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

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Jan. 19 2017, Updated 7:36 a.m. ET

BAC’s cost-cutting program

Banks (JPM) (WFC) are forced to realign their cost structures in order to remain profitable. At the same time, they must contain rising costs in an uncertain and volatile environment and offset the impact of low interest rates.

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. This is $5 billion lower than its annual operating expenses. During the 4Q16 earnings call, BAC’s CFO, Paul Donofrio, discussed the bank’s (XLF) strategy on achieving its cost targets.

Donofrio also mentioned that in 1Q17, the bank’s expenses would be higher by $1.3 billion due to higher payroll taxes and retirement-related compensation costs for employees.

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In 4Q16, Bank of America’s efficiency ratio was 65.1% and its operating expenses were 6% lower at $13.2 billion. While this is a significant improvement from the 88% efficiency in 2014, the bank still has room for considerable improvement. The bank can accomplish this goal by implementing further cost-cutting initiatives or by raising revenues.

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.

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