Bank of America Is Missing Out on Wall Street's Boom

By Rachel Louise Ensign and Liz Hoffman 

Bank of America Corp.'s purchase of Merrill Lynch & Co., struck on the panic-filled 2008 weekend that Lehman Brothers failed, was supposed to make the lender a top-flight global investment bank.

A decade later, the bank is struggling to make good on that promise. Bank of America has failed to capture the benefits of a deal-making boom that has lifted its Wall Street rivals. Its overall investment banking revenue in the first nine months of the year is roughly flat compared with the same period in 2010, compared with an average increase of more than 50% at U.S. peers including Goldman Sachs Group Inc. and JPMorgan Chase & Co.

Bank of America makes far more on service charges like overdraft fees than from merger and underwriting work, and the investment bank has never contributed more than 7% of the company's overall revenue.

Chief Executive Brian Moynihan has instead found success with the Main Street businesses of retail deposits and business loans, pursuing a strategy of "responsible growth" with "no excuses" that values stability over swagger. That playbook has won over investors including Warren Buffett, the bank's biggest shareholder and a vocal cheerleader of Mr. Moynihan's.

Bank executives say they want to improve in investment banking. "We want to be in the top three, and based on our relationships and platform there's no reason we shouldn't be," Chief Operating Officer Tom Montag said in a statement. "It's about keeping our eye on the ball."

The bank has historically relied on the power of its national brand and deep lending relationships to drum up business, rather than cultivating a culture of superstar rainmakers. Many current and former executives say the bank hasn't filled important roles with bankers who have top relationships and visit clients with the intensity needed to beat formidable competitors.

Some of those executives also say the bank's conservative approach has handcuffed the firm's investment bankers, highly paid professionals who pitch big companies and governments on mergers and securities offerings. Bank of America has, for instance, shied away from clients deemed to carry reputational risks that other banks are willing to take on.

The firm has grown more gun-shy after disclosing a $292 million loss earlier this year on a loan to the then-chairman of troubled South African firm Steinhoff International Holdings NV. Lead independent director Jack Bovender told a trade publication that executives responsible for the deal were "taken to the woodshed."

In July, after the bank reported lower investment-banking revenue, Mr. Moynihan said on a call with analysts that the M&A team "knows they can do a better job and are after it." He blamed bad luck, too. The bank has worked on some big deals that fell apart like Comcast Corp.'s bid for 21st Century Fox assets.

It was Mr. Moynihan's predecessor, Kenneth Lewis, who inked the deal to buy Merrill when it was flailing. The union, executives said, would create a balanced behemoth, marrying Bank of America's ready supply of capital with the deals that Merrill's white-shoe bankers would gin up. Bank of America would also gain a "thundering herd" of financial advisers and its sales and trading desks.

The agreement made Bank of America a hero as other financial firms collapsed. But Merrill's eat-what-you-kill power brokers chafed at the merger with the Southern consumer bank. Senior bankers, used to freewheeling autonomy, were asked in ensuing years to carefully track their meetings. Executives were instructed to read employees' emails to check for compliance violations, people familiar with the matter said.

Mr. Moynihan, a low-key lawyer by trade known for being a workhorse, became CEO in 2010. The business was a bright spot early in his tenure, when the bank was dealing with big consumer loan losses. From 2010 to 2013, the firm's investment-banking revenue rose 13%.

Now, however, in a sector filled with competition-obsessed masters of the universe, Bank of America's rankings are slipping. It is eighth in U.S. merger revenue this year, behind Jefferies Group LLC and Barclays PLC, according to Dealogic. It has also slipped in debt businesses it has dominated for years.

Twenty-eight managing directors have left the investment bank for competitors since the beginning of 2017, according to a report by recruiting firm Sheffield Haworth. Only Deutsche Bank AG has seen more departures at that level. A Bank of America spokeswoman said the bank has made 49 managing director hires over that period.

Christian Meissner, who oversees investment banking as well as corporate banking, will leave at the end of this year, the bank announced in September. He will be succeeded by Matthew Koder, the bank's Asia-Pacific president. Mr. Koder has told colleagues he is drawing up a plan to improve the unit's performance.

The firm's conservative approach has meant tighter constraints for the investment bankers. They were barred from business with subprime lenders, even for assignments that wouldn't give Bank of America much exposure to the underlying loans, according to people familiar with the matter. Bankers grumbled that Mr. Moynihan, who lives outside Boston, seemed less interested in getting personally involved in deals than his counterparts at JPMorgan or Goldman Sachs.

In late 2012, for instance, Bank of America was vying for a role on Dell Inc.'s $24 billion buyout. JPMorgan CEO James Dimon was personally involved in lobbying for the business. Senior bankers asked Mr. Moynihan to do the same but at a key point he didn't, according to people familiar with the matter. JPMorgan got a marquee assignment advising Dell's directors. Bank of America won a part of the financing, which it split with three other firms.

"Brian engages with hundreds of clients throughout the year," a bank spokeswoman said.

Tensions flared in late 2015 when Mr. Meissner proposed coleading a EUR20 billion loan to Volkswagen AG, which needed cash to help weather its emissions-testing scandal. Mr. Moynihan pushed back, arguing that backing the car maker would damage Bank of America's reputation, according to people familiar with the matter. The firm instead took a second-tier role in the deal, which was led by Citigroup Inc. and other global banks.

Unlike other top executives, including Bank of America's head of human resources, Mr. Meissner didn't have ready access to the firm's private planes. That was because he didn't report directly to Mr. Moynihan, but to Mr. Montag.

In 2016, one of Mr. Meissner's top deputies, Diego De Giorgi, took the podium at an annual New York meeting and urged bankers to be "sharks" in pursuit of business. At the time, the bank had slipped from second to third in investment banking revenue.

This year, it is No. 4.

Write to Rachel Louise Ensign at [e-mail] and Liz Hoffman at [e-mail]

(END) Dow Jones Newswires

October 13, 2018 07:14 ET (11:14 GMT)

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