Bank of America (BAC): Saying All The Right Things
By:NewsyStocks   Tuesday, January 24, 2022 2:19 PM

The recent announcement from CEO Brian Moynihan that Bank of America (BAC) intends to shave another $3 billion in expenses, on top of the $5 billion plan already in place, was heralded by investors as evidenced by the subsequent jump in stock price.

There's no doubt shaving expenses is a step in the right direction. The positive impact it will eventually have on earnings is great, but perhaps even more importantly it's a sign that management recognizes the need to change and is taking steps to actually do something about it. Whether or not it comes off or turns out to be nothing more than placating the investment community remains to be seen. With BAC's track record it's not unreasonable for investors to demand results first rather than taking management at their word.

Even as positive a sign the expense reduction plan deemed Project New BAC was, it's target of these new round of cuts that speaks volumes. The banking industry as a whole needs to get back to basics. In other words start focusing on core banking lines and stop shooting for quick bucks in trading and investment revenues. Sure, those appease investors in the near-term but as we've come to realize all too clearly they aren't sustainable over the long haul.

The next round of cuts, which should start making their way onto the financial statement by Q3 of this year. The focus of the announced cost cutting measures will be in commercial banking, wealth management and trading. These final two in particular are worth noting. As supplemental sources of revenue these are fine, but too many banks became too dependent on these departments as key sources of revenue. Streamlining these areas will not only reduce expenses it will, it is presumed, allow management to get back to banking.

Wells Fargo (Ticker: WFS) is the most recent example of a bank that is doing it right. Not only did they announce positive earnings in line with expectations, even more importantly they showed growth across their loan portfolios, and improved quality of the loans at the same time. Those are the kinds of earnings investors should be looking for and that's what BAC needs to accomplish in conjunction with their cost-cutting efforts to truly get back on track.

So where does this leave investors? For those with a long term horizon BAC certainly has a ton of upside potential. As management slowly but surely gets their financial house in order this can easily become a $15 stock within a year or two. But for those with weak investment constitutions, in other words are adverse to volatility, BofA is best avoided. In the near term at least it's going to be a wild ride.