Diving Deeper in to Bank Of America Corp (NYSE:BAC)’s Progress

Bank of America Corp (NYSE:BAC) is fighting many wars currently and appears to be winning most of them but sometimes not as quickly as investors would like. The bank is still battling financial crisis issues, has paid billions of dollars to settle legal problems and is rapidly clearing its path. In the most recent quarter, 1Q2015, the bank saw its litigation expenses remain flat from the previous quarter and the amount of mortgages handled by its LAS or Legacy Asset Services hit a new low, a step in the right direction.

The latest quarter succeeded in most part in bringing to the fore the impressive progress that Bank of America is making to return to its former glory as a highly profitable business organization. The bank has come a long way, but the time remaining for issues to normalize in the company is short, which is why despite the mixed results in the latest quarter, Bank of America has a solid long-term outlook.

1Q2015 performance highlights

  • Bank of America Corp (NYSE:BAC) earned net income of $3.4 billion or adjusted EPS of $0.36, better than the consensus estimate of $0.29. Revenue for the quarter came in at $21.9 billion in 1Q in adjusted basis.
  • The bank’s deposit balances in the quarter rose to record levels of $1.15 trillion. Mortgage originations increased to $17 billion and credit quality increased as adjusted net-charge offs fell 28% YoY.
  • BAC issued 1.2 million new credit cards (most going to customers that it already has existing relationships with)
  • Non-interest expenses fell 6% YoY to $14.3 billion, indicating continued efficiency drive.
  • The bank’s tangible book value (TBV) per share rose 7% YoY to $14.79 while bank value per share was up 4% YoY to $21.66.

Efficiency drive takes center-stage

There are parts of the business that the management doesn’t have control, especially on issues such as legacy legal risk, dealing with regulators, low interest rates, and sluggish economic growth. However, where things can be adjusted to produce better results, Moynihan leads the way as you could expect of a good manager.

Efficiency is one area Bank of America Corp (NYSE:BAC) is trying to leave no stone unturned, and the progress is impressive so far.

At the end of the most recent quarter, Bank of America disclosed having a little fewer than 220,000 workers, having dropped about 4,000 employees with 35% of the job cuts taking place in the Legacy Asset Services and 65% in the rest of the company.

The goal at Bank of America is to bring overall headcount to the level that existed in 2008 before the bank brought in nearly 100,000 employees through the acquisition of Merrill and Countrywide.

Technology implementation is one of the strategies helping Bank of America Corp (NYSE:BAC) to lower its headcounts and also cut overall operating expenses. The bank’s management has highlighted that there is still more room to save on operating expenses as they hope to save more money when interest rates and the economy at large improve.

The other area that implementation of technology is having a widely positive impact on the company is mobile banking. As of the end of the latest quarter, the bank disclosed 70 million customers in its mobile banking segments compared to 2 million customers in the prior year.


Investing in areas of opportunity

While Bank of America Corp (NYSE:BAC) is busy driving efficiency, especially eliminating headcount, it is not lost on the bank that it needs to drive future growth. That is why the bank has continued to invest in such areas as Merrill Lynch, the U.S. Trusts and Global Banking, hiring new financial advisors to bolster those operations. With that, you see a company trying to move things in tandem.

As a result of the headcount reductions and other tweaks, Bank of America was able to cut its 1Q expenses by 6% without taking into account litigation costs. Factoring litigation expenses shows that overall expenses were down 30% in the latest quarter. Litigation expenses dropped to $370 million 1Q2015 from $6 billion in 1Q2014.


There is not only more room for Bank of America to continue driving costs down, but the bank has the will to do just that as demonstrated by the recent cost improvements. The combination of greater cost controls and improvement in interest rates should enable the bank to significantly reduce operating expenses and increase earnings with ripple effects pushing share price up from the current levels.

More predictable earnings

Revenue of $21.9 billion and adjusted EPS of $0.36 are not the best results that Bank of America Corp (NYSE:BAC) and afford to give its investors. There is room to produce better results both at the top and bottom-line levels, and BAC is not leaving anything to chance.

The bank has set several processes in motion aimed at bolstering revenue and accelerating EPS growth. The company is trimming its workforce, which should lead to more cost savings with the ultimate impact being felt on the EPS. Additionally, the company is determined to retire some shares, announcing $4 billion buyback program for the next about five quarters starting in 2Q2015.

Bank of America Corp (NYSE:BAC) will be returning more money to shareholders this year compared to the previous year. The plan is to return even more money in the future as the company eliminates its many litigation challenges and continues to build capital.

In addition to stock repurchase, Bank of America is also returning more money to shareholders through dividends. The bank received Fed approval to pay dividends of $0.05 per share, although it is required to resubmit its capital plan, which could impact both dividend and buyback programs, if the company doesn’t address regulator concerns.

At this point, the management of Bank of America Corp (NYSE:BAC) is happy that capital and liquidity have improved to record levels, allowing for more shareholder returns.

Short-term outlook

It is area clear that Bank of America Corp (NYSE:BAC) today stands in a much better position to keep growing than a few years ago. Though economic growth may be below trends and interest rates poor,  the bank should still do well with current interest rates and see profitability poised to jump alongside increase in interest rates.

BAC targets 1% in ROA and 12-13% return on TBV. Moynihan has indicated that the targets would likely not be met until the end of 2016.


The bank’s long-term should benefit from improvements in interest rates and overall economy. The company should be over the hill on the vast majority of legal challenges and be able to start displaying its normalized earning power slowly. Upside remains as the bank still has around 16 percent of total capital allocated to Legacy Asset Services (the division with most of the Countrywide Assets). While, 60 day delinquents at LAS dropped 19 percent to 153Kt, the division posted a loss of $238 million in the most recent quarter. As the company continues to work through that, its earnings and capital position will benefit.


Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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