Bank of America’s Efficiency Could Improve to 63% in 2017

Bank of America (BAC) has put in place a strong expense control mechanism that has resulted in lower growth in operating expenses compared to revenues. The bank’s non-interest expenses rose marginally to ~$13.7 billion in 2Q17 compared to ~$13.5 billion in the prior year. The expenses were partially offset by lower litigation and improved efficiency. The expenses are expected to rise marginally in 3Q17 on improved operating efficiency.

The bank’s non-personnel spending rose to $6.0 billion in 2Q17 from $5.8 billion on a YoY (year-over-year) basis. Its employee expenses remained flat at $7.7 billion. Commercial banks (XLF) have focused on deploying expense management since improving margins was difficult amid a lower interest rate environment.

Among the major bankers, Wells Fargo’s (WFC) efficiency fell in 2Q17, whereas JPMorgan Chase (JPM) and Citigroup (C) saw improved efficiency.

Bank of America (BAC) is targeting efficiency ratio (the percentage of operating expenses divided by net revenues) of 60.0% in the second half of 2017. The ratio was in line with its 2Q17 performance backed by higher operating leverage. The bank’s headcount fell 2.0% to 210,900 in 2Q17, mostly due to the sale of its non-US credit card business and optimization. The fall was partially offset by hiring in primary sales roles.

Bank of America has kept a target of $53.0 billion for non-interest expenses in 2017, a fall of $2.0 billion from the previous year. For 2017, the bank could possibly improve its efficiency ratio of 63.0%. Among its divisions, Consumer Banking garners an efficiency ratio of 52.0%. The Wealth Management division’s ratio is 72.0%, and the Global Banking division has the lowest efficiency ratio of 43.0%. However, the Global Market division’s ratio deteriorated marginally to 67.0%, mostly due to lower trading activity.