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BofA Has More to Trim to Reach Its $53B Cost Target: Q4 Earnings

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Bank of America Corp. 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 overhaul will reduce pressure on executives to stay lean.

Chief Executive Officer Brian Moynihan reiterated Wednesday that the bank can hit the $53 billion goal for annual expenses he set in 2016, even as it continues spending on technology and boosts shareholder payouts. While full-year costs fell less than 1 percent in 2017 to $54.7 billion, Moynihan said the bank is effectively at the target run-rate after progress throughout the year.

“The basic principle is to run a company relatively flat through continued investment and cost effectiveness,” Moynihan said on a call with analysts after reporting fourth-quarter results. “We’ve still got a lot of room ahead of us.”

BofA shares fell 2.6 percent to $30.43 at 10:41 a.m. in New York, the most intraday since November. The stock has gained 34 percent in the past year, outpacing the 24 percent advance of the KBW Bank Index.

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 to meet its annual goal. Already, it’s 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 will cut BofA’s effective tax rate to 20 percent 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 Charlotte, North Carolina-based bank has paid roughly 29 percent in recent years.

The lender is still evaluating what it will do with benefits from the tax overhaul, Donofrio said. Moynihan said the bank might seek to modestly increase some investments, including in technology, while funneling most of the gains to its shareholders. The company last month announced a $1,000 bonus for about 145,000 employees.

“We will continue to have the same rigor around the way we run the company,” Moynihan said. “Just because the tax rates are lower doesn’t change how we’re going to do it.”

Tax Charge

In the short term, though, the tax overhaul resulted in a $2.9 billion fourth-quarter charge, the company said in a statement.

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 tied to Steinhoff International Holdings NV. BofA 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 & Co., Goldman Sachs Group Inc. and Citigroup Inc., 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.”

Expenses Fall

Moynihan announced his cost-cutting goal in mid-2016. 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 of dollars to resolve financial crisis-era messes.

Total expenses for the quarter declined 1 percent to $13.3 billion from a year earlier. That compares with the $13.1 billion average estimate of analysts surveyed by Bloomberg.

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

  • Net income fell 47 percent 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 percent to $2.66 billion.
  • Fixed-income declined 13 percent 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 percent 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 percent.
  • Global Wealth & Investment Management had net income of $742 million, up 17 percent compared to the Q4 2016; revenue of $4.7 billion for the quarter was up 7% compared to Q4 2016.


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