Bank of America (BAC 3.35%) hosted a conference call last week to flush out details of the bank's third-quarter performance. Here are three points that CEO Brian Moynihan emphasized on the call.
1. Bank of America continues to make progress toward its "full earnings capacity."
The financial crisis has cost Bank of America an estimated $195 billion during the last seven years, weighing heavily on the bank's ability to generate a respectable shareholder return. But as these costs have subsided, Bank of America's profitability has responded in kind.
The last 12 months mark the first time since the crisis that the Charlotte, North Carolina-based bank has strung together four consecutive quarters of solid profits, bringing Bank of America ever closer to its goal of generating a 1% return on assets.
As Moynihan discussed:
When you think about it over the last four quarters, we've reported over $16 billion in after-tax income. That compares to the previous 4 quarters leading up to the third quarter of 2014 of about $5.2 billion. ... Returns over the last 4 quarters in aggregate have generated an ROA of about 76 basis points and a 10% return on tangible common equity.
2. Keeping the absolute level of its balance sheet flat
Bank of America has set its sights on getting better, not bigger. You can see this in two areas in particular.
First, while the bank's consolidated loan book has stayed relatively stable during the past five quarters, there's been a shift in the quality of loans it holds. Since the third quarter of last year, toxic and noncore loans held in its Legacy Assets and Servicing segment, as well as its All Other segment, have fallen by $64 billion. Conversely, loans held in its core operating division have increased by $61 billion, leaving the bank with a similarly sized, but higher-quality, portfolio.
Second, Bank of America is replacing non-client-facing employees with ones who interact with clients. For the three months ended Sept. 30, it reported a 1,500-person reduction in its headcount. Within this, however, was an increase of 1,600 client-facing employees, such as mortgage and investment specialists deployed throughout the company's branch network.
According to Moynihan:
For the quarter, we were down about 1,500. In that, we actually had an increase in client-facing headcount for the quarter of 1,600. So basically, we are able to achieve a reduction while we continue to invest. On top of that, the risk in CCAR FTE count, it was up about 400 for the quarter. And other business hiring, especially the new kids from school, we're up about 1,000. So through attrition and then through other reductions, we got that down to net 1,500.
The net result is that Bank of America should be able to drive more revenue with little added compensation expense -- what's known as "positive operating leverage."
3. Mobile banking continues to replace branch banking
The growth of mobile banking in lieu of branch banking is one of the greatest megatrends to hit the banking industry in decades. Bank of America is at the forefront of this.
"We continue to experience shifts in consumer activity away from branches toward self-service options," Moynihan explained.
Self-service trends are driven by mobile banking, online banking and ATM usage. Mobile banking customers increased to 18.4 million, and deposits via mobile devices now represents 14% of consumer deposit transactions. Mobile processing is better for us and it's better for our customers. It is 1/10 to costs relative to processing in financial centers and more convenient for customers.
The adoption of mobile banking by customers has allowed Bank of America to trim its expansive (and expensive) network of roughly 5,000 branches. While mobile accounts increased by 772,000 in the third quarter, its branch count declined by 48, settling at 4,741.
Data source: Bank of America's third-quarter financial supplement. Chart by author.
In sum, while Bank of America still has ground to cover before it returns to the apex of global finance, the evidence from the third quarter suggests that it's continuing to head in the right direction.
