Bank of America investors had better hope the bank’s chief executive, Brian Moynihan, is long-term greedy. About half his pay is now tied to hitting specific targets for average return on assets and tangible book value by 2015. The bank’s first-quarter showing of $2.3 billion applicable to shareholders is better than last year. But without significant further improvement, Mr. Moynihan’s 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 percent 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 Citigroup and JPMorgan Chase caught a break. Annualized return on equity for the quarter was a meager 4.18 percent.
Mr. Moynihan has other, related metrics to worry about. First-quarter return on assets was just 0.48 percent, while adjusted tangible common equity grew just 3.7 percent from last year’s first quarter. Both are below the minimum threshold that the chief executive 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, return on assets needs to average 0.8 percent and tangible common equity has to grow an average 8.5 percent annually over the next three years.
That’s a big leap. Earnings were not all bad news, though. Home loan delinquencies fell nearly 40 percent, 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 Bank of America’s return on assets to average 0.62 percent over the next three years, which would guarantee Mr. Moynihan only the minimum payout. If tangible book value grows an average of 5.25 percent -also the minimum set for that metric â€" 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.
Agnes T. Crane is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
