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How BAC’s Cost-Cutting Initiatives Could Drive Earnings Growth

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Project “New BAC”

Bank of America (BAC) CEO Brian Moynihan has repeatedly discussed the importance of cost controls and how such measures could significantly boost the bank’s earnings over the next few years.

Since the 2008 financial crisis, Bank of America has been focusing extensively on expense control mechanisms. During BAC’s 2Q16 earnings call, Moynihan announced a new expense target of $53 billion for 2018. Bank of America hadn’t previously had an annual expense goal, but this new target was $3.3 billion lower than its total expenses in the previous year.

The target came after Bank of America slashed ~$8 billion in annual operating expenses through its cost-cutting project dubbed “New BAC” and its ongoing efficiency program called “Simplify and Improve.”

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In 3Q16, the bank’s efficiency ratio was 61.7%, and its operating expenses were 3% lower at $13.5 billion. While this was a significant improvement from its 88% efficiency ratio in 2014, the bank still has room for improvement. Such improvement can be accomplished via further cost-cutting initiatives or by raising revenue.

In comparison, BAC’s banking peers (XLF) Wells Fargo (WFC), JPMorgan Chase (JPM), and Citigroup (C) reported efficiency ratios of 59%, 59%, and 57%, respectively, in 3Q16. Efficiency ratio is a measure of operating expenses as a percentage of net revenue. It shows how revenue fuels a bank’s operating expenses. A lower percentage is better, as it means lower expenses compared to revenue.

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