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| | Why Bank Of America?
Description of the Business
Bank Of America is a diversified financial services company. Its main market is the USA.
Analysis of Competitors
The main competitors of BAC are:
- JP Morgan
- Wells Fargo
- Citigroup
- US Bancorp
- Many local smaller banks like Fifth Third Bancorp, Hudson City Bancorp
- Investment banks like Goldman Sachs, Morgan Stanley, Deutsche Bank, Credit Suisse
In the banking sector there is intense competition and it is difficult to differentiate. However there are significant barriers of entry and switching costs are high. In our opinion the banking industry is an oligopoly with the possibility for limited collusion, because of the high switching cost and brand reputation.
Competitive Advantages
As a financial organization it is difficult to differentiate from competitors. Banks are competing on price and services. A very important critical success factor is risk management.
A bank can achieve lower prices (lower interest rates on loans) compared to competitors by having lower funding costs for example because of deposits or high credit ratings. Another important differentiator is the perceived trust customers have in a bank.
The big banks have a competitive advantage compared to smaller local players, as they have the resources to provide big loans to big corporations.
Based on our assessment we think that BAC is one of the major players in the US banking sector. Their size provides opportunites for economies of scale.
Financial Analysis
BAC funds a large part of their loans with low cost deposits, which is a competitive advantage. BAC paid back TARP money and their ratio's are adequate.
Risks
The main risks are:
- credit losses, which could even lead to the need to raise additional capital
- reputational risk, which could lead to reduced amounts of low cost deposits or even a bank run
- liquidity risk, unaible to fund short-term liquidity needs because of frozen capital markets or in case of a bank run
However we conclude in the short term that BAC has a average risk rating and we will use as discount rate 11%.
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