Bank of America Corp said it plans to slash costs by $3 billion annually in commercial lending, investment banking and wealth management, becoming the latest big bank to take aim at expenses as revenue falls in most of its businesses.
The second largest U.S. bank cut costs 25 percent in the second quarter, helping it post a slightly larger than expected profit of $2.5 billion after posting a loss the year earlier. Its work force shrank by more than 12,000 from a year ago to 275,460.
The cost cuts come as the bank faces real pressure. It said its loan book shrank from the same quarter last year. Its interest income fell 15 percent because of low interest rates. And investors are pressing the bank to buy back more bad loans that it made during the housing boom.
The latest round of cost cutting efforts has already begun, Reuters reported last week. The bank aims to complete cuts in these areas by 2015.
"The question is, 'Are they cutting fat or affecting their ability to grow?'" said Jonathan Finger, a frequent critic of the bank's management, whose Houston, Texas-based investment firm, Finger Interests Ltd, owns 1.1 million of the company's shares. "That is a major concern for investors."
Bank of America began the first phase of its cost-cutting plan in 2011, with the goal of saving $5 billion a year and eliminating 30,000 jobs by the end of 2014. That phase of the plan focused on consumer banking and information technology.
The bank did not detail planned job cuts in the latest round of the plan known as Project New BAC. Executives have said there would be fewer reductions because capital markets, commercial banking and wealth management operations have fewer people to begin with.
The Charlotte, North Carolina-based bank has lagged its peers in recovering from the financial crisis, largely due to losses tied to its 2008 purchase of subprime lender Countrywide Financial.
JPMorgan Chase & Co, Wells Fargo & Co, and Citigroup Inc in recent days all beat analysts' earnings estimates, helped by cost-cutting, stronger mortgage business and better consumer delinquency rates.
Like JPMorgan, Citigroup, and Goldman Sachs Group Inc, Bank of America posted weaker equity trading revenue. Underwriting and merger advisory fees also dropped.
Bank of America's adjusted earnings per share of 16 cents beat the average estimate of analysts of 14 cents per share, according to Thomson Reuters I/B/E/S. But questions about future profitability in the current difficult environment pushed the bank's shares down 3.7 percent to $7.63 in afternoon trading.
Revenue at Bank of America totaled $21.97 billion in the second quarter, down from $22.28 billion in the first quarter but up from $13.24 billion a year earlier when it took mortgage charges. Banks are struggling to boost revenue amid weak loan demand for many products, low interest rates and new regulations crimping fees.
To save on interest costs, the bank reduced its long-term debt by $53 billion in the quarter to $301 billion by allowing bonds to mature and buying back securities. That move, along with further planned redemptions, should save the bank about $300 million a quarter.
"We are fighting with all the arrows in our quiver that we have," Chief Executive Officer Brian Moynihan told analysts regarding the bank's declining interest income.
The bank's provision for loan losses fell to $1.77 billion in the second quarter, its lowest level since the first quarter of 2007, compared with $3.26 billion a year ago.
Mortgage banking income increased only slightly from the first quarter to $1.66 billion but was a big improvement over a year ago, when the bank took charges of more than $20 billion to cover legal settlements over mortgages and other home loan related losses.
Mortgage costs "are coming down," said Gary Townsend, president of Hill-Townsend Capital. "That is very important because that has been a huge drag over the past three years."
REGAINING MORTGAGE MARKET SHARE
Bank of America had been scaling back its home lending in the wake of massive Countrywide losses, but said it recaptured some market share in the second quarter compared with the first quarter.
The bank made $18 billion in mortgages in the latest quarter, up from $15.2 billion in the first quarter but down from $40.4 billion a year ago, when it was still buying loans from other lenders.
By comparison, Wells Fargo, the largest U.S. home lender, originated $130 billion of loans in the quarter, including mortgages purchased from other lenders.
Bank of America still has mortgage issues to deal with. Mortgage bond investors are trying to get the bank to buy back some $22.71 billion of loans they say should never have been sold to investors, up from $16.09 billion in the first quarter and $9.92 billion in the second quarter of 2011. Claims could increase in the coming quarters, Bruce Thompson, the bank's chief financial officer, said on the conference call.
In February, Bank of America stopped selling some mortgages to government-backed mortgage entity Fannie Mae in a dispute over requests to buy back soured loans. Thompson said the disagreement continues and that the fight will likely end in legal action or a settlement.
The bank added $395 million to its reserves for loan repurchase requests in the second quarter, up from $282 million in the first quarter, giving it total reserves of $15.9 billion. Wells Fargo and PNC Financial Services Inc also padded their reserves in the second quarter, citing increased repurchase requests for loans sold off during the housing boom.
In a pact announced Tuesday, Bank of America agreed to pay $375 million to settle a case brought by bond insurer Syncora Guarantee over toxic mortgage-backed securities based on home loans made by Countrywide.
Analysts peppered Bank of America executives with questions about when quarterly costs to handle delinquent mortgage loans will start to tail off. The bank spent $2.6 billion on those operations in the second quarter, down slightly from the first quarter, but far off the $500 million per-quarter the bank expects in more normal times.
Thompson signaled those expenses have peaked but won't start going down until next year, after the bank completes work required under settlements with federal and state regulators.
Bank of America's total loans fell to $892.3 billion from $902.3 billion in the first quarter as it continued to shed assets from the credit crisis. A decline in consumer loans offset an uptick in loans to businesses. JPMorgan, Wells Fargo and Citigroup showed slight increases in total loans from the first quarter, as did regional lenders U.S. Bancorp and PNC Financial in earnings reports on Thursday.
Revenue in the bank's signature consumer banking unit was down 16 percent from a year ago but off just 1 percent from the first quarter, as fee income increased. The bank remains focused on cutting costs in the unit, including shedding 57 more branches during the quarter, and continues to test new account packages, Moynihan said.
The bank said it made better-than-expected progress in building capital in the quarter. Its projected Tier 1 common capital ratio under so-called Basel 3 standards reached an estimated 8.1 percent of risk-weighted assets. The bank had previously said it would be above 7.5 percent by year-end.
Thompson said the bank is cooperating with regulatory inquiries over bank lending rates, such as the London interbank offered rate (LIBOR), but declined to provide details.
(Reporting by Rick Rothacker in Charlotte, N.C.; Additional reporting by David Henry and Lauren Tara LaCapra in New York; Editing by Lisa Von Ahn, Maureen Bavdek, John Wallace and Andrew Hay)