Housing Improvement Driving Bank of America's Costs Lower

NEW YORK ( TheStreet) -- While regulators and the media have had great fun bashing Bank of America ( BAC) during the extended aftermath of the credit crisis, CEO Brian Moynihan has been making excellent progress in cutting costs at the nation's second largest bank.

When "Project New BAC" was rolled out in 2011, the company's goal was to reduce annual expenses by $8 billion. The company's second-quarter noninterest expense totaled $15.547 billion, declining from $16.085 billion during the second quarter of 2012, and from $17.834 billion during the second quarter of 2010, according to Thomson Reuters Bank Insight.

Quite a bit of the savings is coming from the improvement in the housing market, which allows the company to trim mortgage loan servicing staff members, who were very busy working through the mess that was inherited in part from Countrywide Financial, which Bank of America purchased during 2008.

When announcing its second-quarter results last month, the bank said its legacy mortgage loan servicing expenses declined by roughly $250 million during the second quarter from the first quarter. The company reduced its full-time staff by over 2% during the second quarter, mainly from reductions in mortgage loan servicing employees and "staff associated with consumer delivery network optimization."

During the company's earnings conference call in July, Moynihan said legacy asset servicing expenses, excluding litigation expenses, were "down by nearly $800 million on a quarterly basis from the peak only a couple quarters ago and are ahead of our projections."

Moynihan apparently is leaving no stone unturned in his quest to lower expenses, going so far as to close some of Bank of America's drive-through teller windows. The Charlotte Observer on Tuesday reported that the bank would completely close drive-through teller lanes in some locations, even in its home city of Charlotte, N.C.

Two Charlotte-area branches saw their drive-through lanes closed during August, with three more branches slated for the same treatment in September, according to the report. "The strategy also impacts Bank of America branches across the country, from Atlanta to Detroit to Houston," the report said. The bank has said that the decisions on drive-through lanes were "based on location and volume."

The bank still faces elevated litigation expenses from lawsuits tied to mortgage securitization -- mainly by Countrywide -- leading up to the financial crisis that began in 2008. Outstanding mortgage putback claims by investors against the company totaled $16.648 billion, down from $17.135 billion the previous quarter, mainly reflecting a settlement with bond insurer MBIA ( MBI).

As large as those figures are, the company "estimates that the range of possible loss for representations and warranties exposures could be up to $4 billion over accruals at June 30, 2013," according to its second-quarter 10-Q filing.

Another way to gauge Bank of America's cost-cutting success is to look at its efficiency ratio, which is, essentially, the number of pennies of overhead expense for each dollar of revenue. The efficiency ratio improved to 69.80% in the second quarter, from 74.56% a year earlier, according to Thomson Reuters Bank Insight.

That's still a high efficiency ratio, when compared to second-quarter efficiency ratios of 60.64% for JPMorgan Chase ( JPM), 59.54 for Citigroup ( C) and 57.73% for Wells Fargo ( WFC).

Credit Suisse analyst Moshe Orenbuch has a neutral rating for Bank of America, but on Wednesday raised his price target for the shares by a dollar to $14, while raising his 2014 earnings estimate to $1.40 a share from $1.30, and his 2015 EPS estimate to $1.55 from $1.45.

"BAC has made good progress on its 'New BAC' cost program -- which has been clearly telegraphed as $8 billion of cost saves by full implementation," Orenbuch wrote in a note to clients. "However, leverage to reduce costs further will come from the mortgage business -- and could come faster than expectations."

"Given mortgage delinquencies are tracking better than expected and 1H'13 mortgage servicing asset transfers are complete, we think this will drive expense declines in 2H'13 and into 2014," he added.

Bank of America's shares have returned 23% this year through Tuesday's close at $14.29, after more than doubling during 2012. The shares trade for 1.1 times their reported June 30 tangible book value of $13.32, and for 10.4 times the consensus 2014 EPS estimate of $1.38, among analysts polled by Thomson Reuters. The consensus 2015 EPS estimate is $1.62.

The forward P/E ratio based on the consensus 2014 EPS estimate is considerably higher than the forward P/E for Citigroup and JPMorgan Chase and matches that of Wells Fargo.

But based on the consensus estimates, Bank of America will also show the greatest percentage earnings growth among the "big four" U.S. banks over the next two years.

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Interested in more on Bank of America? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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