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Despite poor service, bank makes a good investment

By Malcolm Berko Published: May 28, 2006
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Dear Mr. Berko: What are your thoughts on Bank of America? It has a good yield of 4.4 percent and a good record of dividend growth, which is something you really like. Why were earnings lower in 2005 than projected? If you think it's still a good stock, I'd like to buy $3,000 worth for my Individual Retirement Account and reinvest the dividends each quarter, which I have done with every stock in my IRA.

I'm 68, still working because I got caught in the tech and dot-com debacle and lost nearly 60 percent of what I had invested. I used to have an account at NationsBank when they were taken over by Bank of America, but the service at the new bank was terrible compared to NationsBank. I now bank at a hometown bank, but I think I would like to buy Bank of America stock. Please tell me what you think.

E.K., Boca Raton, Fla.

Dear E.K.: Bank of America Corp. (BAC-$49.38) was formed by the merger of NationsBank (a customer-friendly bank) with Bank of America (not a customer-friendly bank) in late 1998. In early 2004, Bank of America (still not a customer-friendly bank) purchased FleetBoston, a very customer-friendly bank.

After five years of good earnings growth, it appears that BAC's earnings for 2005 were not as strong as anticipated. Earnings for 2005 were disappointing and came in at $4.04, which was a dime lower than guidance, the result of poor performance in BAC's brokerage and trading division, and unexpected residual costs from the FleetBoston merger.

I believed that BAC might soon become one of the most profitable banks in the nation with revenues and net income surpassing those of CitiGroup. With 6,000 branches, BAC is truly a nationwide bank and arguably the dominant player in the high-growth regions of the country. BAC has a huge domestic deposit base (probably the largest in the nation) that provides an inexpensive source of funds.

However, BAC has three big problems.

1. Chief Executive Officer Kenneth Lewis (according to several BAC high-level "small shots") lacks the respect of subordinates in the field, as well as some of the boys at corporate headquarters.

2. BAC's investment banking and brokerage division is its weakest-performing unit.

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