Bank of America Corporation BAC may have to resort to further expense cuts in its trading division, unless trading revenues improve significantly. This was stated by the company’s CEO Brian Moynihan at an investor conference in New York.
Moynihan said at the conference, “If the environment stays sort of flattish, less volatility, we’ll have to keep working that expense base down. We’ve got to probably work it down again in the next couple of years if the business stays where it is.”
BofA did not benefit much from the rise in trading activity during the first quarter of 2015. Global Markets recorded a 28% fall in net income mainly owing to a decrease in fixed income trading revenues. Overall, fixed-income, currency and commodities (“FICC”) sales and trading revenues declined 7% year over year primarily due to a fall in credit and mortgages.
For the second quarter of 2015, Moynihan stated that FICC trading revenues will be lower than equity trading, which will be driven by stronger performance of equity markets. A similar view was expressed by JPMorgan Chase & Co.’s JPM CEO Jamie Dimon at the same conference.
This indicates that the industry-wide rise in trading revenues during the first quarter of 2015 was inconsistent and not a fundamental improvement. Generally, the first quarters are seasonally stronger for trading revenues and this is exactly what happened this time as well.
Therefore, given the overall dismal scenario for trading revenues, BofA is expected to resort to cost-cutting measures for improving profitability. However, the CEO did not specify what measures the company plans to undertake.
On a separate note, BofA announced the sale of five banking branches to F.N.B. Corporation FNB in Pennsylvania. The deal is expected to close during the third quarter of 2015, with FNB planning to retain all employees at their respective locations.
We believe BofA’s initiatives to retain its profitability through streamlining or expense cuts will go a long way in enhancing fundamentals.
Currently, BofA carries a Zacks Rank #3 (Hold). A better-ranked bank is The Bank of New York Mellon Corporation BK, with a Zacks Rank #2 (Buy).
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