, and reducing costs by firing people.

That's not a business strategy, though. That's just hunkering down and trying to outwait the economy and business environment with the expectation of "this too will pass."

In the first several years following the Lehman era, the "this too will pass" belief was predicated on the Fed stimulus causing an increase in borrowers that would allow for an increase in economic activity and an ability to both absorb the legacy losses and eventually grow the bank again.

The biggest problem facing the bank now is that while it waited, the business and substantive loan making opportunities that required a money center to fulfill were divided up among the other three: Wells Fargo (WFC), JPMorgan Chase (JPM) and Citigroup (C). (Bank of America and Wells Fargo are part of TheStreet's Action Alerts PLUS portfolio.)

Immediately following the Lehman era, there was massive disruption in the business strategies of all the money centers.

Citi was focused, by necessity, on dealing with the legacy issues it had because of the size of the federal bailout it had received.

While Citi focused on that, Morgan attempted to take over Citi's core international business.

While Morgan was making that attempt, Wells was left unchecked to take over and dominate the residential mortgage business from Bank of America.

In the past few years, however, Morgan has failed to displace Citi in the international banking space and abandoned the effort.

That's good for Citi, as it effectively ensures that Wells and Bank of America won't even bother making an attempt to challenge Citi's dominance of the international space, because if Morgan couldn't do it while Citi was sidelined with legacy issues, it can't be done.

Morgan, however, then turned back to the domestic market to meet growth and business needs and has since begun to challenge Wells' dominance of the residential mortgage sector.

Prior to the Lehman era, Bank of America dominated that space, but it has since made the decision to abandon it to Wells. However, it has not replaced that revenue driver with any other substantive banking activity.

Wells is having problems meeting the Morgan challenge in the residential mortgage space and as a result is finally beginning to show signs of broadening its focus to include other kinds of loan making and investment banking, and has even begun to increase its trading activity.

The money-center banking activity is beginning to coalesce around Morgan and Wells dominating all the domestic market for banking and large segments of the investment banking market, while Citi is focusing on retaking the international business it lost to HSBC Holdings (HSBC) since the Lehman era.

As this new order is becoming increasingly evident, Bank of America is finding itself without business and -- with the oncoming global recession -- without the time required to try to establish a new direction for the company.

The oncoming recession is going to challenge all four  money centers, but it represents an existential crisis for Bank of America because it's going to move from dealing with mortgage legacy issues to dealing with oil-sector loan defaults without any way of cutting costs or buying revenue by offering lower-cost C&I loans than the other three money centers.

And that assumes the federal loan modification programs that are scheduled to expire at the end of this year are extended.

If that doesn't happen, the bank will have to accelerate the process of resolution for nonperforming mortgages, taking the requisite losses at the same time it's incurring losses on the oil-sector loans, which is an imminent issue.

In that environment, the companies borrowing the C&I loans that have propped Bank of America up for the past seven years become the same ones producing losses on those loans for themselves and the bank, and also precluding new offsetting loans from being originated.

The bank has already steadily reduced its labor force for the past seven years, resulting in a 30% cut in total and the smallest number of full-time employees of all the money centers.

Bank of America is on the verge of having investors realize that the bank is in runoff mode.

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