Bank of America Corp. turned in a stronger-than-expected third quarter with a profit of $4.51 billion, compared with a loss of $232 million a year ago. Per share, profit of 37 cents beat the 33 cents that analysts polled by Thomson Reuters expected (WSJ).
The increase in profit is largely attributed to the benefits of effective cost-cutting measures and focus on high quality customers. However, after a sharp 31% plunge, most of which came from reduction in legal fees (which skyrocketed after the 2008 financial crisis), the expenses should be stabilizing. Furthermore, Bank of America Corp. has exhausted almost all avenues of cost reduction by executing 6% cuts in employees and 4% cuts in branches earlier on.
If legal expenses stabilize at current levels, the question then arises “will Bank of America Corp. achieve higher profits or even just maintain the current profits?”. The answer lies in revenue generation, the other key driver of profit. However, the revenue side looks less promising with weak trading conditions, stricter regulations and low interest rates that are hampering performance for the entire banking industry. Of all these key market conditions, Bank of America Corp. will be hit particularly hard by low interest rate due to its large consumer lending and mortgage operation. With Federal Reserve’s recent decision not to raise the interest rate, it looks like Bank of America Corp. has to be more active in forming other strategies that will increase its revenue. Yet, that does not seem to be the management team’s priority. Mr. Donofrio, the CFO of Bank of America Corp, stated that “if the business environment doesn’t improve, the bank will cut costs further”. However, we know that the firm has reached the cost cutting limit, it is high time that the management team look more into revenue side of the story.
- Lia Wei