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How Can Bank of America Drive Better Efficiency?

Companies / Banking Stocks Oct 14, 2015 - 05:53 PM GMT

By: Bloomberg


Brian Moynihan, CEO of Bank of America, spoke with Bloomberg TV’s Erik Schatzker about the bank's earnings and performance.

Moynihan said that the efficiency ratio should be 500 BPS lower and the company has a plan to get it there. When asked about how he will do it, Moynihan said: "The headcount will come down because there were 60 percent people costs. There's not enough other costs to save a lot of money, but question is how you do that."

He added: "Every quarter just through normal attrition there's four or 5,000 people changes in our company. And what we've been doing is when someone's job comes up and someone leaves for whatever reason that's a low attrition rate on 215,000 people. We basically say do we need to replace the job? And a lot of jobs you do and a lot of jobs you don't."

ERIK SCHATZKER: I'm here at Bank of America headquarters in Charlotte with Brian Moynihan. Brian, it's a pleasure, good to see you.

BRIAN MOYNIHAN: And it's great to be here. Thanks.

SCHATZKER: So you reported earnings earlier today. JP Morgan reported last week night, Wells Fargo. We're in the thick of bank earnings season, but your results are noteworthy because for two quarters in a row you've had revenue north of $20 billion. And you're averaging quarterly earnings of about $5 billion, consistency from a bank where shareholders haven't been used to it over the past couple of years because -- more than a couple, in fact, because you've had so much work to do. And you keep it up?

MOYNIHAN: Sure, sure. And it was -- and so you have to step back a little bit and think about what we were telling people all during that time was underneath all the noise and the mortgage litigation, or pick your topic at the given moment, there was a core earnings power that was always there. And what -- it got covered up by other stuff. And now is that's come off and then gone down. And last year this quarter is when we said it would adjust (INAUDIBLE) four quarters that continue to stack up. You really have just seen that core earnings power come through.

Now that doesn't mean we don't have market share to gain, we don't have hard work, we don't have to manage expenses. The environment keeps moving around a little bit one everybody, but the reality is is that what was there was there, and now you're seeing it shine through. And now the question is how can we improve upon that. And that's where we're focused on the company. 

SCHATZKER: In a better environment, how much more money could this bank make?

MOYNIHAN: Well we talk about -- a simple way to think about that is to think about in the U.S. if rates go up 100 basis points from where they are to 1.25 Fed funds rate and three percent 10-year treasury rate, very low rate structure, we make 4.6 billion pretax per year just for that first move. And so --

SCHATZKER: That incremental profit.

MOYNIHAN: Incremental profit. And that's --

SCHATZKER: So that's on a pretax basis over and above what you're making now.

MOYNIHAN: And that we disclose each quarter. And that is because, effectively, we have a core franchise that's taking deposits on the liability side. 

SCHATZKER: That's right.

MOYNIHAN: And they're zero floors. And so we can't charge customers. And so if we pay five basis points for deposit pricing and across the franchise and consumer business, but it can't really go down anymore. So as rates rise you'll be able to capture to spread with traditional (INAUDIBLE).

SCHATZKER: So I reference this before, for almost six years you have been the CEO, and you have been trying to get this company to a place. Is it there yet?

MOYNIHAN: It's there. It's there, but it's not where we want it, because we -- and we get up every morning, and you think about the last six years. And we try to get the frame on this. We trade -- we have $15 share, $15.50, $15.75 share price today. We took $12 and charged on a per share basis in the last five, six years to fix the mortgage crisis, the hole that was left in the capital -- all different things.

And that's behind us now. Our capital ratios are where they should be. We're generating good earnings. So is it fixed? Yes, it's been fixed, but the question is how good it can be. That's still ahead of us. And that's what I sit back with the team, and we just go after and drive. And you see that every day in how we execute.

SCHATZKER: So what's left to do?

