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For Bank of America, it all comes down to revenue

Tourists walk past a Bank of America banking center in Times Square in New York in this file photo taken June 22, 2012.

BRENDAN McDERMID/Reuters

Brian Moynihan is slowly turning the Bank of America supertanker around. That's most visible from the chief executive's push to reduce costs. Expenses in the three months to June dropped 11 per cent from the first quarter. Mr. Moynihan is now targeting $8-billion (U.S.) of annual cuts by 2015, a $3-billion increase over his previous plan. That'll help the bottom line. But without revenue growth, B of A will still look mediocre.

Last year, expenses at the Charlotte, N.C.-based megabank ate up around 80 per cent of revenue, dropping to 77 per cent by the end of June. That's still way more than the average U.S. bank's 65 per cent, according to Barclays. Applying Mr. Moynihan's 2015 goal to the second-quarter showing would have brought B of A's ratio of expenses to revenue down to a much more competitive 69 per cent.

It would also have added another $1.5-billion to the bottom line in the quarter. That in turn would have boosted B of A's return on equity to an annualized 7 per cent or so, rather than the sub-5-per-cent figure it actually reported, after reversing out some gains from tweaking the balance sheet and from debt-related accounting adjustments. And it would have lifted the bank's return on tangible equity to about 10 per cent. That kind of figure would probably just about satisfy shareholders.

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The bank isn't there yet. But it's moving in the right direction on costs, and other factors are slowly working in its favour, too. Losses from the mortgage dross B of A inherited from Countrywide are gradually falling. And provisions for loan losses in the second quarter were the smallest since early 2007. Mr. Moynihan has also overseen the final steps toward a single deposit platform for all banking customers. That's long overdue. The bank started gobbling up rivals almost two decades ago and the lengthy wait speaks volumes about previous bosses' lack of focus on the unglamorous work of integration.

Actions of this kind should help create a more streamlined franchise. That's only half the battle, though. B of A needs to generate more revenue as well if it's going to make shareholders happy. Granted, all banks face that challenge in the current environment. But having sold many businesses and shrunk others – not least mortgages – Mr. Moynihan has more to prove than many.

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