Can Brian Moynihan Survive Long Enough to Fix B of A?

Brian Moynihan has been on a brutal cleanup mission at Bank of America (BAC) for three years, but his toughest task still lies ahead.

Moynihan, who in January 2010 became chief executive of one of the country's biggest and most troubled banks, has cut costs, raised capital levels and tried to placate waves of angry investors, bondholders and government agencies.

In the coming weeks, he will have to convince regulators that Bank of America has solved enough of those problems to start rewarding loyal — and increasingly impatient — shareholders with higher dividends or stock buybacks. Even if he succeeds, many investors, analysts and employees doubt that Moynihan is the kind of aggressive executive who can transform B of A into an earnings machine.

"He's been admirable, considering," is the verdict of William B. Smith, whose Smith Asset Management owns Bank of America shares. Still, in terms of running a diversified megabank long term, "there's very few people who can pull it off."

Though bank watchers praise Moynihan's recent capital-raising prowess — and the bank's doubling share price this year — predictions are mixed on how much time he has left before investors demand new blood. No one blames him for the problems that got Bank of America into this mess; those would be the fault of Countrywide CEO Angelo Mozilo and previous B of A CEO Ken Lewis, who thought it would be a good idea to buy Countrywide's massive mortgage operations as the bottom was falling out of the mortgage world. But some think a bolder, more big-picture leader than the task-oriented Moynihan will be necessary.

"The Jamie Dimons and the Kovaceviches and the Stumpfs of the world, there's very few of them," says Smith, referring to the CEO of JPMorgan Chase (JPM) and the past and current CEOs of Wells Fargo (WFC). "You want to go into battle with [them]. … You're not going to go into battle with Vikram Pandit, and I don't think you're going to go into battle with a Brian Moynihan."

The situational comparisons with recently ousted Citigroup (NYSE: C) leader Pandit are inevitable. Like Pandit, Moynihan became CEO after his bank's fortunes had already faltered, and inherited the task of cleaning up his predecessors' mistakes. Like Pandit, Moynihan has slowly and deliberately whittled down the bank's still-sprawling operations, selling off more than $60 billion in assets over the past three years. (Pandit got rid of some $500 billion in assets before the Citigroup board apparently decided that he wasn't doing enough.) And like Pandit, Moynihan is not a flashy, charismatic CEO.

Some investors have long said that the bank's pieces are worth more than the sum of its parts and advocate for more breakups and spinoffs of businesses like Bank of America's massive credit card operations or its crisis-era Merrill Lynch purchase. Other investors and analysts are cooler to that idea, but warn that Moynihan still faces a wealth of problems to resolve, including $25.5 billion in outstanding mortgage putback claims and unceasing legal battles.

Bank of America paid $2.4 billion to settle one investor lawsuit this fall, eating up its third-quarter profits. Moynihan acknowledged in December that he must address that "recurring earnings question" by cleaning up more of the bank's mortgage problems.

"We had what looked like a pretty solid quarter, but at the end of the day, we didn't make any money because we took care of a piece of litigation," he told investors during a Goldman Sachs (GS) financial services conference in December. "We need to make sure that we have the recurring earnings stream at the same time."

Most of the investors who are celebrating Bank of America's share price this year also make clear that their continued support for Moynihan hinges on the promise of getting a payback soon. In 2011, the Federal Reserve ignited two years of doubts about Bank of America's future when it rejected its petition to return capital to shareholders. The Fed decision pulled the rug out from under Moynihan, who had already told investors to expect a "modestly increased" dividend that year.

"He's done a fine enough job lately to warrant another term. He's obviously dealing with a lot of complicated issues, and I don't think a change in leadership would be good right now," says Alan Villalon of Nuveen Asset Management, which owns Bank of America shares. He, like Smith, was pleased with the trajectory of those holdings this year — the bank's shares are the best performing stock on the Dow Jones Industrial Average for 2012, more than doubling since the beginning of 2012 and closing at $11.61 on Monday.

But Villalon warned that Moynihan's time may run out quickly if the Fed blocks another dividend or buyback request this year.

"With some of the promises he made in the first investor day … people were expecting capital giveback sooner. There were some missteps there," Villalon says. "I hope we're not in that situation" again.

The bank has already surpassed the 8.5% international capital ratio that will eventually be required by regulators, but is hesitant to make promises. Moynihan told investors in December that "the question will be what to ask [regulators] for, and when, because we're not going to fail this. … It's pretty clear that we've got the capital we need. And I think now it's just a question of returning."

Bank of America spokesman Scott Silvestri declined to comment further.

Industry members also question how quickly Bank of America will be able to grow again after years of retrenchment. Moynihan has targeted 30,000 job cuts and an eventual $8 billion in annual expense reductions with his Project New BAC. But analyst David Konrad of KBW pointed out recently that the bank is losing share in most businesses it competes in. Some of that pullback is deliberate, including the bank's decisions to leave the wholesale and correspondent mortgage markets, to sell international credit card businesses and to lay off investment bankers. But it leaves the question of how Moynihan is going to restart growth once he's finished cutting back.

Moynihan acknowledged the somewhat absurd balancing act he faces: "We want to be the biggest company we can be to impact our customers; and the smallest, most efficient company we can be for our shareholders and equity," he said at the Goldman Sachs conference.

He is emphasizing mobile banking as one way to boost the bank's business and attract new customers while cutting infrastructure expenses. Customers using Bank of America's mobile options have grown by 30% this year, and numbered 11.6 million by the end of November, he said recently. He is also staffing up in small-business banking and wealth management.

There are some signs that the mobile efforts will pay off in the long term. Despite its role as the villain of Bank Transfer Day in 2011, when its short-lived debit card fee sent some customers fleeing from big banks, Bank of America is now becoming the biggest single destination for customers fed up with their current banks. According to a June survey by the consulting firm AlixPartners, a fifth of the people who switched banks in the previous year chose to move their money to Bank of America.

AlixPartners managing director Bob Hedges, a friend and former coworker of Moynihan's, credits Bank of America's mobile banking for attracting so many bank switchers. But Albion Financial analyst Jason Ware, while praising the bank's mobile efforts, questions how quickly they will make a difference to Bank of America's bottom line.

"Given he's been in for three years now, the clock is starting to tick," Ware says. "If there aren't measurable improvements noted in the next few years … the board's going to have to do something."

Friends and employees praise Moynihan's work ethic, pointing out how much he has accomplished given where Bank of America was three years ago. A Boston lawyer turned dealmaker at Fleet Financial, Moynihan was one of the few senior executives to survive Bank of America's takeover. He bounced around B of A, running its investment bank and taking a short stint as its general counsel, before emerging from Lewis's implosion to tackle his mistakes.

"Nobody works harder in banking, or anywhere. He's an unbelievably hard worker and one of the smartest guys I've ever met. … He's very fact-based, grind-it-out, hard-nosed," says Mike Lyons, head of corporate and institutional banking at PNC Financial Group (PNC), who's known Moynihan for about twenty years and used to be one of his key advisors at Bank of America.

But the years-long cost-cutting plan has also taken its toll on bank morale, and employees and consultants who do business with the bank express frustration with high levels of bureaucracy that they say make it difficult to get much done internally.

"It seems like constant change, and when that happens year after year after year, that wears on people. … Folks inside the bank are feeling pretty beat up these days," says one bank employee, who was not authorized to speak on the record.

"He got stuck in a tough position … but he's not the rah-rah kind of leader," the employee adds. "I don't think that anyone necessarily thinks that Brian's in this job for five to ten years down the road. I still think he gets viewed as the transitional leader."