Bank of America (NYSE:BAC) is expanding its employee benefits business, and although the news didn’t move BAC stock, the implications could be significant.
Morgan Stanley (NYSE:MS) also recently made a point of saying it was interested in expanding its employee benefits business.
Of the two though, Bank of America arguably has the most to gain. Whereas Morgan Stanley’s employee-minded business is largely founded on stock options as compensation and health savings accounts.
Bank of America’s wealth management arm offers health services, but also facilitates 401k accounts and other retirement services where most wealth is accumulated.
Still, just how big of a deal is this business to Bank of America relative to, say lending and trading?
Employee Benefits Business and BAC Stock
Neither company explicitly, publicly said employee benefits plans were a new priority. Rather, Reuters reported that in separate interviews with each company, both Morgan Stanley and Bank of America confirmed the employee benefits arena was an opportunistic target.
With or without an official public statement though, it’s a smart strategic move. Rival banks JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC) have both gotten out of the 401k business in recent years, setting the stage for B of A to leverage its existing business that’s already at scale.
Reuters reports Bank of America presently manages retirement plans for five million employees spread across 30,000 employers.
It’s a conventional bank to be sure, with a pretty respectable trading business to boot. But, its wealth and investment management arm that’s about to ramp-up its marketing is actually tied with B of A’s global banking (business banking and underwriting) as the company’s top revenue source. They each accounted for 29% of Q2 sales.
That’s the good news; the bad news is Bank of America’s wealth management business isn’t terribly profitable. In fact, in absolute terms, its investment management unit is the least profitable of the four the company operates. Of last quarter’s total pre-tax income of $9.9 billion, wealth and investment management only made up $1.4 billion of it.
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That’s 14%, give or take. Shareholders should also bear in mind that the employee-benefits portion of this unit’s total revenue is only part of the division’s total top line.
The Upside
There’s still an upside to focusing on this segment going forward though. That is, employees who become comfortable with Bank of America’s offering during their working years are likely to stick around during their retirement years.
“It creates value for the employer, the employee and creates a new source of potential clients for us,” said Morgan Stanley’s wealth unit’s Chief Operating Officer Jed Finn.
These customers are also at least a little more likely to use B of A for other banking needs then, and in the meantime.
And, though a relatively small piece of the profit pie and revenue pie right now, the potential is still significant. Bank of America’s global head of commercial banking Alastair Borthwick explained to Reuters that only about one-tenth of the bank’s business customers are also employee/retirement-plan customers.
Bottom Line for BAC Stock
It’s not a reason in and of itself to buy BAC stock, and particularly not a reason to step into a new position right away. It can take months for an enterprise-level organization to make such a change.
It is, however, something for current and prospective owners of Bank of America stock to watch going forward as a growth opportunity, especially now that Charles Schwab (NYSE:SCHW) has put pressure on all banks’ trading units by offering free online stock trading.
That’s something B of A will have to respond to, somehow, sooner or later. Never even mind the fact the falling interest rates are poised to crimp lending margins.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.
