Bank Of America's Cost Cutting: Huge Rewards Down The Road?

| About: Bank of (BAC)

Summary

Bank of America had a nice surprise for 2Q earnings.

The bank is being forced to follow other financials and cut expenses to manage earnings.

As the bank continues to streamline its business, there could be huge potential should its interest incomes ever get a chance to grow.

A fascinating time for financials

Bank of America (NYSE:BAC) beat expectations with its 2Q earnings report. At $20.6 billion in revenues and income at $0.36 a share, the company took down estimates of $20.4 billion and $0.33 a share, respectively. The quarter has certainly followed the trend of repressed income for banks due to low interest rates. BofA's earnings of $0.22 a share on March 23rd were below last year's $0.25. You can see it more clearly in the progressively falling revenues.

  • Q1 of 2014 saw over $25 billion.
  • In the opening of 2015 we were at $23.4 billion.
  • This year, we saw Q1 hit just above $22 billion in revenues.

Bank of America isn't alone. All the big financial institutions are taking flak. JPMorgan (NYSE:JPM) has lost revenues four years in a row. Goldman Sachs (NYSE:GS) has seen the same decline. In the aftermath of the now infamous "Brexit", and other varying global factors, it's going to become increasingly difficult for the Fed to up rates this year. Obviously, this has put a little damper on the recurring theme of banks potentially having a nice year with rising rates. PNC Financial (NYSE:PNC) has suffered slowing (sometimes shrinking) interest incomes, as have smaller institutions like First Commonwealth (NYSE:FCF). In less than ideal conditions for making money from loans, banks have moved to cutting expenses hard in order to keep showing good earnings. Brian Moynihan (Chief Executive at BAC) stated costs were back to levels from 2008.

The negative view (and bigger headline) on all this would be that banks are desperately crunching their budgets trying to survive in a very inhospitable market. It's fair to see things this way. Revenues did drop 9%. We've taken a 180 degree turn from guessing "when" rates would rise to now wondering "if" they can rise this year. It will certainly stop banks from making any huge gains in 2016. But what if we look further down the road?

Potential being created?

Amongst the scrambling to keep good income statements amid damaged interest based income, we may be seeing some of the best streamlining of businesses since the great recession. Think about it. These banks are cutting every nook and cranny they can to keep income up. JPMorgan has consolidated its capital to protect against risks like the energy sector. PNC is still looking at more measures to be taken in its native Pittsburgh area. Bank of America is no different.

The bank has done the same reducing its expenses by 3% year over year. In this streamlining lies great investment potential. Consider how well Bank of America will operate when interest rates finally rise and its interest income sees the increases it has been waiting for. For those that have been losing their minds waiting for this to happen already, perhaps the wait has been a blessing in disguise. It has forced these banks to improve their expense management. This in turn will yield much larger margins on profits when they are no longer being squandered by low interest rates.

In 2011, interest based income was over $66 billion. In 2015, it was down to $49.82 billion. Yet, in 2011, net income was $1.45 billion while 2015 saw income of over $15 billion. Bank of America is primed for awesome performance when rates finally rise. It is more of a question of when. The stock ran up about 6% in the two days after the bank's 2Q announcement. It will be interesting to see how it fares over the next few months. In the short term, rates are certainly not in the bank's favor. But I like seeing the earnings surprise whilst conditions are definitely not in its favor. The forced hyper-management of its costs is priming the bank for great returns should rates ever rise. Any thoughts and ideas would be appreciated in the comments section. My next article will be a part 2 of sorts where I do some heavy comparisons in financials between BofA and its contemporaries.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.