Bank of America's (NYSE:BAC) biggest challenge over the last seven years has been to reduce its expenses to a reasonable level. It has largely accomplished that objective and must now turn its attention to the top line, which is in serious need of help.
In the second quarter of this year, annualized expenses equated to 25.4% of its shareholders' equity. That wasn't the lowest among its closest competitors, but it wasn't far off.
While U.S. Bancorp and JPMorgan Chase both had lower expenses relative to their shareholders' equity, the difference was small. And, surprisingly, Bank of America's size-adjusted expense base was better than the notoriously efficient Wells Fargo.
This is a big change from even just last year. Bank of America's expenses equated to 40.1% of its shareholders' equity in the third quarter of 2014, though the period included a $5.3 billion pre-tax charge related to a legal settlement with the Department of Justice.
Conversely, assuming Bank of America is able to keep a lid on expenses going forward, its biggest challenge is now on the revenue front. It's no exaggeration to say that the $2.2 trillion bank lags the same peers in this regard by a large margin.
Its annualized revenue equated to only 33.1% of its shareholders' equity last quarter. The same figure for Wells Fargo and U.S. Bancorp was 45%. And JPMorgan Chase, while trailing the latter two banks, still came in ahead of Bank of America, with a ratio of revenue to shareholders' equity of 39.2%.
To put this in perspective, if Bank of America generated the same amount of revenue relative to capital as Wells Fargo does, its top line would expand by nearly $30 billion a year. That compares to $83 billion in total revenue over the past 12 months.
The good news for Bank of America shareholders, needless to say, is that the bank is aware of its need to boost revenue. Chairman and CEO Brian Moynihan has delved into details of the bank's efforts in this regard on multiple occasions recently:
- It's increasing the number of small business bankers and financial solutions advisors in its branches.
- It's more than doubled 401(k) sales since 2013.
- It's issuing more credit cards.
- And it's investing heavily in digital and mobile banking channels.
In short, assuming that Bank of America is right and that it can indeed abandon its defensive posture in favor of an offensive approach, then shareholders in the nation's second-biggest bank should start to see the impacts on the top line when it reports third-quarter earnings on Sept. 14th.
John Maxfield has no position in any stocks mentioned. The Motley Fool owns and recommends Wells Fargo, and recommends Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.