Bank of America downsizing - more to follow
By Alexander Chepakovich, CFA 2011-09-13Bank of America has announced today that it will eliminate 30 thousand jobs or 10% of its total workforce. Does it look like panic? I bet it does. Otherwise why would the bank who just took $5 billion in what was presented as equity capital from Warren Buffett (on this see my story Do not rush to buy when Buffett 'invests') would do such a drastic thing?
Things are really bad, and not just for Bank of America, but for the whole banking system, and not just of the United States. In the USA, at least, it is possible to address the overcapacity issue quickly. This is almost impossible to do in the mainland Europe, where firing people is not that easy.
So why this decision has been taken now and what is to follow? The answer to the first part of the question is quite obvious: we are in a recession and nobody knows for how long it will last. There is still a bubble in the banking industry that was formed during the time of reckless spending on credit, which banks were all too eager to provide without too much caution or wisdom. Now is the reckoning time. Banks have to adjust their ambitions and scale of operations to what is presently needed by the economy. They need to cut costs in order to be profitable - the times of easy money fat bonuses has gone and is unlikely to return any time soon.
The second part of the question is also not very challenging: to me all this looks like only the beginning. More cost saving measures (read 'job cuts') will follow at banks all across the world. By the time it is all done, we will have much leaner and much less glamorous financial organizations, who will concentrate primarily on simple bread-and-butter operations, such as deposit taking, corporate lending and processing payments. Frankly, that's what banks are here for. Other, much sexier (and much more rewording in boom times) things can be left to specialized investment banks, Basic banking is still a very profitable business if it is run prudently and intelligently.
What are investment implications of this transition? Look for boring well-run houses that concentrate on doing very basic things and do them well. Stay away from mammoth do-it-all institutions: if you dwell deeply into their operations, they are quite mediocre in most areas. The only thing that allows them to exist is willingness of governments to save them in times of trouble. This leads to reckless deals when banks charge too little for the risk they take. This dumping, by the way, squeezes small prudent lenders out of the market (they become uncompetitive). Unlike the popular belief, I think that less regulation and especially less support in the banking sector is a good thing.