To call the situation dire would be an understatement.
It was a Friday in mid-August 2011, and Brian Moynihan and his top two lieutenants were sharing a late dinner at Press, a wine-and-sushi bar a couple of blocks from Bank of America’s headquarters in Charlotte. Moynihan, who had been at the helm of the 94-year-old institution for just 20 months, had cut a Florida vacation short to try to address the crisis, which seemed to be mounting by the day. Some analysts predicted the mortgage mess inherited from BofA’s newly acquired Merrill Lynch and Countrywide subsidiaries was bad enough to sink the whole enterprise. BofA had just gotten sued for $10 billion by AIG for losses it claimed on “fraudulent” mortgages packaged by Countrywide, Merrill, and BofA. Fed Chairman Ben Bernanke had just announced that because the economy looked far weaker than he’d predicted months before, the Fed intended hold interest rates low for an extended period. BofA shares had fallen to $7, half their value from the start of 2011.
Without a drastic move, the relentless drumbeat of bad news could sap BofA’s strong core businesses, sending its capital to dangerously low levels. U.S. regulators were carefully monitoring the situation.
At the table were Mike Lyons, now chief of corporate and institutional banking at PNC Financial Services Group, and Bruce Thompson, then BofA’s CFO. “We were all getting on the phone trying to reassure high-net-worth customers who were pulling their money out at Merrill Lynch,” recalls Lyons. “Big producers in the investment bank, who couldn’t assess whether the mortgage carnage would sink their employer, said they were leaving.”
The trio’s arguments weren’t working. As Moynihan tells Fortune, “We had sufficient capital and earnings power to get through the crisis, but it was all about perception.” The efforts to reassure their own nervous investment bankers and big corporate borrowers that they were “building tangible common equity,” according to Lyons, were overwhelmed by all the negative publicity about mortgage losses. “We thought we were doing the right thing,” recalls Lyons, “but it was hard to get people to believe us.”
The three had no good options. Issuing new shares was a no-go because, as Lyons says, “If you issue equity when you’re in trouble, the market always thinks you’ll need to issue more.” And they rejected selling branches because that course would weaken the core retail franchise essential to a revival. “We had to show the world a source of capital, not because we needed it, but to get the negative attention off of us,” says Moynihan.
What they desperately needed, the group decided, was a ringing vote of confidence from the outside––not from an oil sheikh or Russian oligarch, but a top investor who commanded widespread respect on Wall Street, and who could see through the fog to perceive BofA’s true value. But who would take that risk?
The group left Press still searching for a rescue plan. Shortly after, on Monday, Aug. 22, Moynihan got a call.
It was Warren Buffett.
“Buffett said, ‘I’ve got an idea,’” Moynihan recalls, then proposed purchasing $5 billion in BofA preferred shares. Famously, Moynihan told Buffett, “We don’t need it,” to which Buffett riposted, “If you needed it, I wouldn’t be making the offer.” The wonder, says Lyons, is that Buffett went public with the same arguments Moynihan had been advancing, stating that BofA harbored a powerful retail franchise with big earnings potential, and that bank was “well led” by Moynihan. “We no longer had to make our case about the intricacies of tangible common equity,” says Lyons. “The world’s best investor, who really understood the risk-return equation, was making the case for us. It was as if Buffett was listening in on our conversation at Press.” Immediately after BofA announced Buffett’s investment later that week, the outflow at Merrill stopped, and investment banking stars mainly ceased threatening to depart.
“Everybody thought his situation was almost hopeless,” Buffett tells me in a recent phone interview. “Perception does turn into reality. You could tell customers and investors that you had great Basel reserves of 15%, and they’d still line up to pull out their money if they lost confidence.” For the Oracle of Omaha, a pivotal Moynihan decision was resisting pressure to bankrupt its Countrywide subsidiary: “I remember Wall Streeters urging that action. It was such a cesspool that people felt cleaning it up would be prohibitive. It was a tough decision—he knew he’d be writing big checks—but he chose to work his way through Countrywide’s problems instead.”
It was the right decision. Buffett’s Berkshire Hathaway made over $20 billion in capital gains and dividends on its BofA stock and now ranks as the largest shareholder at around 11%. “BofA goes back to the early 1900s and has an amazing history,” he says. “Brian has restored its former glory. And I’m very happy.”
