Bank of America Earnings: More Cost Cuts Are Hard to Come By

Former Morgan Stanley CEO John Mack was once known as Mac the Knife. Jimmy “Three Sticks” Robinson steered American Express for more than a decade and a half. And the notorious Drexel Burnham Lambert, before it was dominated by Mike Milken, was founded by a guy who went by Tubby.

If Wall Street CEOs still had nicknames, perhaps Bank of America’s would be known as Brian Moyni-Scissorhands. Or maybe not. It’s not that catchy. Still, it would be deserved. Since taking over as CEO in 2010, Moynihan has cut Bank of America’s non-interest costs by $28 billion to just under $55 billion. For the first time this year, Moynihan, for a quarter at least, finally got the bank’s expense ratio, long the highest among its big rivals, down to 60 percent, which was a milestone.

To the Bone

Bank of America had a harder time chopping expenses, which were elevated in part because of legal costs after the financial crisis, in the past year

Source: Bank of America

And yet, even for Moynihan, cutting Bank of America’s expenses any lower could be difficult. The bank’s fourth-quarter earnings, reported on Wednesday morning, was evidence of that. After adjusting for a one-time tax charge, the bank reported a better-than-expected 47 cents a share, or $5.3 billion. Revenue was up 7 percent from a year ago, its biggest annual increase in a while.

Growing Again

Bank of America’s revenue increase in 2017 was the biggest in years

Source: Bloomberg

But for the first time in a while, expenses — which had been declining regularly, down nearly $600 million in the third quarter — esssentially held steady, dropping just 0.9 percent in the last three months of the year. The bank restated its third-quarter results, adding $260 million to expenses because of an accounting change. Without the accounting change, it appears that expenses rose in the fourth quarter, which is the first time that has happened in years. Even at $55 billion, the bank is still roughly $2 billion shy of its $53 billion expense goal.

The good news is that just as Moynihan seems to have cut as much as he can, the bank’s lending business is delivering. Loans rose 3.3 percent. And profits in its consumer lending division rose 14 percent. More important, its effective return on equity in the division rose to 24 percent, up from 22 percent a year ago. Moynihan’s plan all along was to cut costs and rake in the profits when interest rates increased and made lending more profitable. And that’s working out now. The problem may be that it has taken longer than expected for interest rates to comply.


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