Bank of America sets new cost target under pressure from low rates

Mon Jul 18, 2016 10:49pm EDT
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By Dan Freed and Sruthi Shankar

(Reuters) - Bank of America Corp (BAC.N: Quote) reported a 19 percent drop in second-quarter profit on Monday and set a new expense target as growth in businesses from lending to trading failed to offset the impact of persistently low interest rates.

Like other lenders, the Charlotte, N.C.-based bank has been struggling under the weight of low rates for years, but analysts say Bank of America is particularly sensitive to the issue because of how management has positioned its balance sheet. Accounting oddities related to interest rates also dented the bank's profit during the quarter.

On conference calls following the results, senior executives said the bank is doing all it can to offset the impact of low rates - including keeping a tight lid on costs.

Chief Executive Brian Moynihan announced a new expense target of $53 billion for 2018. Bank of America did not previously have an annual expense goal, but this one is $3.3 billion less than its total expenses over the past four quarters. It comes after BofA has spent years of working through a sweeping cost-cutting project dubbed "New BAC" and an ongoing efficiency initiative called "Simplify and Improve."

"The question is, can we grow earnings without rates improving?" Moynihan said. "We believe we surely can."

The bank's shares closed 3.3 percent higher at $14.11 on Monday following its results.

Bank of America isn't alone in its struggle to boost earnings without a lift from higher rates. Its decline in profits, despite loan growth, mirrored that of rivals that have reported results lately, including JPMorgan Chase & Co (JPM.N: Quote), Wells Fargo & Co (WFC.N: Quote) and Citigroup Inc (C.N: Quote).

After keeping rates near-zero for seven years, the U.S. Federal Reserve bumped its target slightly higher last December. But optimism has faded that rates will continue moving upward in the near-term, especially after Britain's shocking vote to leave the European Union.   Continued...

The Bank of America building is shown in Los Angeles, California October 29, 2014.    REUTERS/Mike Blake/File Photo