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How Is Bank of America’s Progress on Cost-Cutting Initiatives?

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Bank of America has focused extensively on cost cutting

Global volatility has rocked financial markets and pressured their margins during 1Q16. Banks (XLF) have been forced to realign their cost structures to remain profitable while containing rising costs in an uncertain and volatile environment.

Since the 2008 financial crisis, Bank of America (BAC) has been focusing extensively on expense control mechanisms. Under its Project New BAC initiative, the bank has cut more than $8 billion in annual expenses. It has also cut its employee count by 25% and significantly scaled down its branch count.

Similarly, peers Wells Fargo (WFC), JPMorgan Chase (JPM), and Citigroup (C) have been cutting down on their employee and branch counts to save on overhead expenses.

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Analysts look out for efficiency ratios

Wall Street analysts keep a close eye on the efficiency ratios of banks. Efficiency ratios will be especially important during the upcoming earnings results, as low interest rates and global events have eaten into banks’ revenues.

An efficiency ratio is a measure of operating expenses as a percent of net revenue. It shows how revenues fuel a bank’s operating expenses. A lower percentage is better, as it means lower expenses compared to revenues.

In 4Q15, BAC’s efficiency ratio was 70%, and its operating expenses were $13.9 billion. While this is a significant improvement from 88% efficiency in 2014, the bank still has room for considerable improvement. This can be accomplished by pursuing further cost-cutting initiatives or by raising revenues.

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