Slow Growth in Consumer Banking Business for Bank of America

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Improving business activity has helped banks reduce provisions for credit losses and improve margins on both credit cards and mortgages. Still, the consumer banking segment has been slow to recover given the relatively moderate pace of consumer spending growth. Average consumer deposits at Bank of America ( BAC ) increased marginally by 1% in 2010, to $411 billion. Bank of America's competitors in this space, notably JP Morgan ( JPM ), Wells Fargo ( WFC ) and Citigroup ( C ), also reported similar levels of growth in average deposits.

We estimate that deposits and consumer loans account for about 13% of our $16.12 price estimate for Bank of America stock. Our price estimate currently stands above the market price.

See our full analysis and $16.12 price estimate for Bank of America

Slow Rise in Consumer Deposits

A slow economic recovery combined with fewer federal subsidies to spur growth and increased federal regulations that could curb profits has created a headwind for banks in the traditional consumer banking space. For instance, new regulations will limit banks from charging high fees on debit card transactions and restrict certain interest rate increases on credit cards. As a result, banks are coming up with fees on checking accounts and adding new penalties for insufficient account balances.

But banks do not want to scare away customers by raising fees too high or imposing superfluous penalties. JPMorgan CEO Jamie Dimon estimates that 5% of his bank's depositors may become "unbanked" as a result of the added fees.

Bank of America saw mixed results in 2010 with macroeconomic improvement that allowed the firm (as well as other banks) to reduce reserves for losses, bolstering profits. This means banks can commit more capital for lending, trading and other activities, creating upside potential for bank stocks. Still, the consumer banking, credit cards and mortgage business remains week and banks with heavy exposure to U.S. consumers may find it difficult to generate significant upside to current stock values.

Bank of America Deposit Base Outlook

Deposits and consumer loans represent total outstanding interest earning loans for Bank of America. The deposit base grew from $308 billion in 2005 to $406 billion in 2009 at an annual growth rate of about 7%. The acquisition of LaSalle and Merrill Lynch, coupled with strong economic conditions, facilitated deposits growth during this period.

We estimate a modest increase in the deposit base going forward, with deposits and consumer loans reaching $506 billion by 2017 at an annual growth rate of about 3%. The increase in the personal savings rate in the U.S., which grew from an average of 1.25% in 2005 to 5% in 2009, will help banks raise their deposit base. On the other hand, financial regulations could curtail the amount a bank can lend to consumers, negatively affecting loan growth in the years ahead.



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

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