Bank of America New Account Fees Could Add Slight Additional Upside

By
A A A

Bank of America ( BAC ), the largest bank in the U.S. based on the level of deposits, is testing new fee structure for its checking account service which used to be free. The new pilot program for the customers in Arizona, Georgia and Massachusetts allow the customers to apply for various account types with a monthly fees ranging from $6 to $25. The bank plans to expand the program nationally later this year. Other banks such as JP Morgan ( JPM ), Citigroup ( C ) and Wells Fargo ( WFC ) have introduced new fees on the checking account service after the Dodd-Frank financial reform bill restricted banks from charging merchants processing fees on debit card transactions.

We have a price estimate of $16.17 on Bank of America's stock which is about 10% above the current market price.

Bank of America is trying to earn more revenues from its existing customer base by requiring them to use more products and services in order to avoid monthly fees. Under the new pilot program, Bank of America introduced four types of checking account.

"Essentials" is a basic account with a monthly fee and a debit card. "eBanking" accounts have no fees if the customer opts for e-statements and makes deposits and withdrawals online or by ATM. "Enhanced" accounts will have a fee if a customer doesn't keep a minimum of $2,000 balance. "Premium" account requires a minimum of $20,000 balance and provides free money orders and check printing.

New Fees Could Lift Service Fees as a % of Deposits

The service fee as a % of deposits represents the total service fee that Bank of America generates on consumer banking and deposits business as a percent of the total outstanding deposits. The fees include overdraft fees, insufficient funds fees, monthly fees, etc.

Bank of America's service fee as a percent of deposits declined from 1.9% in 2008 to about 1.3% in 2010 as the bank limited overdraft fees for customers and the implemented certain regulations by the Federal Reserves which restricted the bank's ability to charge certain fees. We expect service fees as a percent of deposits to increase back to about 1.7% after the introduction of new checking account fees. If this increased to around 2% by the end of the forecast period, this would add around 1-2% to our price estimate.

Below you can also see our forecast for profit margins on deposits and consumer loans. If we assume that higher profit margins would accompany higher fees for this business and we adjusted 2013 profit margin back to 2008 levels, this would chip in another 3-4% to the price estimate.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: BAC , C , JPM , WFC

Trefis

Trefis

More from Trefis:

Related Videos

Budgeting for Baby
Budgeting for Baby                  
A Home to Retire In
A Home to Retire In                 

Stocks

Referenced

Most Active by Volume

112,007,213
  • $14.79 ▼ 2.12%
79,492,830
  • $17.05 ▲ 0.24%
63,236,947
  • $56.63 ▲ 7.54%
55,553,482
  • $3.41 ▼ 3.94%
53,662,885
  • $14.19 ▼ 3.47%
52,606,858
  • $100.75 ▲ 0.64%
39,074,810
  • $4.84 ▼ 2.22%
38,681,912
  • $25.62 ▲ 0.79%
As of 9/30/2014, 04:15 PM

Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com