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Bank of America’s Cost-Cutting Initiatives and Earnings Growth

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Project New BAC

Bank of America’s CEO (chief executive officer) Brian Moynihan has often talked about the importance of cost controls and how these measures could significantly boost the bank’s earnings over the next few years. Banks (XLF) are forced to realign their cost structures in order to remain profitable. They try to contain rising costs in an uncertain and volatile environment and offset the impact of low interest rates.

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Since the 2008 financial crisis, Bank of America has been focusing extensively on expense control mechanisms. During its second-quarter earnings call, Moynihan announced a new expense target of $53.0 billion for 2018. The bank previously didn’t have an annual expense goal, but this figure is $3.3 billion less than its total expenses in the last year.

The expense target comes after Bank of America has cut more than $8.0 billion in annual expenses through a sweeping cost-cutting effort dubbed “Project New BAC” and an ongoing efficiency initiative called “Simplify and Improve.”

Efficiency ratio and operating expenses

In 3Q16, Bank of America’s efficiency ratio was 61.7%. Operating expenses were 3.0% lower at $13.5 billion. While this is a significant improvement from 88.0% efficiency in 2014, the bank still has room for considerable improvement.

Improvement can come with further cost-cutting initiatives or by raising revenues. In comparison, peers Wells Fargo (WFC), JPMorgan Chase (JPM), and Citigroup (C) have reported efficiency ratios of 59.0%, 59.0%, and 57.0%, respectively.

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 since it means lower expenses compared to revenues.

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