MOYNIHAN: Well we have eight businesses and six of them are the growth engines for our company. Two of the businesses have constraints on them because in general retail banking we have to be careful that they'll get the full relation of the customers and markets. We've constrained its size relative to our company and because we saw, or we thought we saw, or maybe we saw more than we should have seen, but we thought that there would be restrictions on capital and liquidity that would kind of keep in that check. But the other six businesses --

SCHATZKER: Was that right, or are you looking back on that saying it was wrong?

MOYNIHAN: That's why LCR we're compliant already. That's why our SIFI buffers are lower than other people relative to our size. So we get what we need out of the business, serves the investors well, number one research platform in the U.S., just announced in the last few weeks.

So as you think about that, the other six businesses which are serving affluent customers, and wealthy consumers, and middle-market companies and small businesses, all those businesses just have to grow in our corporate investment banking. And that means more salespeople invest in those businesses. And that's what you saw today.

We're down -- headcount continues to work its way down in our company. That's the expense mantra that we all talk about. But the reality is in a -- this quarter, we hired over 1,000 new students, new kids in from school. We added 1, 000 client-facing people. And we still were able to manage through hard (INAUDIBLE) work 1,500 net people out of the company.

SCHATZKER: You have been able to reduce expenses, to the point you just made, in part by reducing headcount dramatically over the space of the past five years. Yet, if I compare Bank of America to some of the other banks in your industry, the comparison could still be more favorable. Wells Fargo has an efficiency ratio, non-interest expenses as a percentage of revenue in the order of 57 percent. You guys are north of 60. Why can't yours be 57 percent?

MOYNIHAN: We're going to have -- there's going to be differences in business mixes, but ours should be better. And so we're run --

SCHATZKER: Better than it is today.

MOYNIHAN: Better than it is today. And that's going to come. One of those issues is yield. Our net interest income is compressed because of things we had to do with the portfolio over the last few years that some of our competitors didn't. So that's that increase in the rate bonds. The second reason is we're still carrying a $900 million a quarter of LAS costs, or getting --

SCHATZKER: Legacy stuff.

MOYNIHAN: Legacy stuff. And it's the cost of doing a great job and modifying mortgages. Now they're coming down and there's a lag to that. And the other is just sort of as you shrunk the company kind of getting the stuff out, and that takes time. So we need to drive that down by probably 500 basis points. And that's going to be by a combination of revenue life as we keep growing the balance sheet. Even if the rates don't rise we just drive incremental growth, and then continue cost take-out. And that's the goal. So we're not --

SCHATZKER: So if we stay lower for longer, which is the way it looks for the time being, you still think -- you think you can get deficiency ratio into the 50s?

MOYNIHAN: No, to 60.

SCHATZKER: And to 60.

MOYNIHAN: And we're at 65. We got to drive it down, but it will take longer if rates don't go up. It will come faster if rates go up.


MOYNIHAN: But about half of that would be driven by cost management, and the other half is driven by rates, and maybe in round numbers, just give you a sense. And so --

SCHATZKER: How do you take out $2 billion more of costs? And look what you've already done.

MOYNIHAN: Well we got -- we've said that LAS is running about 900 a quarter.


MOYNIHAN: And we've got a plan to get it down to 500. That's not good enough. There's 400 a quarter right there. And then on top of that the real key is on the core expense basis how you keep investing growth, but not have your costs go up. And that's just incremental efficiency. And what you've seen quarter after quarter in the last four out of the five quarters we run about 12-7 to 12-8 in incremental and core costs. And we've able to keep it there while we've invested in it. That's where we use this project called SIM (PH). SIM (PH) is just improving our company. It's incremental ideas. It's many, many of them, and you just constantly work.

SCHATZKER: Can you do it without bringing headcount down further?

MOYNIHAN: Well there's -- the headcount will come down because we're -- there were 60 percent people costs. If you -- you can't save money without -- there's not enough other costs to save a lot of money, but question is how you do that.

And for a while we had to do that very quickly because the LAS costs were coming down fast, and we had 58,000 people. We're down to 12,000 or something like that, so we had to build it up and then bring it down.

