Bank of America Corp. CEO Brian Moynihan says the bank plans to cut costs by $5 billion and slice over 30,000 jobs - or 10% of its workforce - in the largest single job cut this year.
BAC stock rose 1% on September 12 to $7.05 following the announcement.
The company has already cut 6,000 jobs and plans on implementing other cost reductions in a new program called Project New BAC. The first phase will reduce costs by 18%. Bank of America's investments, wealth management and banking operations, which currently make up $28 billion in costs, will be the primary focus for cuts in phase two, generating significant profit savings. The program's goals are to restore investor confidence and improve the company's efficiency ratio to 55%.
Job Cut Target Date: 2013
Job eliminations will occur in phase one and will be completed by 2013. According to Bank of America's website, the company views employee cuts as “the most difficult outcome of this work.” As of late June, Bank of America had over 288,000 employees.
According to insiders who are familiar with the situation, bank officials considered an even more drastic firing spree than what was recently revealed, including an over 40,000 worker reduction.
Moynihan has already made other dramatic moves to save the company, including firing two high-ranking lieutenants, hiring two people as chief operating officers, selling $5 billion of preferred stock to Warren Buffett's conglomerate holding company Berkshire Hathaway, and selling half of the remaining stock to a major Chinese lender to create more capital cushion to protect against future losses. The bank is now also attempting to sell a large chunk of its troubled mortgage business.
Moynihan accepts that the bank may have to lose its number-one slot to stay in the game: “We don't have to be the biggest company out there,” he said to the Washington Post.
Bank of America is seen by many investors as one of the most bloated companies in the banking industry. However, some investors and analysts are concerned that job cutbacks might lead to poor customer service and a loss in market share.
Bank of America's Fight for Survival
Bank of America's first major mistake leading to its current situation was the purchase of Countrywide for $2.5 billion in 2008. Countrywide was the nation's largest mortgage lender at the time, and its segment of Bank of America has since accumulated a net loss of $30 billion.
To make matters worse, Countrywide mortgage services have led to lawsuits and regulation probes. In the first half of 2011, the bank coughed up over $12 billion to settle claims for faulty mortgages. When asked by reporters at the September 12 conference if he was considering filing bankruptcy for Countrywide, Moynihan responded vaguely: “We look at all our options.”
Moynihan inherited the problems from ex-CEO Ken Lewis, who stepped down over the controversial Merrill Lynch purchase during the recession. Since then, Moynihan has fought to calm investors during economic and business uncertainty.
Bank of America is among five major banks in negotiations to settle a state attorney general's investigation into “robo-signing” and mortgage service abuses.
Bank of America's stock has fallen 48% so far this year. Many investors are concerned that the company will not gain enough capital to withstand another wave of financial uncertainty while meeting the 2013 global capital requirements. According to Nancy Bush, analyst and editor at financial information firm SNL Financial: “There is a fair amount of skepticism on Wall Street, and Brian (Moynihan) is doing as much as he can do in the face of a worsening economy.”
Key Statistics – Banking Trends in the US (source: American Bankers Association; August 2011 Survey)
- During a recent survey, 62% of all poll respondents in the US named online banking as their preferred banking method compared to just 36% in 2010.
- Some 57% of bank customers in the US aged 55 years and up say they prefer banking online compared to 20% in 2010.
- Respondents who said they prefer to do banking in local branches fell to 20% this year, from 25% in 2010.
- Roughly 8% of bank customers admitted to using ATMs, compared to 15% in 2010.
- Half of the 6% who reported using the telephone for bank transactions last year used the telephone in 2011.
- Customers who bank by mail dropped from 8% in 2010 to 6% this year.