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Inside Bank of America’s Operating Margin Improvement Plan

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Targeting inefficiencies

Commercial banks (XLF) have been focusing on improving their operating margins by controlling administrative and employee expenses. Banks are targeting higher revenue per employee and business network.

Bank of America (BAC) has improved its profits across divisions by bringing in strong expense management. The banking giant achieved a 7% operating leverage in 1Q17, reflecting the company’s controlled spending.

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In 1Q17, Bank of America posted non-interest expenses of $14.85 billion, as compared to $13.16 billion in 4Q16 and $14.82 billion in 1Q16. This rise was mainly due to higher incentives, FDIC (Federal Deposit Insurance Corporation) expenses in its Global Wealth segment, and the non-recurrence of litigation recovery recorded in Q1-16 in its Global Markets segment.

In 2016, the bank saw non-interest expenses of $55 billion, as compared to $58 billion in the previous year. By comparison, the bank’s revenues grew to $84 billion, as compared to $83 billion one year previously.

Efficiency outlook

Bank of America saw higher compensation expenses in 1Q17, but it pulled off a marginal rise in overall expenses on a YoY (year-over-year) basis. The bank has kept a target of $53 billion for non-interest expenses in 2017, as compared to $55 billion in 2016. Cost-cutting initiatives and projects like New BAC have resulted in huge savings across the divisions.

In 1Q17, Bank of America’s efficiency ratio was ~66.2%, as compared to ~70.5% in 1Q16. (An efficiency ratio is a measure of operating expenses as a percentage of net revenue.)

Notably, Bank of America peers J.P. Morgan (JPM), Citigroup (C), Wells Fargo (WFC) are also targeting higher margins through lower spending.

Now let’s examine the analyst ratings for BAC and its peers.

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