Expanding wealth management
Major US banks (XLF) are focusing on expanding their wealth management businesses to offset the negative impact on revenues from low interest rates and muted trading activity.
At the Deutsche Bank Global Financial Services Conference held during the week ending June 3, 2016, Bank of America’s President of Wealth Management US Trust, Keith Banks, highlighted the importance of expanding this business. He also laid out the bank’s strategy for doing so, which will involve heavy investments. Notably, BAC competes with UBS, Morgan Stanley (MS) and Wells Fargo (WFC) in this segment.
Expansion strategy and rationale
Specifically, according to a Reuters report, Bank of America plans to add 100 financial advisors, which would bring the total headcount to above 450 over the span of next three years. This strategy is also part of the company’s plan to tap into ultra-rich clients.
Traditionally, wealth management is considered a stable revenue-generating segment. Prolonged low interest rates and challenging market conditions hurt revenues from interest-related activities as well as investment banking and trading. Banks have thus become dependent on wealth management for boosting income.
But although wealth management is a stable revenue generation source, BAC’s Global Wealth Management and Investment segment could be still impacted by persistent market volatility. In 1Q16, the segment posted revenues of over $4.4 billion, which was 2% lower than one year previously. Profits, however, were 13% higher due to lower expenses. Currently, BAC’s wealth management arm contributes ~23% of the company’s total revenues.
Now let’s go back and do a breakdown of BAC’s 1Q16 earnings.