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Improving Operating Leverage Is Key for Bank of America in 2018

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Operating leverage

Bank of America’s (BAC) spending on technology has increased substantially in recent quarters to improve trading, banking penetration, and wealth services. Higher penetration through technology could help the bank garner higher operating leverage and improved efficiency ratios. The bank’s non-interest expenses fell to $13.3 billion in 4Q17, compared to $13.4 billion in the prior year. Non-interest spending has declined consistently since 1Q17, reflecting strong expense management amid improving operating performance.

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Banks (IYF) have continued, since the 2007 financial crisis, on the path of expense management in a bid to improve returns for shareholders. Amid rising rates and NIMs, banks have room to increase spending on the expansion of branches, networks, and technology. J.P. Morgan (JPM) and Citi (C) have managed improved efficiency ratios in 2018, whereas Wells Fargo (WFC) and Goldman Sachs (GS) saw subdued margins amid a lower credit offtake and trading activity.

Investing in talent

Bank of America is hiring in banking, quants, fintech, and technology. The bank’s total personnel expenses declined to $7.5 billion in 4Q17, mainly due to a lower headcount and weaker performance in trading activity. The bank’s other major expenses—including occupancy, data processing, and marketing expenses—increased on a YoY basis, reflecting investments in technology. It posted an improved efficiency ratio of 64% in 4Q17, compared with 66.3% in the prior year.

Bank of America’s Global Markets was the only segment that saw deteriorated operating efficiency amid lower trading revenues. Other segments saw improvement due to higher revenues in spite of higher technology spending.

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