How Well is Bank of America Corp (NYSE:BAC) Positioned for Growth in FY2016?

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Bank of America Corp (NYSE:BAC) has recently appointed a new CFO, Paul Donofrio, and the new executive has already started making progress in three main areas of the bank. These include the balance sheet, operational leverage and capital expansion and returns. This move has made the BAC stock one of the most attractive in the industry. Furthermore, if the CFO is able to make these improvements as planned, it could position BAC for growth, not only in 2016, but even through 2017.

Growth Prospects

One of the main areas of growth for the bank in recent times has been the loan business. The bank has employed more loan officers and initiated target marketing campaigns, so as to attract more customers. Analysts expect that this should deliver at least 4% loan growth in the next year. It is important to note here that the company’s loan business had not reported any significant growth since 2013. Furthermore, non-core loans are starting to run-off and BAC definitely needs new core loans to replace them.

The most significant aspect of BAC’s business is that it is closely tied to the US economy. The company has increased its focus on the moderately improving US economy, rather than in Europe. Currently, BAC faces run-off in its mortgage portfolios, while improving itself as a corporate bank. Furthermore, the CFO also ruled out the possibility of portfolio acquisitions to drive future growth. This seems to be a rational decision, given that the company can now use those resources to develop its own portfolio. Additionally, any further acquisitions would just add more operating costs, at least for the short term, to the recovering company.

Improved Efficiency

Much like other corporate banks, the BAC is working to improve its operational efficiency for the coming year. This is being done by reinvesting current savings of the bank. However, a greater difference of such initiatives would be visible once the growth rate environment improves. Additionally, the new CFO is also concentrating on improve BAC’s share value, through capital returns. A regulatory filing has already been made in this regard and the management believes that the proposal would be accepted without much challenge.

BAC’s cost reduction program also includes shrinking the Legacy Asset Servicing expenses and litigation costs as well. By the end of the 4Q2015, the company expects LAS expenses to reach $800 million, with further reductions to reach $500 million by 4Q2016. Similarly, the company expects litigation costs to decline, but it believes that they would still remain between $1 billion and $1.2 billion per year.

Capital Return Plans

However, the BAC has also set a target of 12-14% return on TCE. Given the size of the corporation and the diversified nature of its business, this target would be very difficult to achieve. In fact, the only way BAC can meet this target, during the next year, is if the overall operating environment experiences positive change. Added to the CFO also stressed on the fact that the company has been working closely with regulatory bodies to get its current capital returns plan approved. He also hinted at the possibility of adjusting this plan, by mid-2016 or early 2017. This could mean that BAC is aware of its high aspirations and would be willing to change plans, if the environment does not change in their favor.

Conclusion

After years of shrinking itself to cope with the changing conditions, Bank of America Corp (NYSE:BAC) is finally making efforts to grow its business. If the current plans are executed in a timely and effective manner, they could help the company improve its share value significantly in the market. Furthermore, even if the regulatory bodies approve the company’s capital return plan, the investors would have a lot to look forward to in 2016. However, it is expected that the stock would reach its peak, once the operating environment improves.

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