And then in other areas like our retail system we went from 100,000 people six or seven years ago down to about 60 today with more salespeople. So but a lot of people say, well, how do you do that? Well every quarter just through normal attrition there's four or 5,000 people changes in our company. And what we've been doing is when someone's job comes up and someone leaves for whatever reason that's a low attrition rate on 215,000 people. We basically say do we need to replace the job? And a lot of jobs you do and a lot of jobs you don't.

SCHATZKER: Brian, what do you do if the U.S. economy starts to slow again?

MOYNIHAN: Well I think the question will be, what do we see in the business statistics? So the U.S. economy is still running way below trend, as economists would call. And we're seeing more car production, more mortgage production, more checking account production. So as long as we keep producing, you then kind of run and keep operating. If you said because what was going on in the economy caused business activity to slow at a level, you would start to pull up a little.

SCHATZKER: But you don't change your strategy.

MOYNIHAN: The strategy is fairly straightforward. You have clients. You get the -- you take the best products in the world that we have. We're number one in pick your product, or number two or number three across the board. And you just keep driving the integration products for the benefit of the customer. So that's not going to change, great client service, great client salesmanship. It just says how many more financial advisors can I add in Merrill Lynch, can afford to? And it's a question of judging the opportunity to get them successful.

SCHATZKER: But you must understand what people wonder. They look at Bank of America and say this is the company that's supposed to be a leveraged bet on the U.S. economy. And they see revenue not growing, but shrinking at a time when the U.S. is the fastest-growing economy in the industrialized world. What's wrong with that picture?

MOYNIHAN: Well the issue is we had -- that rundown in revenue had a lot to do with loans and deposit, loans and, especially loans, but other assets that we had that weren't core. And we ran those down. And that's pretty much hit equilibrium. So we fee revenue and spread revenue. And spreading revenue has been basically flat for the quarter.


MOYNIHAN: Now we have this one-time adjustment, because we're basically flat. What we've said is that's starting to grind up because we're actually growing the core loans, the total loans, and --

SCHATZKER: Replacing the old stuff with better quality?

MOYNIHAN: Even and just top buying.


MOYNIHAN: The total number of loans in our portfolio has grown two quarters in a row. And that is what we're replacing all that other stuff. But the good news is we can outgrow it. When we had $175 billion of credit card loans down to the 90 we have today, it was hard to outpace that growth. We probably hit a bottom at 89, 90. We can now grow that back because the card production can keep up with it with the credit standards we want.

So we just grind forward. That's what people said. The question, we're levered back to the economy because it happens a lot faster, but we still can drive the revenue of our country just by good, hard work, even in a lower growth environment.

SCHATZKER: You have said there four -- there are four ways which you measure yourself, return on equity, return on tangible common equity, return on assets and your efficiency ratio, with current efficiency ratio. You want to get it to 60. What about the others? What is an acceptable ROE for this bank? 

MOYNIHAN: I did -- we focus on return on tangible common equity because that's the (INAUDIBLE).


MOYNIHAN: And we have told people that basically that a 7.50, 7.75, almost eight percent tangible common equity ratio we think at 12 percent that's a one percent return on assets divided by eight is our equity level. That gives you 12. And we used to say 14 because we were at seven. And what happened is because of all the capital rules and stuff we had to change, pick up more equity. So we could see that path forward, this quarter around 10.


MOYNIHAN: And our cost to capital is probably lower than, but that's an interesting discussion.

SCHATZKER: Philosophical debate.

MOYNIHAN: But the reality is we're at 10. And with the work we see ahead of us, we got to push that up, the kinds of discussion we're having. It's all linked together, the efficiency ratio, the core revenue growth, if the -- if rates rise the faster core revenue growth.

SCHATZKER: It'll be --

MOYNIHAN: But I said we should get to 12 percent over the next few years if we keep doing it. If rates rise, we'll get there faster.

SCHATZKER: All right, Brian, great talking with you.


Copyright © 2015 Bloomberg - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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