Bank of America is increasing its presence in the margin loans business in a reversal of the dramatic retreat it made several years ago from lending against large equity stakes after it sustained huge losses on a soured deal.
The second-largest US bank has been hiring bankers this year and making more balance sheet funds available to the corporate equity derivatives business, according to sources familiar with the matter, leading to expansion across collars, accelerated share repurchases and margin loans as part of a wider push in equities trading and global markets.
BofA has participated in at least two sizeable corporate margin loans in recent months, sources said. BofA was one of several banks involved in a roughly US$1bn margin loan in connection with the Larry Ellison-backed takeover of Paramount Global, sources said.
Overall, it’s been the most active period for BofA in margin lending since it pulled back from the business after reporting a US$292m charge in Q4 2017 related to former South African retailer Steinhoff International and loans made to its former chairman Christo Wiese secured by his stake in the company.
BofA chief executive Brian Moynihan alluded to the return to margin loans at Barclays' financial services conference earlier this month. “We’re building back up the equities business and getting our fair share there – some of the lending business and stuff. So we feel good about that,” Moynihan said.
A spokesperson for Bank of America declined to comment. Spokespeople for the investor group overseeing the Paramount takeover didn't respond to a request for comment.
Lending against large equity holdings is an important revenue generator for most investment banks. But the concentrated nature of these deals – which are often secured on a single stock – can also make them extremely risky.
Few incidents illustrate the potential dangers better than a €1.6bn loan that banks made to South African businessman Wiese. The loan was collateralised twice over, secured on €3.2bn of Steinhoff stock, but that wasn’t enough to protect banks including BofA, Citigroup, Goldman Sachs and JP Morgan against a roughly 90% plunge in Steinhoff’s share price in December 2017 following the revelation of accounting irregularities.
Losses at other banks ran into the hundreds of millions of dollars, but BofA’s response to these events was the most radical. Even though an internal investigation concluded Steinhoff was to blame for BofA's charge, the bank decided to scale back margin lending significantly and sold other loans on its books to rivals.
"It embarrassed Moynihan," said one senior banker with knowledge of those events. "[Senior investment bankers] tried to explain it away and the board flipped out and made [them] scale it down."
Many saw the retreat of this one-time big hitter in margin lending as emblematic of BofA's growing risk aversion more broadly – something that reportedly contributed to the exit of investment banking chief Christian Meissner around a year later.
Rebuilding
Fast forward several years and BofA is reinvesting in the corporate equity derivatives business, which covers activities that help clients manage strategic equity stakes across the globe. Its reemergence has raised eyebrows among competitors.
“I was surprised,” said a senior banker at another firm. “They are back [in margin lending], it seems.”
“Recently we’ve seen them in a thing or two,” said a second senior banker. “The last four to five years they’ve not been a big player in the margin loan market as a result of some of the losses that they had.”
As well as hiring bankers and devoting more financial resources to these activities, BofA has built the risk and control functions needed to sign off margin loans across different jurisdictions within a narrow timeframe – a requirement that is essential for those looking to compete on jumbo trades.
“When corporates want a margin loan, they’re normally looking at a very quick timeframe. So you need a robust process in place, with all the risk limits and approvals, to ensure you can move quickly and win these mandates,” said one industry veteran.
BofA’s push comes as activity around the Visa B share trades has started to wind down, freeing up balance sheet funds and providing an incentive to find other sources of revenue. The Visa trades have been big business for banks’ equity derivatives and financing desks, which have helped firms manage their decades-old stakes in the payments company, and BofA has been one of the most prominent in this highly lucrative space.
More broadly, BofA has been investing heavily in recent years to make up ground in sales and trading, including a concerted effort to expand its equities franchise.
Moynihan told the Barclays conference that the bank is on course for its 10th consecutive quarter of annual growth in trading revenues. “That's a very strong performance [which is] starting to reflect the investments we made a few years ago,” he said.