Bank of America Not Out of the Woods Yet

We expect the pace of expense improvements to slow, and don’t think Bank of America is out of the regulatory woods yet. Bank of America recorded a total of $16.4 billion in litigation expenses during the year, about 22% of the company’s total non-interest expenses in 2014. The bulk of the bank’s mortgage-related problems are clearly behind it, but we believe the country’s largest banks are still easy targets. Total non-interest expenses excluding litigation were down a full $1.1 billion from the fourth quarter of 2013. However, $700 million of this reduction was due to a fall in legacy assets and servicing expenses. Although the bank is continuing to reduce headcount--down 8% during the year--compensation expense fell only 4% during the same period. We attribute this difference in part to the departure of lower-paid employees in the legacy mortgage business, and believe expenses will be harder to reduce as the company’s results improve, especially in its wealth management and investment banking segments. In fact, the company’s fourth-quarter results benefited from lower incentive-based compensation due to the poor performance of the global markets segment, and management indicated that the core expense base is stabilizing. We forecast non-interest expenses of $59 billion in 2015, growing slowly to $60 billion by 2018. For comparison, Bank of America reported a “core expense” run rate of $12.7 billion in the fourth quarter, excluding $1.1 billion related to the runoff mortgage business and $393 million in litigation.

Improving results have given the company an opportunity to deepen customer and employee relationships. Bank of America provisioned only $2.3 billion for credit losses during the year, as charge-offs reached a multiyear low. We expect charge-offs to grow to $3.7 billion by the end of our current forecast period. As credit quality improved and the company continued to move past its legacy issues, Bank of America capitalized on opportunities to deepen its ties to depositors. Brokerage assets grew 18% during the year, and card issuance grew 19%, though deposit balances only increased by 4%. The company also experienced a drop in broker attrition. These results are evidence that the bank is slowly repairing its damaged brand.

Weak markets performance was related in part to reduced risk. Management attributed weakness in the global markets segment--trading account profits totaled only $111 million--to low volatility in equities and less client activity in credit and mortgage trading, along with the adoption of funding value adjustments related to certain derivatives trades and a reduction in balance sheet exposures. On the other hand, the global banking segment reported decent performance, as the company took in 7.5% of global investment banking fees during the quarter, second only to

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