Is This the New Bank of America Moynihan Promised?

Stock Market


Bank of America (NYSE:BAC) edged higher Wednesday morning after the firm reported third-quarter financial results that were good but not great. Net income jumped sharply, climbing to $2.5 billion, or 20 cents per share, from $340 million, or zero cents per share, in the year-ago period. However, with revenues effectively flat at $10.5 billion, the bank’s increased profit was driven primarily by improved credit and financial conditions and reduced costs.

“This quarter, we saw good loan growth, improved credit quality and record deposit balances,” CEO Brian Moynihan said in the earnings report. “The economy and business climate will improve even more quickly as conditions normalize, and we are well positioned to benefit from that.”

Bank of America’s third-quarter earnings beat analyst expectations by about 2 cents per share, although revenue fell slightly short. Investors pushed the stock up about 1.5 percent in early morning trading Wednesday.

While Moynihan has repeatedly highlighted improving business conditions as a major factor driving the firm’s post-crisis recovery (shares are still off nearly 40 percent over the past five-year period), some analysts have focused more on Bank of America’s aggressive cost-cutting campaign. Cost cutting has helped the bank produce strong results — particularly in the third quarter — despite some softening of business conditions.

Perhaps the best evidence of this is the reduction in mortgage origination and refinancing activity that slammed the financial industry in the third quarter. An increase in mortgage rates dramatically reduced demand for these financial services, causing headaches for most of the industry.

For Wells Fargo (NYSE:WFC) and JPMorgan Chase (NYSE:JPM), the mortgage slowdown is of special concern. The mortgage refinancing surge drove strong results in many quarters for both banks, which are the country’s No. 1 and No. 2 largest mortgage lenders, respectively.

The average rate for a 30-year fixed mortgage soared as high as 4.6 percent in the third quarter — a level that may not be very high historically but is significantly higher than the 3.5 percent recorded a year ago. Wells Fargo has already alerted investors that its refinancing volume has declined, so what analysts will want the company to make clear during its earnings conference call is how the bank plans to compensate for that loss revenue. Since Wells Fargo originates about one-third of all United States mortgages, rising mortgage rates will take a high toll on the bank.

But Wells Fargo still managed to beat the bears, reporting that net income rose to $5.6 billion, or 99 cents per share, up from the $4.9 billion, or 88 cents per share, the company reported in the third quarter of 2012, making this quarter the 15th straight quarter of increasing profits. The results were also higher than the 97 cents per share in net income that analysts had forecast.

Still, higher interest rates took their toll. Only $87 billion worth of home loan applications were made in the third quarter of 2013, down from $188 billion in the same quarter of last year, while Wells Fargo’s mortgage originations dropped from $139 billion to $80 billion in the same period. But in particular, the decline in Wells Fargo’s mortgage banking revenue was the result of the drop in refinancing.

JPMorgan was not so lucky. On top of these headwinds, the firm has been slammed with enormous regulatory and legal pressure. The firm, America’s largest bank by assets, reported an unexpected net loss of 17 cents per share for the quarter, largely the result of enormous legal expenses. Analysts were expecting a profit of about $1.19 per share, which compares against year-ago earnings of $1.40 per share.

JPMorgan reported a pretax expense of $9.15 billion in the third quarter, or $7.2 billion after tax, for corporate legal expenses.

Faced with similar financial and regulatory headwinds, Bank of America’s cost-cutting strategy has proven to be fairly successful. However, the firm did report in the third quarter that total non-interest expense increased $309 million on the year to $2.9 billion. This was driven higher by an increase in litigation expenses (all that fallout from the financial crisis) but was partially offset by reductions in operating expenses.

Without its aggressive cost-cutting plan, Bank of America could have easily found itself knocked flat this year by the headwinds facing the industry. The bank’s cost-cutting plan, Project New BAC, was announced in 2011. As part of the program, the bank said it would reduce its headcount by approximately 30,000 people, remove an entire layer of middle management, reduce net expenses by $5 billion through 2014, and generally undertake a massive restructuring of operations to make it more efficient and competitive, according to a company release.

Bank of America shares have climbed more than 122 percent in the past two years, the bank has restored its fortress balance sheet, and costs are at their lowest level since 2008.

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