Bank of America Is Missing the Point

In Tom Peters’ 1997 book The Circle of Innovation, the legendary business consultant makes a key point: You can’t shrink your way to greatness. Apparently Bank of America (NYSE:BAC) CEO Brian Moynihan hasn’t read the book, as the company announced it’s shrinking its employee count by 16,000 before 2012 comes to a close.

The news came this morning, though it didn’t come as any real surprise. Last year, the bank announced plans to eliminate a total of 30,000 jobs as part of the so-called “Project New BAC.” The 16,000 folks getting the boot before the end of this year are presumably part of that cost-reduction plan; it’s unlikely any of them are big fans of the well-named restructuring program.

Uh Oh — More Big Layoffs Are Cooking
Uh Oh — More Big Layoffs Are Cooking

The question is: Should investors be fans of the maneuver?

Mass layoffs are high up on the checklist of standard operating procedures for struggling companies, so in that regard, Moynihan is doing everything he’s expected to do. And to be fair, the integration of Merrill Lynch following the acquisition of the brokerage firm in early 2009 did leave some job-function overlap that had yet to be dealt with.

The fact BAC shares are in the red just a few hours after the looming layoffs were announced, however, suggests the market knows fewer people won’t actually fix the underlying issue. Indeed, fewer people might exacerbate Bank of America’s problems.

This Doesn’t Fix That

The job cuts Bank of America will be making over the next few weeks will primarily reduce the headcount of the company’s mortgage lending operation, as well as its front-line employees, with some branches closing in the process.

Neither group reached “bloated” status as a result of the Merrill merger.

Rather, the real problems that Bank of America (amazingly) still faces are a huge portfolio of non-performing loans, and still-shrinking revenue. Fewer bank tellers and a smaller mortgage operation won’t actually fix either impasse.

To give credit where it’s due, Bank of America’s mortgage unit isn’t losing money now as quickly as it was in 2010 and 2011. On the other hand, it’s still losing money as it continues to buy back its bad loans and is forced to take write-downs on them. While the bank has earmarked another $16 billion to eat those loans that Fannie Mae, Freddie Mac and other lenders are feeding back to BofA, it’s possible the loss reserve still might not be big enough. These “putback” claims cost the bank $22.7 billion in the second quarter of this year alone.

Bank of America also has inexplicably stopped writing mortgage loans from third-party lenders … a relatively common practice in banking. That decision, made in the fourth quarter of 2011, led to a 73% plunge in new mortgage loans by Q1 of this year.

While the overall loan portfolio seems to be broadly on the mend, Bank of America is missing most of the mortgage opportunity.

The Last Word

For reference, competitors like retail-banking-oriented U.S. Bancorp (NYSE:USB) have managed to grow revenue since the financial crisis peaked in 2008, while Wells Fargo (NYSE:WFC) has been growing its mortgage business — with good loans — leaps and bounds for the year so far.

So, it can be done. BofA just isn’t doing it.

And if nothing else makes the point, then perhaps this will: Bank of America’s top line has fallen in seven of the past nine quarters.

BAC might be able to work some accounting magic in the middle and bottom lines of the accounting statement, but revenue can’t be faked — it’s falling, and there has to be a reason. Cutting employees isn’t going to change that at all. Indeed, with fewer folks on the front lines to sell and service the customer, revenue might be even more difficult to muster now.

But at least axing 30,000 employees will save somewhere between $3 billion to $5 billion — about half the amount Bank of America has netted in income over the past four quarters. Let’s just hope it never needs those employees back to, you know … grow the business again.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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