Bank of America's Most Profitable Business Segment May Surprise You

Bank of America's consumer bank still pumps out profits despite the downward trend in its branch count. Image source: iStock/Thinkstock.

With the growth of digital banking, bank branches have gotten a bad name. This is one reason Bank of America (NYSE: BAC) has slashed its branch count by more than 20% since CEO Brian Moynihan took over at the beginning of 2010.

Interestingly, though, if you dig into Bank of America's business units, you'll find that its consumer banking segment is its most profitable. It earned $7.2 billion last year, up from $6.6 billion in 2015.

That's not only the largest profit in absolute dollars among Bank of America's operating units, as its runner-up global banking segment earned $5.7 billion in net income last year, it's also the most on a relative basis. The consumer banking unit's return on average allocated capital last year was 21%, which is tied for first place with its global wealth and investment management segment.

Data source: Bank of America. Chart by author.

This doesn't necessarily mean branches are still in vogue. After all, the increased digitization of banking is reflected in the profit Bank of America earns from its consumer bank, the benefits of which are substantial.

The North Carolina-based bank says an automated deposit costs 90% less than a deposit done at a branch, and figures from JPMorgan Chase back this up. According to JPMorgan, it costs $0.65 to handle a deposit transaction in a branch, $0.08 per transaction on an ATM, but just $0.03 per mobile deposit.

This starts to add up when you consider that Bank of America has more than 21 million active users of its mobile banking app. A full 68% of the bank's deposits are now done without a teller's assistance, either by way of an ATM or remote deposit capture on a smartphone.

The net result is that Bank of America has been able to meaningfully cut its expense base. Its average cost per $100 in deposits has dropped by 34% since 2010, the bank noted last year, going from $2.61 to $1.71 as of the first quarter of 2016.

As these trends continue, not only should it make Bank of America more profitable, but it will further widen the profitability gulf between its consumer banking unit and the three other operating segments.

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John Maxfield owns shares of Bank of America. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.