Put simply, Moynihan––despite a number of false moves along the way––has orchestrated the single most outstanding comeback from the financial crisis. “Where are all the naysayers now?” says Ken Langone, the former Home Depot chairman who holds a big position in BofA. “I make my decisions 90% on who the leader is and 10% on the numbers. And like Buffett, I bet on Brian.”
Indeed today the view looks very different from Moynihan’s office on the 50th floor of the Bank of America Tower in Midtown Manhattan. Looking down from the office wall is a portrait of Winston Churchill, a figure Moynihan loves to read about and a fellow bulldog who battled his way through dark days. “They have similar personalities,” notes a former colleague. Speaking to Fortune on his 10th anniversary as CEO, Moynihan spoke on topics ranging from how leadership in technology is central to his growth strategy, to his commitment to raising minimum pay for employees, to what he sees as a strong possibility that BofA could double its market share in consumer deposits as well as his strategy for getting there.
Bank of America vs. JPMorgan
One measure of Moynihan’s success is how well he’s performed versus the other two consumer banking giants, JPMorgan Chase and Wells Fargo. He’s gained on the industry’s longtime superstar, Jamie Dimon’s JPMorgan, and surpassed the franchise recently deemed far superior, Wells Fargo. Five years ago, BofA earned $14.5 billion, 41% less than JPMorgan’s $24.4 billion. BofA is closing in fast. This year, it recorded net income of $29 billion, trailing JPMorgan by 20%. In 2015, BofA’s market cap trailed Wells’ by over $100 billion. Today, BofA not only outearns Wells—which has been bedeviled by the fallout from its aggressive sales culture—but the former’s valuation is more than $100 billion higher, at $325 billion.
Investors overlooked Moynihan’s capabilities for two reasons. First, because of a banking legend who overshadowed his early accomplishments, and second, because Moynihan is the antithesis of a showman. In 1993, Terry Murray, the flamboyant CEO of Fleet Financial, in Providence, hired Moynihan, then his M&A attorney, to spearhead what would become one of the great expansion campaigns in banking history. Over the next decade, Fleet bought most of the major banks in New England, culminating with the purchase of venerable BankBoston in 1999 to create FleetBoston. Throughout the run, the two operated as a team, similar to the pairing of Sandy Weill and Jamie Dimon, where Murray, like Weill, set the big vision, and Moynihan filled the Dimon role by tackling the hands-on integration work. “He’d not only negotiate the deal and hammer down the price, he’d oversee all the post-merger work to align computer systems and trim the headcount,” Murray tells Fortune. “He could accomplish in seven or eight months what the management at other acquirers would take years to do.”
His tactics at times took a circuitous route that mystified onlookers. When the Justice Department required that Fleet sell 280 branches in New England, Moynihan shunned interest from strong buyers such as Chase and RBS Citizens. His plan: keep powerful players out of Fleet’s home market. So he landed the weakest buyer he could find, Sovereign Bank. The new Sovereign customers quickly returned to FleetBoston.
“His stamina was extraordinary,” says Lyons, who in his early twenties worked with Moynihan at Fleet. “He’d leave the office at 6:30, and on the way out tell me, ‘Come to my house at nine, and bring your laptop.’ Then we’d work for a couple more hours and start again at around 7 a.m. His mind was always working nonstop.”
After BofA bought FleetBoston in 2004, Moynihan cycled through a number of roles, including a successful stint in 2007 and 2008 reviving the investment bank from big trading losses. When the huge deficits at newly acquired Merrill Lynch shook the entire bank, Moynihan won the CEO job by delivering his manifesto to the board in the form of a one-page summary of his strategy. In late 2009, the board, dominated by FleetBoston veterans who’d watched Moynihan in action for years, named him to rescue what was probably the most reviled enterprise by customers, regulators, and investors in America.
Quickly Moynihan pledged to sell a patchwork of enterprises purchased by his predecessor, Ken Lewis. All told, Moynihan exited no fewer than 14 far-flung holdings, from a stake in China Construction Bank to credit card purveyor MBNA. He refocused on the core consumer franchises, notably the branch network that blanketed the nation, and harvested a gigantic pool of deposits that formed an ultra-low-cost source of loans while also ceasing to chase new customers with credit card promotions. Instead, the new strategy centered, as it does today, on serving existing clients who, as their wealth grows, will expand from opening checking accounts to taking out home loans and building an investment portfolio at Merrill Lynch.
