By Christina Rexrode and Peter Rudegeair 

Bank of America Corp. said it would deliver another $5 billion in annual cost cuts by 2018 as part of its strategy to deal with persistently low interest rates that are eating away at lenders' profitability.

The move by the second-largest bank in the U.S. by assets shows the importance Chief Executive Brian Moynihan is placing on cost discipline and job reductions to weather a tough period, even as its rivals push harder on loan growth.

Bank of America on Monday turned in second-quarter earnings and revenue that were lower than a year ago, in part due to relatively weak progress on lending. But investors rewarded the bank for announcing the new cost-cutting target and sent the stock up 3.3% to $14.11.

Much of the cost-cutting burden is falling on the bank's staff. Bank of America has shed about 25% of its jobs since Mr. Moynihan became CEO in 2010, with employment falling to about 210,000 from nearly 284,000. The bank slashed about 6,000 jobs over the past 12 months, or 3% of its work force, and in January it let retention packages for some of its longtime Merrill Lynch brokers expire.

"We're down 2,600 people quarter over quarter," Mr. Moynihan said. "It's a constant reduction in personnel through hard work and automation."

Bank of America's large base of U.S. deposits and portfolio of rate-sensitive mortgage bonds makes it particularly dependent on an uptick in interest rates -- a difficult position at a time when the Federal Reserve is effectively on hold and demand for government bonds is pushing down benchmark interest rates around the world.

The bank reported a profit of $4.23 billion in the three-month period ended in June, down 18% from a year earlier. Its per-share profit of 36 cents was better than the 33 cents expected by analysts polled by Thomson Reuters. Revenue fell 7% to $20.4 billion, which also beat expectations.

The lender's expenses fell 3% in the second quarter. J.P. Morgan Chase & Co. and Citigroup Inc. last week reported that they, too, reduced expenses in the period. At Wells Fargo & Co., expenses rose 3%.

"I've always maintained that Moynihan was a great fix-it guy but not a good growth guy," said Charles Peabody, an analyst at Portales Partners. "What they've done with their expense structure over a five-year period is pretty impressive."

Low interest rates are pressuring banks across the spectrum. Hopes were high early in the year that the Fed would continue to push rates up after voting for its first increase in nearly a decade in December. But market turmoil has led the central bank to hold off.

The latest blow to rate-rise hopes came last month in the so-called Brexit, when the U.K. shocked markets by voting to withdraw from the European Union.

Mr. Moynihan, now in his seventh year as Bank of America's CEO, said the lender can handle lower rates for longer, despite the fact that it is more positioned to benefit from rising rates. "The question is, can we grow earnings without rates improving?" Mr. Moynihan said. "We believe we surely can."

To do that, he said, the bank would continue to increase the income it gets from fees, while managing risks. Loans are growing, and may look even stronger compared with peers such as J.P. Morgan and Wells Fargo, once Bank of America works through the last stages of winding down bad housing assets it picked up during the last financial crisis.

But the main plank of the strategy is further cost-cutting. Mr. Moynihan said the bank would aim to reduce its annual expense level to $53 billion by 2018, down from about $58 billion in 2015 and $56 billion over the four quarters ended June 30.

Mr. Moynihan said Monday that the bank gave new targets in part because investors and analysts "were not sort of getting the expenses right ... thinking that we could not continue the rate of investment and continue to bring down expenses."

The new forecast includes often-unpredictable legal costs, which have helped the cost-cutting drive by falling sharply since Bank of America agreed to a record $16.65 billion fine for past mortgage abuses in 2014.

Cost-cutting has already been a key tenet of Mr. Moynihan's. The number of Bank of America branches has dropped from about 6,000 to 4,700 during his tenure. Mobile-banking technology is reducing the need for tellers. An efficiency program, "Simplify & Improve," has cut down on the number of products the bank offers.

Meanwhile, the firm has invested in automated trading platforms that cut down on the need for well-paid traders. Mr. Moynihan said last month that he planned to keep cutting jobs at the trading unit, which already lost 10% of its workforce over the previous year and increased its revenue this quarter by 12%.

While trading has grown more electronic across Wall Street, the pruning has led some employees to complain privately that they don't have enough resources to do their jobs well.

Bank of America's second-quarter numbers followed the template of J.P. Morgan and Citigroup, which reported earnings last week. Earnings at all three banks fell from 2015's second quarter, but still beat analyst expectations, which had been sliding as the earnings data approached. Results were boosted by a mini boom in trading, caused by Brexit uncertainty, but many analysts don't expect that to last.

At Bank of America, net interest income fell 12% to $9.21 billion from $10.46 billion in the year-ago period, a worse decline than at other banks. Return on assets was 0.78%. Mr. Moynihan has said he would like to get to 1%, but can't do that until interest rates increase.

"The management team is at least trying to do what they can to improve results," said Brennan Hawken, an analyst at UBS AG. "It would be far more negative if they came out and said, 'The revenue environment really stinks -- sorry, wish we could help you.'"

Write to Christina Rexrode at christina.rexrode@wsj.com and Peter Rudegeair at Peter.Rudegeair@wsj.com

 

(END) Dow Jones Newswires

July 18, 2016 17:56 ET (21:56 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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