Reuters Breakingviews delivers agenda-setting financial insight. Its global correspondents react to stories as they develop, delivering sharp and provocative commentary on big financial news as it breaks. Click here to read more international insights.
Bank of America investors had better hope chief executive officer Brian Moynihan is long-term greedy. About half of his pay is now tied to hitting specific targets for average return on assets (ROA) and tangible book value by 2015. The bank's first-quarter showing of $2.3-billion (U.S.) applicable to shareholders is better than last year. But without significant further improvement, Mr. Moynihan is going to fall way short.
Shareholders reacted viscerally to the results on Wednesday. Earnings missed consensus estimates by just 2 cents, yet owners wiped more than 6 per cent off the stock at one point. The results were a stark reminder that investing in the bank is a longer game. In addition to weakness in consumer banking, mortgages and trading, it also had to sock away more for legal costs, whereas rivals Citi and JPMorgan caught a break. Annualized return on equity for the quarter was a meagre 4.18 per cent.
Mr. Moynihan has other, related metrics to worry about. First-quarter return on assets was just 0.48 per cent, while adjusted tangible common equity grew just 3.7 per cent from last year's first quarter. Both are below the minimum threshold Mr. Moynihan needs to hit by the end of 2015 to earn even a portion of the $5.5-million in pay linked to performance. To get paid in full, ROA needs to average 0.8 per cent and tangible common equity has to grow an average 8.5 per cent annually over the next three years.
That's a big leap. Earnings were not all bad news, though. Home loan delinquencies fell nearly 40 per cent, the bank settled some outstanding litigation for $500-million and inked another deal on problem legacy mortgages with Fannie Mae. Other lawsuits remain, however.
Analysts currently expect BofA's ROA to average 0.62 per cent over the next three years, which would guarantee Mr. Moynihan only the minimum payout. If tangible book value grows an average of 5.25 per cent –also the minimum set for that metric – then the boss would only get his hands on a third of the $5.5-million.
For once, a spot of executive greed for a bigger payout would be good news for shareholders, too.