Beginning the third quarter of 2012, Bank of America Corporation (BAC - Analyst Report) is hopeful of saving about $230 million interest expenses per quarter as it plans to bring down its long-term debt by nearly $40 billion in the current quarter. The company's Chief Financial Officer (CFO) Bruce Thompson stated this while addressing Morgan Stanley's (MS - Analyst Report) investor conference in New York.
This initiative of BofA would create a positive impact on its net interest income. Also, this is a convenient way of trimming down the overall expenses, which has been trending higher since the financial crisis.
BofA has already completed cash tender offers for $2.1 billion in aggregate principal amount of subordinated notes and $915 million in aggregate principal amount of trust preferred securities (TruPS). Apart from these, on May 15, the company announced the redemption of $1.8 billion unsecured subordinated retail debt securities, which is expected to be completed by the middle of this month.
In 2011, BofA started an expense savings initiative - Project New BAC - with the focus on improving its earnings by lowering expenses and increasing revenue, while returning more value to the shareholders. The company will be retrenching nearly 30,000 workers under the first phase of this initiative with a goal of reducing expenses by about $5 billion annually by 2014.
Additionally over the last two years, BofA has been divesting or closing down its non-core operations to strengthen its capital position in order to meet the stringent capital standards and improve its overall efficiency. In 2011, the company generated $34 billion in proceeds from the sale of its non-core assets and businesses, thereby lowering the risk weighted assets (RWAs) by $29 billion. By the end of this year, the company anticipates RWAs under Basel III to go down to $1.75 trillion.
BofA's efforts to enhance its balance sheet position have now started bearing fruits. In mid-March, the company cleared the stress test, which is conducted annually by the Federal Reserve to see whether a company is capable of withstanding a bigger financial crisis in future than it endured in the past. Though this time BofA did not request for a new capital deployment, we anticipate it to aspire for dividend hike and share repurchase next year, while submitting its capital plan for another round of stress test.
Further, a reduction in long-term debt will go a long way in improving the overall financials of BofA. However, the company should not get complacent with its efforts to improve the balance sheet. It should continue striving for more improvements in its balance sheet and capital ratios.
Currently, BofA retains its Zacks #3 Rank, which translates into a short-term Hold rating.
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