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Bank of America’s Operating Efficiency Improved in Q3

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Oct. 22 2018, Updated 8:02 a.m. ET

Improving operating efficiency

Bank of America (BAC) has been reducing its administrative expenditures and increasing its spending on technology to improve its operating efficiency and margins. Improved operating efficiency and margins have led the bank’s earnings to grow at a faster pace.

Bank of America reported third-quarter non-interest expenses of $13.1 billion. This figure was 2.0% lower than in the third quarter of 2017 and 1.6% lower than in the second quarter. These reduced expenses resulted from improved productivity and disciplined expense management. 

The latest results marked 15 consecutive quarters of positive operating leverage for Bank of America. The bank’s third-quarter efficiency ratio of 57.0% was 368 basis points lower than in the third quarter of 2017 and 137 basis points lower than in the second quarter.

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Bank of America’s (BAC) spending declined despite its increased allocation to technology spending, which improved its efficiency and margins. Its Global Banking business was the only segment that reported deteriorated operating efficiency on a year-over-year basis amid lower trading revenues. Other divisions saw improvement due to higher revenues despite the increased technology spending.

Higher returns

Despite increased spending on technology as well as credit card, retail, and lending enhancements, Bank of America’s (BAC) Consumer Banking segment registered YoY and sequential declines in non-interest expenses.

The company’s Global Wealth and Investment Management segment’s expenses rose 1.0% YoY due to compensation for fund performance and investment in sales professionals. The bank has been hiring, primarily to fill client-facing roles, to boost its wealth, trading, and transaction advisory businesses.

Investment in technology has allowed Bank of America to improve its operating efficiency and return on equity (or ROE). The bank’s third-quarter ROE reached 11.0%, up from 7.89% in the third quarter of 2017 and 10.75% in the second quarter.

Peer comparisons

JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) are among the major banks (XLF) that are increasing their investments in technology. These banks are also maintaining their investments in improving their core banking and trading services. JPMorgan Chase, Citigroup, and Wells Fargo reported third-quarter ROE figures of 14.0%, 9.6%, and 12.04%, respectively.

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