B of A has ways to go to hit $53 billion cost target this year

Bank of America once excited investors by pledging steep cost cuts by the end of this year. It still has a ways to go.

The lender showed promise on revenue growth, as net interest income jumped to the highest in more than five years and revenue from trading and investment banking both topped estimates. Now, analysts question whether it can leverage that by further cost cuts or if tax reform will reduce pressure on executives to stay lean.

Bank of America, which spent more than any U.S. rival to clean up operations after the financial crisis, will have to eliminate about $1.7 billion in expenses this year. Already, it has cut employees in 23 of the past 25 quarters, including 463 in the most recent period. But quarterly results posted Wednesday show it still has to find more savings — somewhere.

Last month’s Republican-led tax overhaul should cut B of A’s effective tax rate to 20% in 2018, Chief Financial Officer Paul Donofrio said on a call with reporters, which should help boost this year’s earnings and potentially reduce shareholder pressure on costs. The bank has paid roughly 29% in recent years.

The lender is still evaluating what it will do with benefits from the tax overhaul, Donofrio said. Chief Executive Brian Moynihan said on the call that the bank might seek to accelerate some investments, including in technology, while most of the gains will go to shareholders. The company last month announced a $1,000 bonus for about 145,000 employees.

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In the short term, though, the tax changes resulted in a $2.9 billion fourth-quarter charge. The expense, roughly in line with what Moynihan forecast in December, included about $1.9 billion in changes to deferred-tax assets, which essentially function as IOUs that reduce tax bills.

Fourth-quarter earnings were also crimped by a $292 million charge for a loan to Steinhoff International Holdings NV. B of A got stung providing a margin loan that used Steinhoff’s stock as collateral, according to a person briefed on the matter who asked not to be identified discussing client business. The bank joined other big U.S. lenders, including JPMorgan Chase and Citigroup, that got burned lending to the embattled South African retailer.

“There’s no change in risk appetite in the company,” Moynihan said. “Once in a while, something doesn’t turn out the way we want because that’s what the definition of taking risk is.”

Moynihan announced his cost-cutting goal in mid-2016, promising to reduce annual expenses to $53 billion by the end of this year. At the time, the bank had been spending more than $57 billion annually. But that already was down from roughly $70 billion in the early part of Moynihan’s tenure, when the firm was shelling out billions to resolve financial crisis-era messes.

The second-largest U.S. lender ended 2017 with 209,376 full-time employees, the company said Wednesday. Compensation expenses were elevated in the fourth quarter as the Charlotte, N.C., bank accelerated bonus payouts ahead of changes to U.S. tax laws.

Total expenses for the quarter declined 1% to $13.3 billion from a year earlier. That compares with the $13.1 billion average estimate of analysts surveyed by Bloomberg. Full-year costs fell less than 1% to $54.7 billion.

Here’s a summary of Bank of America’s fourth-quarter results:

  • Net income fell 47% to $2.37 billion, or 20 cents a share, from $4.54 billion, or 39 cents, a year earlier. Adjusted profit, which excludes the impact from the tax overhaul, was 47 cents a share, the bank said, exceeding analysts’ 45-cent estimate.
  • Total trading revenue dropped 8.8% to $2.66 billion. Fixed-income declined 13% to $1.71 billion, while equities was unchanged at $948 million. Analysts had expected bond and equity revenue of $1.65 billion and $869 million, respectively.
  • Net interest income rose 11% to $11.5 billion from a year earlier. Net interest margin, the difference between what the bank pays depositors and charges borrowers, rose 3 basis points from the previous quarter to 2.39%.
Bloomberg News
Earnings Expense management Bank of America
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