Smoothing banking’s cycles
For Moynihan, the problem with big banks was that they regularly squandered the big money they made in flush times by chasing high-risk business that backfired in downturns. Moynihan pledged to smooth those cycles by adopting a low-risk model that still incorporated steady growth. The idea wasn’t to hugely outpace the economy––that goal was fatal, he warned––but to expand revenues around one point faster than national income by gradually taking market share through superior service, and adding more loans and brokerage accounts as regular customers became more affluent. The model didn’t require big capital spending on branches, for example. Moynihan argued that B of A already had far too many. Instead, the bank would cultivate fresh technology, where dollops of capital could generate outsize improvements in both service and efficiency.
Early on, Moynihan made a lot of big mistakes. In 2011, BofA flunked its first Federal Reserve “stress test” in a highly embarrassing setback. That year, Moynihan imposed hefty credit card fees that unleashed a barrage of criticism from consumer groups and prompted President Obama to bash the initiative as “a bad business practice.” In a submission to the Fed requesting approval for its plan to buy back shares and boost its dividend, BofA committed a $4 billion accounting error that inflated its reported capital. The Fed forced BofA to suspend the long-promised reward to shareholders, and the gaffe made what appeared to be a new and improved BofA look like the same old screwup.
Moynihan just kept going. “Whether everyone is down on him, or everyone is praising him, he’s completely unaffected,” declares Lyons. “He puts his head down and advances with an intensity I’ve never seen before.”
Indeed, while his predecessor, Ken Lewis, often went to a restaurant in Charlotte’s Bank of America tower after work, Moynihan always preferred going to Press a few blocks away because he considered it more private––which apparently was his own faulty perception. Many fellow diners crowding into Press were BofA employees, or lawyers and consultants who depended on the bank. Lyons remembers that when they were plotting to save BofA during the crisis, all around them BofA staffers kept staring at Moynihan, wondering if they’d get fired next week. “It’s typical of Brian,” says Lyons, “that he was totally oblivious. He used to say, ‘I love Press because nobody knows me here.’”
Even as Moynihan shrank branches and headcount, he kept BofA growing. “I was worried that he’d just keep shrinking the bank,” says John McDonald of Autonomous Research. “His genius was coupling risk reduction and downsizing with a responsible growth mantra.” McDonald credits Moynihan with using digitization not just for the common purpose of reducing costs, but to make the consumer experience simpler and more satisfying, and hence furnish more mortgages, car loans, investment portfolios, and credit card credit to its increasingly affluent customers.
The best test of the Moynihan model is how it works in a low–interest rate environment that reduces the “net interest margins.” NIM forms the bulwark of banking profits. It’s the margin between the rates banks collect on their loans, and what they pay depositors on checking and savings accounts. After rising in 2018, rates contracted sharply in the past year, once again pressuring NIM. Yet BofA still managed brisk growth. “On average the individual loans are less profitable, so we have to overcome that by making higher volumes of loans, and keeping expenses basically flat,” says Moynihan.
A big contributor to the CEO’s twin goals of boosting growth and capping expenses is BofA’s digital innovation. “They’re doing just as much as JPMorgan but don’t get as much credit for it,” says McDonald. BofA now has 10 million subscribers for its Erica mobile phone app, which enables customers to check FICO scores, dispute bills, and deposit checks on their handheld devices. Processing a check deposited by iPhone costs 5¢, versus $5 at a branch. A program called Preferred Rewards operates a bit like frequent-flier miles. By adding a home loan or increasing checking balances, a customer can get lower rates on their credit card or car loans. In the fourth quarter of 2019, BofA received 45% of its applications for consumer mortgages online, while 61% of folks seeking auto loans filed via the digital portal.
Moynihan’s secret: Operating leverage
These strategies converge to generate what Moynihan prizes most: operating leverage. That results from growing revenues consistently faster than expenses, so that earnings expand at relatively rapid rates––even though sales simply track Moynihan’s goal of slightly outpacing the overall economy. So how’s it working? Let’s examine BofA’s consumer business, its biggest sector. Last year, it grew consumer deposits by 5% and loans by 7%, and revenues increased less, by 2.6% or $969 million (to $38.6 billion), because of compression in NIM. But because operating expenses actually dropped, almost 90% of that revenue increase flowed to net earnings. That raised the consumer divisions net profits by 7% to $13 billion. Strong operating leverage across the bank, coupled with the repurchase of 9% of stock outstanding, raised earnings per share by 12%.
