BofA raises return target as CEO’s new plan aims to catch up with rivals

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By Saeed Azhar, Arasu Kannagi Basil and Nivedita Balu

BOSTON (Reuters) -Bank of America raised a closely watched profitability target on Wednesday as CEO Brian Moynihan laid out a plan to catch up with Wall Street rivals that includes tech investments and an expansion strategy.

Moynihan and other top executives are convening in Boston for the bank’s first investor day since 2011 to answer concerns about returns that have trailed peers. 

BofA is targeting a 16% to 18% return on tangible common equity – a metric investors use to assess a bank’s performance – in the medium term, compared with its earlier forecast of a mid-teens return, aiming to narrow the gap. 

The bank generated a 15.4% ROTCE in the third quarter, while larger rival JPMorgan achieved a 20% ROTCE in the same period, filings showed. BofA’s target matched analysts’ expectations.

“ROTCE goals put BofA in the upper tier of peers. New targets appear achievable, though not particularly aggressive,” Argus Research analyst Stephen Biggar said.

Analysts said BofA will have to earn credibility as investors look for proof the goals will be reached. Barclays said the ROTCE target could have been better by 100 basis points to please investors.

Shares of BofA, which fell 3% early, were down nearly 1.5% in late-afternoon trade. 

EXPANSION TO SIX U.S. CITIES

As part of the plan, BofA is aiming to expand in six additional cities through 2028, including in Alabama, Louisiana and Ohio. The move would give it access to over $222 billion in deposits, targeting student, family and employee banking and a footprint in 85% of U.S. households. 

“We will truly cover America in a densified – all eight lines of business – focused way. A nationwide franchise for this density and this capability in all those cities is a unique advantage,” Moynihan said. 

He later told reporters the bank has no plans for acquisitions outside the United States, but could look at U.S. payment businesses. In 2021, BofA acquired Axia Technologies, a healthcare payment and technology company.

Moynihan also said the bank’s increasing use of artificial intelligence will change the amount of work done by employees, but added it will not necessarily lower headcount.

“What I can see is changing the amount of work per thing done.”

For investment banking, another key business, BofA aims to increase its share of fees by between 50 and 100 basis points in the next three to five years, seeking to catch up as it has consistently lagged rivals JPMorgan and Goldman Sachs.

The M&A pipeline was improving, business head Matthew Koder said. “More larger deals than ever before …  more sole or lead adviser positions than ever before,” he told investors.

On the trading front, BofA is aiming to capture 9% of the industry revenue pool in the medium term. It now has a 7.6% market share.

The wealth business is targeting 4% to 5% net new asset growth in the medium term, adding fee-generating assets worth $135 billion to $150 billion annually.

“Market share gains are much easier said than done, and peers will also be stepping up their game as the investment banking environment continues to improve,” Biggar noted. 

CONSUMER CREDIT STABLE 

BofA said U.S. economic growth remains solid even as employment data shows signs of weakness, with consumer spending up 5% this year based on the bank’s data. Consumer credit is stable, BofA said.

“Consumers remain active … Employment remained steady. We can see that in the paychecks coming into our consumer accounts,” Moynihan said.

However, Moynihan said he was mindful of regulatory changes. “We’re all watching further regulatory changes, government debt levels and the impact on the economy, trade policies.” 

BofA expects net interest income – the difference between what banks earn on loans and pay on deposits – to grow by 5% to 7% annually over the next five years, driven by loan growth and fixed-rate asset repricing. Profit per share is expected to grow more than 12%.

 Following a rocky start after Moynihan took the helm in 2010 in the aftermath of the 2008 financial crisis, he engineered a momentous turnaround, driven by an oft-repeated mantra of “responsible growth,” but investors are urging the bank to make a higher return on its investments. 

(Reporting by Saeed Azhar in Boston, Arasu Kannagi Basil in Bengaluru and Nivedita Balu in Toronto; Editing by Arun Koyyur, Mark Porter, Franklin Paul, Rod Nickel)