BAC Bank of America Corporation

   (FROM THE WALL STREET JOURNAL 1/20/16) 
   By Justin Baer and Christina Rexrode 

The biggest U.S. banks, powerless to reverse the slide in oil prices, brighten the outlook for China's economy or lighten their own regulatory burdens, have turned to the one lever they alone control: cutting costs.

Bank of America Corp. reported its biggest annual profit in nearly a decade on Tuesday, even as revenue fell, the payoff from a yearslong campaign to shed expenses. Minutes later, Morgan Stanley delivered its full-year results with a promise dubbed "Project Streamline," the Wall Street firm's plan to pare more than $1 billion in annual costs by the end of 2017.

The outlook for the world's economies remains cloudy and markets began 2016 deep in the red, giving bank executives and their shareholders little reason to expect this quarter will bring stronger demand for many of their key services.

"Overall anxiety levels are very high," UBS Group AG analyst Brennan Hawken said. "No management team wants to go up there and sound out of touch."

He added that "we'd have to have a pretty significant turnaround to avoid having cost cutting not be a major theme this year."

Big U.S. and European banks already have eliminated more than 100,000 jobs since 2012, and billions of dollars in assets have come off their balance sheets as executives settled into the postcrisis era. Yet many of their returns still are trailing what investors consider their cost of capital, leading many to conclude 2016 will be another lean year.

"Our No. 1 priority is to control what we can control given the market realities," James Gorman, Morgan Stanley's chairman and chief executive, said during Tuesday's conference call with analysts.

Bank of America, the nation's second-biggest lender by assets, earned $15.89 billion in 2015, more than double its 2014 income, thanks to a steep drop in legal and regulatory fines. That was its biggest profit since 2006. Annual revenue slipped 2%.

"Expenses are on our mind every day at Bank of America," said Paul Donofrio, the bank's chief financial officer. "We have everybody focused on expense discipline." Some analysts questioned how much the bank would be able to keep cutting costs, a key tenet of the bank's strategy for the past several years. Shares fell 1.5%

In the current environment, no expense is too small to scrutinize, even for a big bank. Citigroup Inc. is planning to ditch voice mail for some employees and installing printers in its Lower Manhattan offices to print only after an employee scans an ID badge.

At Morgan Stanley, the firm's executives rolled out their two-year plan to reduce expenses by simplifying the company's legal structure, shifting employees to low-cost offices in places such as Mumbai and Budapest, consolidating various functions and relying more on technology. "We're going to go after the infrastructure costs of the firm," Jonathan Pruzan, Morgan Stanley's finance chief, said in an interview.

The savings should lift the firm's return on equity -- a key bank-profitability metric -- closer to its 10% goal in the next two years. Morgan Stanley's ROE was 8.5% for 2015, up from 4.9% a year earlier. Morgan Stanley's ROE came in at 4.9% for the fourth quarter, excluding accounting adjustments.

To get there, executives said Tuesday, the firm also will need to deliver on its cost-cutting plan, boost revenue by 3% to 5% annually and free up additional capital it can return to shareholders though dividend increases and stock buybacks.

Last month, Morgan Stanley moved to cut about 1,200 jobs tied to its fixed-income business.

At Bank of America, fourth-quarter profit was $3.34 billion, or 28 cents a share. That compares with $3.05 billion, or 25 cents a share, in the same period of 2014. The company beat the 26 cents a share expected by analysts polled by Thomson Reuters.

Adjusted revenue increased 4% to $19.76 billion, slightly less than the $19.82 billion that analysts had expected.

Analysts have noted that much of the recent cost cutting is coming in the unit that services troubled mortgages, which is being wound down.

Morgan Stanley swung to a profit in the fourth quarter as the Wall Street firm's gains in merger advice and stock trading offset a slump in its business tied to debt markets.

For the quarter, Morgan Stanley earned $908 million, or 39 cents a share. That compares with a loss of $1.63 billion, or 91 cents a share, in a year-earlier period that included a $2.6 billion settlement over the sale of mortgage bonds.

The firm earned 43 cents a share in the latest quarter, excluding certain accounting expenses. On that basis, analysts polled by Thomson Reuters had expected earnings of 33 cents a share. Revenue totaled $7.74 billion, little changed from a year earlier.

(END) Dow Jones Newswires

January 20, 2016 02:48 ET (07:48 GMT)

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