Bank of America Earnings: More Cost Cuts Are Hard to Come By

(Bloomberg Gadfly) -- Former Morgan Stanley CEO John Mack was once known as Mac the Knife. Jimmy "Three Sticks" Robinson steered American Express for more than a decade and a half. And the notorious Drexel Burnham Lambert, before it was dominated by Mike Milken, was founded by a guy who went by Tubby.

If Wall Street CEOs still had nicknames, perhaps Bank of America's would be known as Brian Moyni-Scissorhands. Or maybe not. It's not that catchy. Still, it would be deserved. Since taking over as CEO in 2010, Moynihan has cut Bank of America's non-interest costs by $28 billion to just under $55 billion. For the first time this year, Moynihan, for a quarter at least, finally got the bank's expense ratio, long the highest among its big rivals, down to 60 percent, which was a milestone.

Bank of America Earnings: More Cost Cuts Are Hard to Come By

And yet, even for Moynihan, cutting Bank of America's expenses any lower could be difficult. The bank's fourth-quarter earnings, reported on Wednesday morning, was evidence of that. After adjusting for a one-time tax charge, the bank reported a better-than-expected 47 cents a share, or $5.3 billion. Revenue was up 7 percent from a year ago, its biggest annual increase in a while.

Bank of America Earnings: More Cost Cuts Are Hard to Come By

But for the first time in a while, expenses -- which had been declining regularly, down nearly $600 million in the third quarter -- esssentially held steady, dropping just 0.9 percent in the last three months of the year. The bank restated its third-quarter results, adding $260 million to expenses because of an accounting change. Without the accounting change, it appears that expenses rose in the fourth quarter, which is the first time that has happened in years. Even at $55 billion, the bank is still roughly $2 billion shy of its $53 billion expense goal.

The good news is that just as Moynihan seems to have cut as much as he can, the bank's lending business is delivering. Loans rose 3.3 percent. And profits in its consumer lending division rose 14 percent. More important, its effective return on equity in the division rose to 24 percent, up from 22 percent a year ago. Moynihan's plan all along was to cut costs and rake in the profits when interest rates increased and made lending more profitable. And that's working out now. The problem may be that it has taken longer than expected for interest rates to comply.

Costs are starting to rise for its consumer lending business as well, in fact faster than the rest of the bank. Bank of America's overall provision for credit losses rose to $1 billion in the fourth quarter, up 29 percent from a year ago. Overall, loan charge-offs jumped $363 million in the quarter, including a $300 million charge for Steinhoff International Holdings NV, the troubled retailer, which has caused losses for other banks as well. And while consumer loan growth at Bank of America was higher on average than at its rivals, the question is whether lending growth will be able to outpace expenses. Bank of America's overall lending growth is expected to slow next year to just 2 percent, according to analysts at brokerage firm KBW, which specializes in financial services. What's more, KBW expects Bank of America's provision for bad loans to rise steadily over the next two years.

Bank of America Earnings: More Cost Cuts Are Hard to Come By

Shares of Bank of America have been one of the best performers, rising 42 percent in the past year. Bank analyst Charles Peabody recently warned that investors, and executives, seem to be forgetting that the financial crisis, while extreme, was not out of the ordinary. Credit tends to cycle. Loan losses have been falling for a while. That won't go on forever. How Moynihan manages that will determine whether he lives up to his new clunky moniker.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Stephen Gandel is a Bloomberg Gadfly columnist covering equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.

To contact the author of this story: Stephen Gandel in New York at sgandel2@bloomberg.net.

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