Buffett particularly admires Moynihan’s iron grip on costs. “At the same time he’s growing deposits, loans, and revenues, he’s been holding costs steady at around $53 billion,” Buffett tells Fortune, adding that the combination has generated cash flows enabling Moynihan to repurchase huge numbers of shares. “On a conference call a few months ago,” says Buffett, “he was asked if he could give a target for total expenses. He said that he wouldn’t give a target because [that would set a minimum, and] he didn’t want anyone to keep resting on their laurels. That’s Brian.”
Doubling consumer deposits: The blueprint
Shortly after our interview in Manhattan, Moynihan surprised industry onlookers by disclosing the epic goal of doubling BofA’s consumer deposits, now an industry-leading $720 billion. That target looks so ambitious that it invites obvious questions: Would getting there mean shifting to the kind of aggressive sales culture that’s the antithesis of Moynihan’s longtime strategy?
“Doubling consumer deposits is our target,” Moynihan explains to me, speaking by phone from a restaurant after a hectic day at the World Economic Forum in Davos. “But we don’t have a timetable for getting there.” He notes that banks that hold 10% or more of the nation’s deposits are banned from making acquisitions that would surpass that regulatory cap. “But there is no constraint on our size as long as we grow organically,” he says. “Our market share is currently somewhere between 12% and 15%. In many industries such as autos and soft drinks, the industry leaders have market shares of over 40%.”
Naturally, a huge boost in deposits translates to a big expansion in mortgages, home-equity lines, and credit card and auto loans. But B of A won’t get there by shouldering heavier risk, avows the CEO. “We will only take on customers that meet our credit standards,” he says. Though he didn’t expressly state that the blueprint has three main components, Moynihan highlighted a trio of initiatives designed to grow faster than the overall market by taking bigger slices of the growing pie than its competitors. The first is expanding into new markets. Five years ago, says Moynihan, BofA wasn’t even present in seven of America’s 30 largest cities. Since then, he’s planted branches in Denver, Minneapolis, Indianapolis, Pittsburgh, Cincinnati, and Columbus, and will soon fill the map by opening in Lexington, Ky.
Second, many of BofA’s 66 million customers have, say, their primary checking accounts with the bank, but credit cards or home loans with competitors. BofA aims to win that business through its strategy of providing extra benefits––via the Premium Rewards program––based on the dollars clients send its way. At the same time, the more share-of-wallet BofA can win from its younger customers who don’t yet have a home loan or auto loan, the bigger its share of the overall market will become. “Only two-thirds of our customers who meet our credit standards have credit cards with us,” says Moynihan. “In mortgages, it’s just four in 10, up from two in 10 several years ago. That trend will continue. We have plenty of room to grow in all consumer categories.”
Third, Moynihan believes that the winning model is not the Internet-only option, but what he calls BofA’s “high-tech, high-touch” offering that gives customers the full panoply of options from getting a car loan online to talking to a financial adviser at your local branch. The proof, he says, is that BofA is already deploying its digital platform to gain share by growing its mobile phone users, for example, from 16 million to almost 30 million over the past five years. For Moynihan, the best evidence that his bank can hit that lofty target is the current trajectory. “We’ve been consistently growing deposits 6% to 7% a year, or $30 billion on an annual basis, faster than the overall market,” he says. It’s not about making big forecasts, he adds, rather it’s “grinding away” at the strategy that’s winning right now.
The ‘r’ word
Back in his office, as swirling fog cloaks and then unveils spectacular views of lower Manhattan, I ask Moynihan if at age 60 he’s thinking of retiring. “No,” he answers. “We’re off to a nice start. We’re setting our own destiny.” When I relay this to Buffett, he shoots back, “When you mention the word ‘retirement’ in connection to Moynihan, I panic. Moynihan and retirement should never be in the same sentence. If he does retire someday, I hope he comes to work for Berkshire Hathaway.”
For a CEO who’s such a hawk on expenses, it’s perhaps surprising that Moynihan keeps returning to a favorite theme, sharing BofA’s success with his 208,000 “teammates.” He capped our discussion by emphasizing his pride in just having raised the minimum wage for his employees, from $17 to $20 an hour, and the number is bigger in high-cost-of-living cities. “We believe we make the kind of money where teammates should have a good standard of living,” he says.
Count on Moynihan to shun the victory lap, and keep on charging.
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