Chairman,
Chief Executive Officer
and President
The company we're building.
At the beginning of this letter I described our vision for Bank of America. Investors tend to ask tough questions about our strategy that deserve answers:
First: Is Bank of America too big to grow at attractive rates? Our answer:
Absolutely not.
While Bank of America is large in the aggregate, we compete in markets — defined by geography, product or market segment — in which our current share of the market is much smaller than the "natural share" we should expect given the size of our company. In the retail markets, that natural share is defined somewhat by our deposit share in a given geographic market. Examples of product markets in which we have plenty of room to run include mortgage, home equity and small business lending.
I would add that the geographic markets in which we have chosen to compete are the fastest growing in the country, providing more opportunity for us to grow our business.
While our wealth management business is large and growing, we have a huge opportunity embedded in our current client base: clients who qualify for high service levels such as Premier or Private Banking but who have not yet chosen to take their relationship with us to that level. Outside our existing client base, the opportunity is even larger.
One of the most important moves we made in 2006 to pursue growth in the wealth management business was our agreement to acquire U.S. Trust for $3.3 billion, a transaction we expect to close in the third quarter of 2007. As one of the oldest, largest and most respected private banks in the country, U.S. Trust will combine with The Private Bank of Bank of America to create the leading private bank in the country. Clients of both our organizations will benefit from a more comprehensive set of products and services, and access to the broadest financial services distribution network in America. U.S. Trust brings to this partnership one of the strongest brands in the industry, which we are looking very hard at retaining.
By focusing on these and other opportunities, we aim to generate strong, consistent organic growth across all our businesses.
Second: Is Bank of America's growth to be fueled primarily by acquisitions or by winning and expanding customer relationships? Our answer: Wrong question.
A better question would be whether Bank of America is capable of generating revenue and earnings growth organically and through acquisition. And our answer is an emphatic "yes."
The strongest companies are those that have the resources, knowledge, judgment and skills to pursue multiple paths to growth. For the past nine years, we have focused primarily on generating organic growth through process improvement, increasing customer satisfaction and product innovation. At the same time, we have taken advantage of select opportunities presented to us to enter new markets. These acquisitions — Fleet, National Processing Inc., MBNA and U.S. Trust, scheduled to close in 2007 — add customers, capabilities and great new opportunities to grow the business.
Today, there is nothing more important than executing well on our current organic growth strategy. Every other opportunity pales in comparison to the opportunity we have with our customers and prospects in our current markets. And yet, our ability to pursue multiple paths to growth is a great strength of your company, and will continue to be. Acquisition — when the likely returns to shareholders are attractive, the addition increases our potential growth and the risks are in line with the potential rewards — will always be on the table as a potential path to growth for our company.
Third: Does Bank of America want to be a U.S. banking company or a global financial services company? Our answer: Both.
We view wholesale financial services as global. Our commercial, corporate and institutional clients are doing business around the world. We cannot serve these clients if we can't provide the global reach they require, which is why we have corporate banking offices in 44 countries around the world, and why we are expanding our ability to provide more products in more places.
Retail banking markets are largely local or regional. This is why we have invested in building market share within the U.S. markets where we have chosen to compete, even as we have divested foreign retail franchises where we felt our presence was too small.
Our preference in fast-growing foreign retail banking markets has been to invest in the best-run large bank in the local market, as we did in Mexico, China and Brazil. This strategy enables us to participate in the growth of the market with a local bank that brings appropriate size and scale to the table; reduces the operational risks that come with managing a foreign banking franchise; and provides the opportunity for us to develop relationships, learn from our partners in the market and explore alliances that can benefit customers and shareholders of both companies.
Our acquisition of MBNA has created something of a corollary to this policy, in that we now own a foreign card operation that is No. 1 in the United Kingdom. This business presents prospects for growth in existing and new markets and offers additional insight into international retail financial services markets.
Finally: What unique advantages does Bank of America bring to the marketplace? Our answer: Many.
In addition to our people and our culture, which, taken together, represent our greatest advantage, we believe there are four additional key attributes that give us a unique advantage in the marketplace:
The knowledge, insight and understanding we gain from working with the largest customer and client base in the industry drive our ability to innovate across all our businesses. We were named Outstanding Corporate Innovator of the Year by the Product Development & Management Association in recognition of our development of products like Keep the Change™, free SafeSend®, Business 24/7™ and Affinity Banking.
More than anything, it was client knowledge and innovation that led to our $0 Online Equity Trades™, which we launched in October 2006. This product enables brokerage clients with a deposit balance of $25,000 or more to execute online equity trades with no fee.
The size and scale of our franchise in the United States gives us a tremendous advantage, as evidenced by our sales growth across products and channels last year. Active online banking customers grew to 21 million, and active online bill payers grew to 11 million — representing 65 percent of the market of online bill payers with demand deposit accounts at financial institutions in the United States. First mortgage applications increased by 7 percent and home equity applications increased by 14 percent over 2005. Customers opened 2.4 million net new checking accounts, which contributed to a net new account gain of 3.7 million.
A key differential for Bank of America is integration. Our focus on integrating across the company enables us to create value that others miss. We are working to serve customers' needs in ways that draw on the power of all our capabilities. Our associates pursued many cross-line-of-business initiatives last year, but none was more successful than the partnership between Global Wealth & Investment Management (GWIM) and Global Corporate & Investment Banking (GCIB). By working together to integrate the delivery of financial services to clients with "core" relationships originated in either business, associates in these groups generated more than a hundred million dollars in incremental net income, proving that we can create value by working together on behalf of our clients.
Execution is a core strength. Our history and culture of superior execution enables us to get things done right — on schedule, on budget and in ways that enhance the customer experience. In 2006, we again executed a large, complex merger transition on time, under budget and virtually flawlessly for our customers. This year it was MBNA and our Card Services business. And our Capital Markets & Advisory Services business proved itself a major player in the leveraged buyout (LBO) market, participating in seven of the 15 largest LBOs last year, including the two largest LBOs in history: Hospital Corporation of America (HCA) and Equity Office Properties (EOP).
It is the combination of these attributes that is enabling us to fulfill our vision for Bank of America — and that enables us to create opportunity and value uniquely for our customers and shareholders in all we do, every day.
Next: What's on tap for 2007.
3. The company we're building.