Bank of America (NYSE:BAC) has come a long way over the last few years, putting in considerable effort since 2010 to improve its reputation after becoming the bank with the largest number of lawsuits filed against it in the wake of the economic downturn of 2008 (largely due to its decision to acquire Countrywide). The bank has worked through the lawsuits and reached a series of multi-billion dollar settlements with the disgruntled parties even as it initiated a complete overhaul of its operations as a part of Project New BAC in late 2011.
The effectiveness of the strategic plan is demonstrated to a good extent by Bank of America’s performance figures for the last quarter of 2013, which it released on Wednesday.  Its focus on core services and on cost cutting has reduced expenses considerably – giving the bottom line a much-needed lift. The bank’s better-than-expected performance for the last quarter allowed it to post full-year earnings of more than $10 billion for the first time since 2007.
Notably, the bank reported a sharp improvement in its net interest margin (NIM) figure for the second consecutive quarter – up from 2.34% in Q2 to 2.55% in Q4 – something that has not been seen across the banking sector for quite some time now. And while the bank took pre-tax charges in excess of $3 billion for the quarter in the form of DVA accounting losses and legal reserves, improving economic conditions allowed it to set aside less cash as provisions.
- How Have Loan Charge-Off Rates For The Largest U.S. Banks Changed In The Last Five Quarters?
- What Were Total Loan Charge-off Rates For The Largest U.S. Banks In Q2 2016?
- How Much In Outstanding Mortgage Loans Did The Largest U.S. Banks Service As Of Q2?
- How Have Third-Party Mortgage Servicing Portfolios For The Largest U.S. Banks Changed In The Last 5 Quarters?
- How Much In U.S. Card Purchase Volumes Did The Country’s Largest Card Issuers Report In Q2 2016?
- How Have Card Charge-Off Rates For The Largest U.S. Card Issuers Changed In The Last 5 Quarters?
We are raising our price estimate for Bank of America’s stock from $16 to $18.50 in view of the following factors:
- We expect improvements in the bank’s interest margin witnessed over the last two quarters to continue over coming quarters, as the Fed’s taper plans will gradually reduce liquidity in the economy – helping interest rates in the future
- The bank met its cost-reduction targets for 2013, and is expected to continue to improve operating margins over the next two years. This should keep non-interest expenses low across its operating divisions.
The Bank’s Primary Focus Remains Cutting Costs
As a part of the Q4 earnings conference call, Bank of America CEO Brian Moynihan detailed the five main aspects targeted by Project New BAC: “capital generation, reducing our costs, managing the risk down, addressing the legacy issues, and driving business growth overall.” 
While the efforts on the capital front have made Bank of America one of the country’s best-capitalized banks, the focus on costs is particularly commendable. The bank has reduced its global workforce from just under 290,000 at the beginning of 2011 to just over 242,000 now – a 17% reduction within three years. Over this period, the bank has also shuttered roughly 700 branches (5,805 then vs. 5,151 now) and has sold off a number of non-core business units that were low on profitability. As a result, the bank’s total non-interest expenses (adjusted for one-time items) is at the lowest level since it consolidated the acquired operations from Merrill Lynch and Countrywide in 2008.
Global Banking and Global Wealth & Investment Management (GWIM) Operations Post Record Performance
Bank of America’s well-diversified business model also played an important role in its performance over the last quarter and full year 2013. The bank posted highest ever revenues of $4.3 billion for its Global Banking business in Q4 – 7% higher than the figure for the previous quarter and 9% more than that for the same quarter last year. The gain can be traced back to record investment banking fees from the bank’s advisory and underwriting desks.
The bank also reported record GWIM revenues of $17.8 billion for the year backed by a steady inflow of assets over the year. The revenues for the fourth quarter ($4.48 billion) were just shy of the record figure ($4.5 billion) seen in Q2 2013. Client balances shot up from $2.15 trillion at the end of 2012 to $2.37 trillion at the end of 2013 – a 10% hike.Notes:
- Bank of America Reports Fourth-quarter 2013 Net Income of $3.4 Billion, or $0.29 per Diluted Share, on Revenue of $21.7 Billion(A), Bank of America Press Releases, Jan 15 2014 [↩]
- BAC Q4 Earnings Transcript, Seeking Alpha, Jan 15 2014 [↩]