In late 2011 Bank of America (NYSE: BAC ) unveiled a plan to cut costs and streamline the company. The plan was nicknamed "Project New BAC." This included selling non-core assets and significantly reducing headcount.
Despite the company's weak first quarter results -- which CEO Brian Moynihan suggested was due to legal expenses associated with Countrywide -- I believe there are three reasons investors should still be on board with the cost cutting initiative.
The easiest way to judge management is to look at their track record for following through on goals. The initiative suggested the company would cut costs, and over the last few years that's exactly what's happened.
The two largest non-interest expenses for Bank of America are occupancy (branch expenses) and personnel. From 2011 to 2013 occupancy and personnel costs are down 6% each. While that might not sound like much, it works out to a saving of about $2.5 billion.
Moreover, Bank of America lead all banks in branch reductions in 2013 with 118, and its off to another fast start in 2014 with another 60 according to SNL Financial.
Strong despite cuts
As investors we often get hung up on the idea that if you cut enough costs, profitability has to improve. But that's not always the case. Bank branches serve an essential purpose of creating customers and collecting deposits.
However, even with the significant trimming in branch count, Bank of America's total deposits are up over $100 billion from 2011 to the first quarter of 2014.
I believe this can be explained through Bank of America's focus on utilizing technology. According to Moynihan, bank teller transactions continue to steadily decline while self-service channels such as ATMs, online, and mobile are increasing.
There's still a necessity for physical banks, but Bank of America is proving that reducing locations doesn't mean sacrificing customer base.
Shining the light
Legal troubles with Countrywide along with Bank of America's continued search for additional cost cuts attract most of the attention. However, a positive but overlooked area that should be more in the spotlight is the company's global wealth management segment of U.S. Trust and Merrill Lynch, which has thrived following the financial crisis.
The two companies generate mainly fee-based revenue through managing assets of high net worth clients. The hands on asset management creates a sticky relationship, it's also a difficult business for others to duplicate because it requires strong financial backing and significant resources.
In the company's first quarter conference call Moynihan said, "our Wealth Management business with U.S. Trust and Merrill Lynch client balances again grew this quarter now total over $2.4 trillion. This has driven record asset management fees in this segment."
In addition, a side benefit of this business is that opens up significant cross-selling opportunities between wealth management and Bank of America's retail banking business.
The last word
Project New BAC and Coutrywide's legacy issues won't last forever. Eventually the effort that's being put into making the company leaner and more focused will work its way to the bottom line.
However, when that day comes Bank of America's stock will not be trading at such a favorable valuation. With the actions that have been taken, and those that will be in the near future, Bank of America is putting itself in a strong position to be successful and would be a great addition to any portfolio.
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