Bank of America is a Multinational Banking and Financial Services company headquartered in North Carolina. The Bank operates in 50 states of The United States and 40 countries around the world. The corporation came in news when it bought Merill Lynch during the financial crisis of 2008 and made it the world’s largest wealth management company. However, in order to undertake an indepth view of the corporation’s financial health, we will be conducting ration analysis of its financial statements.
Regulatory Capital Adequacy Ratio Analysis:
Capital Adequacy ratios are calculated specifically for the banks and financial institutions. The ratio indicates the financial stability and efficiency of the bank. Following are some of the capital adequacy ratios of Bank of America:
i)Tier 1 Capital Ratio:
This ratio facilitates the comparison between the bank’s total risk weighted assets and its equity capital. In other words, this ratio measures the financial strength of the bank. For core equity capital, bank sums up equity capital+disclosed reserves, and for total risk weighted assets, it includes all the assets which the firm holds and are systematically weighted for credit risk.
ii)Tier 1 Leverage Ratio:
This ratio is used to judge the capital adequacy of a bank and is used as an evaluating tool o determine both the capital adequacy and to set a constraint on the degree to which the bank or any financial institution can leverage its capital base.
Summary: Regulatory Capital Adequacy Ratio Analysis:
The organization is having sufficient Capital Adequacy as both the Capital Ratio and Tier 1 Leverage Ratio are in conformity with Federal Reserve regulations although declining Tier 1 Leverage Ratio is a matter of analysis but since it is above the 4% mandation of Federal Reserve, it seems that we can conclude that Bank of America is having sufficient Capital Adequacy.
Another set of ratios which carry a great importance for the market analyst, investors and creditors of the company as it discloses the profit margins of the company. The trend in profitability analysis can be a great source of information for the users of the financial statements including the management of the company to decide the future course of their plans:
i)Net Profit Margins: Net Profit/ Revenue*100
These ratios are calculated to adjudge the net profit margins of the company after both operating and non-operating expenses are deducted from Gross Profits. It is an important source to ascertain the profitability of the entity.
ii) Return on Equity: Net Income / Total Equity
ROCE calculation is completely different from above discussed profitability measures as this ratio indicates the return earned by equity shareholders, both common and preferred, from their investment in the company.
Summary: Profitability Analysis of Bank of America
Our profitability analysis of Bank of America indicates that the corporation has come out successfully from financial crisis as the net profit margins are healthy and has increased over the years. Similarly, even the shareholders of the company will be satisfied as ROE multiple has also shown increasing trend over the years.
Solvency Ratio provides information on the firm’s long term solvency and its ability to meet its long term obligations. Below discussed are some of the popular Solvency Ratios:
i) Debt/ Equity Ratio
Calculated as ratio of debt to equity, this ratio indicates the capital structure composition of the company. Higher the ratio, more is the inclusion of debt financing in the capital structure of the company, and more is the financial risk included in the company.
ii)Financial Leverage Ratio: Average Total Assets/ Average Total Equity
Another set of solvency ratio which indicates use of debt financing by the company.
Summary: Solvency Position of Bank of America
Referring to the above analysis, we can infer that during 2010-2012, the corporation reduced the use of debt financing as a decreasing trend in both Debt Equity Ratio and Financial Leverage was witnessed. However, although during 2012, Bank of America decreased the use of debt financing, but rising financial leverage ratio is an indicator of increase of risk to equity shareholders.
These ratio indicates the efficiency of the management to utilize its asset to generate revenue for the company.
i)Total Asset Turnover: Revenue/Total Assets
The parameter which measures the firm’s use of its total assets to create revenue is called Total Asset Turnover.
ii) Fixed Asset Turnover Ratio:
Another set of efficiency ratio which measures efficiency relating to utlization of fixed asset.
Summary: Efficiency of Bank of America
In terms of efficiency of Bank of America, while Total Asset Turnover has remained almost constant during 2010-2012, low fixed asset turnover might be a sign of worry for the company as this indicates that the company is using its fixed assets inefficiently now.
Our ratio analysis indicates that the corporation is working with sound financial health as all the section of our analysis has shown positive signs. Sufficient Capital Adequacy, High Net Profit Margins, High ROE and low Debt-Equity Ratio indicates that Bank of America is financially sound organization.
SWOT Analysis of Bank of America
There are various strengths, weaknesses, opportunities and threats of Bank of America. The SWOT analysis of Bank of America is discussed below.
Strengths of Bank of America
- BOA has created a brand name for itself in the market and hence, investors and customers trust the name.
- BOA has strong financial support and hence, even during recession and financially weak periods, the bank is safeguarded from risks.
Weaknesses of Bank of America
- After the recession in 2008, the revenue of the bank is reducing and hence, the company’s growth prospects are reduced.
- The assets of BOA are not able to sustain in the continuously growing world and hence, they are facing a financial turmoil.
- Investors have lost faith in the institution and hence, they are not willing to render financial support.
Opportunities for Bank of America
- BOA doesn’t have presence in all the countries so they can look for countries wherein they can see growth prospects.
- BOA can undertake mergers and acquisition so that they can grow in the market.
- BOA can attract more customers by way of providing more value on the loans that they take.
Threats for Bank of America
- The government regulations in every country are changing frequently and hence, it is becoming difficult for BOA to cope with it.
- The number of banks is increasing continuously and hence, the competition in the banking sector is also increasing.
Plenty of strategies are used by Bank of America so that they can sustain the heavy competition in the banking sector. Few of the strategies that were undertaken by Bank of America are as follows: -
- BOA realized that their customer is more important to them than that of anything else. Continuous quality improvement and six sigma are implemented at BOA so that the customers can be satisfied. They believe that every satisfied customer will recommend BOA to other customer (Cox n.d.).
- BOA knows to survive in the competitive market. It was seen that after the acquisition, the bank wasn’t having sufficient cash but they decided to sell the non-core assets so that they can generate money for everyday operations.
- Giving home loans is one of the widely used strategies by BOA. It is seen that BOA owns maximum number of houses in the USA. Due to this, more and more people prefer to get home loan from BOA rather than that of any other banks (OMalley 2011).
Cox, D, ASQ, Driving Organic Growth at Bank of America, Viewed on 23nrd February, 2014, http://asq.org/financial/bank-of-america-case-study.html
Marketing Mix, SWOT analysis of Bank of America Corporation, Viewed on 23nrd February, 2014, http://marketingmix.org/swot-analysis-of-bank-of-america-corporation/
MBA, Bank of America, Viewed on 22nrd February, 2014, http://www.mbaskool.com/brandguide/banking-and-financial-services/597-bank-of-america.html
OMalley, D, 2011, Investorplace, 6 reasons to stick with Bank of America, Viewed on 23nrd February, 2014, http://investorplace.com/2011/06/6-reasons-to-stick-with-bank-of-america/#.UwnfWOOSzfI