Over the past two decades, Bank of America has grown more than tenfold, increasing the size of its balance sheet from less than $200 billion in the mid-1990s to almost $2.2 trillion today. But current and prospective investors in the nation's second biggest bank by assets shouldn't expect this trend to repeat over the next 20 years.
This isn't because of something Bank of Americahas done wrong; it's the result rather of a legal cap on the share of total domestic deposits that an individual bank can hold. Under the Riegle-Neal Act of 1994 -- which gave nationally chartered banks the power to branch across interstate lines for the first time since 1927 -- a bank cannot acquire another depository institution if their combined deposits would exceed 10% of the nationwide total.
The last time Bank of America came up against this was 2007, when the Federal Reserve approved its acquisition of Chicago's LaSalle Bank. Bank of America held 9% of total domestic deposits at the time, while LaSalle Bank held 0.9%. Taken together, they narrowly snuck under the 10% bar.
But it won't be so lucky in the future. Currently, Bank of America, JPMorgan Chase, and Wells Fargohave market shares that each exceed 10% of total domestic deposits. Bank of America's is 11.3%, followed by JPMorgan's 11.1%, and Wells Fargo's 10.5%.
This matters because, absent lawmakers' suspension of the 10% bar in a future crisis, it eliminates the growth-by-acquisition tactic that's served as the centerpiece of Bank of America's strategy since 1957. It's accordingly critical that Bank of America figures out how to grow organically, which is generally accomplished by earning a high return on equity -- namely, 12% or above.
It also means the nation's largest lenders will be at a disadvantage relative toregional banks.US Bancorp serves as a case in point. With $410 billion in assets, it's the biggest regional bank in the country. But with only $269 billion in domestic deposits, its share of the national total amounts to only 2.5%. This means it can acquire or merge with almost any depository institution it finds attractive, either from a price perspective or in terms of how it compliments US Bancorp's existing business lines.
The net result is that, while I believe Bank of America provides a promising short-term opportunity to maximize one's bank-stock returns, US Bancorp takes the cake in my opinion when it comes to a long-term buy and hold.
The article The Legal Barrier to Bank of Americas Growth originally appeared on Fool.com.
John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.