This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Bank of America's Cost Cutting Will Face Scrutiny

NEW YORK ( TheStreet) -- Bank of America (BAC - Get Report) is set to report earnings Wednesday morning, and once again the focus will be on how well the bank is doing at cutting expenses.

Analysts are looking for the bank to earn 27 cents per share, compared to 28 cents during the third quarter and 29 cents during the fourth quarter of 2012.

"We doubt that weak Q4 results will have a significant impact on share prices with investors far more focused on core earnings trends for the year ahead," argued Atlantic Equities analyst Richard Staite in a Dec. 19 preview of the banking sector.

"We expect management comments during Q4 conference calls to generally remain upbeat with stronger economic growth, a steeper yield curve and stronger equity revenues all being supportive for the sector," he continued, adding that "against that background" he still ranks Bank of America as his top pick.

Must Read: Buy Capital One Now, Says UBS

Indeed, as Staite predicted, JPMorgan Chase (JPM - Get Report) Chairman and CEO Jamie Dimon was upbeat when that bank reported earnings Tuesday. After an analyst characterized him as being "cautiously optimistic," Dimon corrected him.

"We didn't use the word cautiously optimistic, we're using the word optimistic because we are actually optimistic. And if you have the U.S. economy starting to grow we will see loan growth and volume growth and - across all these businesses. We are actually optimistic about the U.S. economy in particular," Dimon said.

That obviously bodes as well for Bank of America as it does for JPMorgan, but Atlantic's Staite nonetheless favors B of A.

"Recent management comments from BAC highlight revenues are moving in the right direction and it still has by far the largest cost cutting story with $9bn of cost savings still ahead," Staite wrote.

Those cuts will take several more quarters to play out however. Oppenheimer analyst Chris Kotowski, who has a rating of "perform" on Bank of America is looking for the lender to show $15.99 billion in fourth quarter expenses, compared to $18.36 billion a year ago and $16.39 billion the previous quarter.

Traditional banking businesses such as consumer and business lending and mortgage production tend to follow a fairly predictable pattern. The severe drop in mortgage production that occurred in the third quarter caught no one by surprise, given the rise in long-term interest rates and consequent decline in refinancing activity, and it is widely expected to remain at the third quarter levels, as indeed Wells Fargo (WFC) demonstrated in its fourth-quarter results reported Tuesday.

Trading revenue is always the most difficult thing to predict for global securities giants like Bank of America. It can also be difficult to estimate since many banks report the revenues in different ways.

JPMorgan on Tuesday showed weaker than expected equity trading revenue, according to Atlantic Equities analyst Richard Staite. Trading revenues of $873 million were below Staite's $1.26 billion estimate and below the consensus of $1.19 billion.

Is that positive for Bank of America because it means it may have picked up market share or is it negative because it means the industry as a whole fared worse than analysts expected? It's hard to know, but I'd bet Bank of America gained market share. It has a strong, possibly underrated, equities trading business, and it is unusual that industry performance as a whole in an area like equities trading catches the analyst community off guard. Rather, analysts hear from a few sources what the performance is likely to be across the industry and then apply what they've gleaned to all the banks they cover. Perhaps because equity markets performed well in the fourth quarter they just assumed JPMorgan would benefit. What is likely, instead, is that JPMorgan slipped up on one or two trades, suggesting competitors may have done better -- perhaps even benefitting by taking the other side of the trades that went bad for JPMorgan.

This is a relatively minor question, though. Investors will want to see how Bank of America is faring on expense reduction above all, and any signs of a change in management's outlook on that front would be most likely to drive the stock price.

-- Written by Dan Freed in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
BAC $11.32 -5.60%
JPM $53.24 -4.10%
AAPL $92.99 -1.40%
FB $99.91 -1.10%
GOOG $673.23 -1.60%


Chart of I:DJI
DOW 15,624.06 -290.68 -1.83%
S&P 500 1,828.66 -23.20 -1.25%
NASDAQ 4,249.5380 -34.0540 -0.80%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs