BAC’s cost cutting initiatives
Banks (XLF) have been forced to realign their cost structures in order to remain profitable while containing rising costs in a volatile and low interest rate environment. Since the 2008 financial crisis, Bank of America (BAC) has been focusing extensively on expense control mechanisms. Bank of America has an expense target of $53 billion for 2018.
During the earnings call, CFO Paul Donofrio discussed the bank’s strategy to achieve its cost targets. One-third of the cost savings are expected to accrue from “continued progress on delinquent loan servicing,” while the rest will result from implementation of technology to digitize processes and elimination of handling costs.
In 3Q16, the bank’s efficiency ratio was 61.7%, and operating expenses were 3% lower at $13.5 billion. While this is a significant improvement from the 88% efficiency in 2014, the bank still has room for considerable improvement with further cost cutting initiatives or by raising revenues. In comparison, its peers Wells Fargo (WFC), JPMorgan (JPM), and Citigroup (C) have reported efficiency ratios of 59%, 59%, and 57%, respectively. The efficiency ratio is a measure of operating expenses as a percent of net revenue that shows how revenues fuel a bank’s operating expenses. A lower percentage is better, as it means lower expenses compared to revenues.