Wednesday, January 26, 2011

BAC - The Consumer Side Of The Business

I examined BAC earnings by the seven business groups as defined in their earnings supplement  to get a sense what is driving and what is impeding growth.  What struck me as rather odd was the mix with the consumer side of the business.

I define consumer by adding the (1) Deposit Business, (2) Home Loans and Insurance and (3) Global Card Services.  Below is a chart of each business unit as a percentage of total revenue net of interest expense.

Deposits - The fee side of the business, saving / checking accounts, money market funds, CDs, student loans.  This business has started contributing more to the business but for the most part has remained flat.

Global Card Services - after taking a dip it has turned back up and contributed almost a third of total net revenue.  I know this part of the business has been showing improved credit quality but I don't necessarily think that trend continues.  For many, credit cards and HELOCs remain a key source of funding.  In a recent post I discussed how only 35% of Americans have 3 months of emergency funds available.  For now this business group has experienced continual drops in provisions for loan losses (14% drop Q4 2010 over Q4 2009).  I suspect that reverses trend though in the coming year.

Home Loans - I was really surprised at this one.  It has literally fallen off a cliff.  Q4 2010 had a 600 million non interest loss making this quarter look even worse but clearly the trend is flat to slightly down.  This clearly shows how weak the US housing market is with BAC being the leader in home mortgage.  I came across a report from iEmergent (chart below) which forecasts flat to declining home loan origination in 2011 versus 2010 with refinance activity falling significantly.

iEmergent expects mortgage loan purchase volume plus refinancings of between $903.8 billion and $990.7 billion this year.  "Expect total volume to move toward the lower end of the range if mortgage rates rise and the refinance spigot shuts off during the first half of the year," said Dennis Hedlund, president of the Iowa-based firm.


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