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What Were Bank of America’s Key Earnings Drivers in 3Q16?

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Sep. 29 2016, Updated 12:05 p.m. ET

Investment banking revenue

Bank of America (BAC) expects its investment banking revenue to rise in 3Q16. Christian Meissner, BAC’s head of investment banking, pointed out improvements in the company’s investment banking activity, the major reasons for which were the oil price recovery and the stabilization of the market.

Over the last few quarters, investment banking revenues in the banking industry (XLF) have been sluggish, and the operating environment has been difficult. Peers Citigroup (C), Goldman Sachs (GS), and JPMorgan Chase (JPM) reported weak investment banking revenues in 1H16. In 1H16, Bank of America’s investment banking fees fell 12% to $1.4 billion.

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Positive outlook on oil prices

Bank of America’s exposure to the energy sector was $21.2 billion in 2Q16, making up 2.4% of total loans. Against these, the bank has 4.7% energy reserves. Falling oil prices hurt the company’s earnings in 1Q16, as they created provisions against losses on loans to the energy sector. However, in 3Q16, oil prices recovered. Further, analysts expect oil prices to rise further.

Cost-cutting initiatives

In a recent CNBC interview, Bank of America CEO Brian Moynihan discussed the importance of cost controls and how such measures could significantly boost BAC’s earnings over the next few years. Bank of America has an expense target of $53 billion for 2018. This is $3.3 billion less than its total expenses in the last year.

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