BofA Takes Step Toward Still Improbable Goal

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Bank of America (NYSE:BAC) boss Brian Moynihan is making progress - but the ultimate goal still looks improbable. The lender with $2.2 trillion of assets on Monday reported its best pre-tax showing in a decade in the third quarter. Absent higher rate hikes or capital returns, though, a decent return on equity remains a long way off.

The bank made net income of $5 billion in the period, 7 percent more than the same quarter last year. Citigroup (NYSE:C), JPMorgan (NYSE:JPM) and Wells Fargo (NYSE:WFC), all of which unveiled their third-quarter numbers on Friday, registered declines between 3 percent and 10.5 percent.

BofA benefited from the investment-banking trends that also benefited Citi and JPMorgan - its fixed-income traders added 39 percent to the top line, for example. But Moynihan has also been playing catch-up on cutting costs. A couple of years ago, the bank was spending around $70 of every $100 of revenue on expenses. The chief executive has now got that down to just over $62. The bank's peers, though, have been solidly below $60 for some time.

The trouble is, BofA would have had to slash expenses to just $51 per $100 of revenue in the third quarter to boost its annualized return on equity to 10 percent - the rule of thumb big banks need to cover their cost of capital. Though Moynihan's third-quarter efficiency ratio, as it's called, wasn't far off his target for 2018, that's of little benefit: he'd still have had to cut another $6.5 billion of costs to make a double-digit ROE.

That leaves the bank's long-suffering shareholders at the mercy of the Federal Reserve, whether it raises interest rates, allowing banks to make more money, or permits BofA to buy back a lot of shares. Neither looks likely any time soon.

There may be a way to close the gap from the other end. Some lenders already hint that a return-on-equity figure closer to 9 percent is more realistic than 10 percent considering that rates are low, cheap deposit funding is growing and regulations have made banking less risky than before the financial crisis.

Shareholders, though, aren't yet buying it, with Bank of America's stock trading at two-thirds of book value. Moynihan's long slog toward a distant target continues.