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Shares of Bank of America (NYSE: BAC) are off to a forgettable start this week, down more than 3% as the closing bell on Monday approaches. The explanation for the drop appears to be threefold.
First, it was announced Monday morning that Bank of America's investment banking unit, Merrill Lynch, was fined $12.5 million by the Securities and Exchange Commission to settle allegations that Merrill maintained "ineffective trading controls that failed to prevent erroneous orders from being sent to the markets and causing mini-flash crashes."
As the SEC's press release went on to note:
While $12.5 million may not be a lot to Bank of America -- it is, after all, a multitrillion dollar bank that earns billions of dollars in profits each quarter -- this is a reminder that banks are facing an especially onerous regulatory and compliance regime that's eroding profits and making it difficult for banks to earn their costs of capital, and thereby create value for shareholders.
Second, it was also reported on Monday that Bank of America will be slashing jobs in its investment bank in Asia. This follows a similar report from Goldman Sachs, which is planning to cut roughly a third of its 300 investment banking positions based in Asia, excluding Japan.
Bank of America's plan is more modest, only impacting a couple dozen jobs, but, like above, it serves as a reminder of the inhospitable environment in which banks find themselves today. Thanks to low interest rates and high compliance costs, banks have to cut costs wherever they can in order to bolster otherwise lackluster profitability.
Finally, it's worth noting that other bank stocks are down on Monday too, including Wells Fargo and JPMorgan Chase -- which are Bank of America's primary competitors among large universal banks. The implication is that the decline in Bank of America's shares is also being fueled by industrywide concerns.
The one concern that comes to mind immediately is low interest rates, which are compressing lending margins and profits across the industry. There was chatter leading up to the Federal Reserve's meeting last week that the central bank could soon raise rates, but it chose again to take a rain check -- much to bankers and bank investors' chagrin.
In sum, while I remain bullish on Bank of America's shares, nobody ever said that owning a stake in the North Carolina-based bank would be smooth sailing.
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John Maxfield owns shares of Bank of America, Goldman Sachs, and Wells Fargo. The Motley Fool owns shares of and recommends Wells Fargo. The Motley Fool has the following options: short October 2016 $50 calls on Wells Fargo. The Motley Fool recommends Bank of America. 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.