B of A Pressured to Further Reduce Spending

After years of cost cutting, Bank of America has whittled its expenses down to the lowest level in five years. But B of A's expenses still far exceed those of its competitors JPMorgan Chase and Wells Fargo, and investors and analysts were clearly disappointed Thursday when Brian Moynihan, B of A's chairman and chief executive, failed to outline any specific plans for further reducing overhead.

"We don't expect a new program with expense targets," Moynihan told analysts. "We take additional actions on expenses every day."

Noninterest expenses fell 18%, to $14.2 billion, in the fourth quarter from a year earlier, due to lower mortgage-related litigation costs. But B of A still lags it peers. Expenses make up 77% of B of A's revenue compared with 70% at JPMorgan Chase and 63% at Wells Fargo.

"We continued our focus on optimizing the balance sheet this quarter, building capital and managing expenses in a challenging interest rate and geopolitical environment," said Chief Financial Officer Bruce Thompson.

B of A's expense-reduction plan from 2011 — dubbed New BAC — was designed to cut expenses by $8 billion a year. But with the plan essentially ended in the fourth quarter, analysts seemed perplexed that Moynihan had no plans for further reductions given that revenues fell nearly 13% in the quarter.

"They clearly did a good job with expenses but people would like to see further expense reduction now that New BAC is over," said Erik Oja, a bank equity analyst at S&P Capital IQ.

B of A's fourth-quarter profit fell 11% due partly to a slowdown in trading revenue that has hit other big banks. The company offset the drop in trading with large expense reductions, lower chargeoffs, and strong credit card and commercial lending.

Fixed-income trading revenue was a particular sore spot, declining 21% in the fourth quarter from a year earlier, to $1.5 billion.

Thompson said on an earnings call with analysts that the bank's global markets business had "no losses or particular pain points."

"We saw a significant slowdown as we saw overall volatility in the markets," Thompson said. "We made very solid progress in a market that was very challenging."

B of A earned $3 billion, or 25 cents a share in the fourth quarter, compared with $3.4 billion, or 29 cents a share, a year earlier. Total revenues fell 12.6% to $18.9 billion. Three one-time charges lowered revenue by $1.2 billion, or seven cents a share. Analysts polled had expected earnings of 31 cents a share and revenue of $21 billion.

B of A's share price was down nearly 5% late Thursday, to $15.42.

Net interest margin, which tracks the profitability of a bank's investing and lending activities, took a big hit. NIM fell to 2.18% in the fourth quarter, from 2.29% in the third quarter, due to lower loan yields on investment securities, Oja said.

B of A, like other big banks, also is still living off reserve releases. But the reserve release of $660 million in the fourth quarter was half that of a year earlier.

More than any other bank, B of A has suffered from the heavy toll of litigation expenses, which for years has overshadowed its efforts to grow its business. Thompson estimated that B of A has resolved 98% of all residential mortgage-backed securities litigation. The bank also has slashed the number of legacy delinquent loans it services by 14%, to 189,000, in the fourth quarter, and it achieved its target of reducing its legacy asset and servicing expenses to $1.1 billion, from $1.8 a billion a year earlier.

Still, some analysts would prefer to see the focus on revenue growth rather than more expense cuts.

"At what point does the restructuring of the balance sheet give way to growth?" asked Jim Mitchell, an analyst at Buckingham Research.

Thompson said he expects deposit growth to be strong this year and that its plan is to parlay those fresh deposits into new loans.

"We would expect strong deposit growth through 2015 and the goal is very much a focus to grow loans," said Thompson. "You're likely to see the balance sheet creep up as deposits come in and we grow loans."

One interesting factoid that Moynihan raised on the call: roughly 12% of B of A's deposits were completed on mobile phones.

Falling gas prices were on the mind of several analysts who wanted a fuller explanation of the impact on B of A's customers. Thompson estimated B of A's "funded exposure" to oil and gas firms, including derivatives, was $23 billion at the end of 2014. Roughly 60% of those corporate customers are directly affected by the price of oil, he said.

"We're comfortable with the commitments and we're continually running and stress-testing the portfolio," said Thomason. "If we're in a long period where these prices persist, there are costs and difficulties that a corporate client might have, [but] there are offsets given the benefits to the consumer of lower energy prices."

Moynihan said the benefits to consumers were "stark," but it was also too early to determine if the drop in gas prices has had any impact on certain business segments like mortgages.

"We've seen consumer spending on credit and debit cards go up by 3% for the year," said Moynihan.

Credit cards were also a bright spot, as 1.2 million in new cards were issued in the fourth quarter, a 19% jump from a year earlier. Moynihan attributed the increase to B of A's core cash back offering which he said has been "simplified" to three to four cards.