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Why Bank of America Is At an ‘Inflection Point’

The facade of the Washington headquarterThe facade of the Washington headquarter
The facade of the Washington headquarters of Bank of America is seen on December 3, 2010.Photograph by Paul J. Richards—AFP/Getty Images

It’s been a brutal few years for the banking industry, which has struggled to grow revenue amid low interest rates and tougher regulations following the 2008 financial crisis.

But a team of Goldman Sachs analysts are now saying they believe Bank of America is poised to make a turnaround after meeting the bank’s CEO Brian Moynihan Wednesday. It must have been some talk because the analysts say it’s not just cost cutting that will raise the bank’s earnings—but the ever elusive revenue growth even in this low interest rate environment.

“We believe that Bank of America is on the cusp of an inflection in operating leverage as revenue growth and cost reductions appear set to occur concurrently,” a team of Goldman Sachs analysts led by Richard Ramsden wrote. “Management was optimistic about its ability to grow revenues despite a continued choppy macro environment and tepid capital markets.”

The firm reiterated its “Conviction Buy” rating on the stock, saying it expects the bank to earn $89.2 billion in revenue in 2018, up 6.18% from 2015. Goldman also expects BofA to show year-over-year revenue growth by 2017.

The rating comes as the banking industry in general has depended on cost cuts to buoy their bottom line. Banks as a group have hired younger, cheaper workers, made efforts to curb travel costs, while Bank of America has cut back on real-world branches in favor of mobile banking and other digital options.

 

But BofA will also ramp up its revenue, which has been falling since 2013, on the back of lending and fees. BofA has seen an uptick in both the credit card and mortgage businesses— and Goldman expects that to translate into an average annual loan growth of 4% through 2018.

On the fees end, the bank should benefit from a growing market share in fixed income, currencies and commodities as European firms exit the business following Brexit. Goldman notes that Bank of America’s fixed-income and investment banking market share had growth roughly 1% year-over-year in the second quarter.

Checking accounts have also grown, with the average deposit balances up 6% year over year, boosting servicing fees.

Bank of America’s cost cutting efforts are also not slowing any time soon. The firm has said it plans to lower expenses to $53 billion annually by 2018—a mind-boggling $5 billion reduction from the bank’s expenses in 2015. Goldman though seems confident those targets will be achieved, as mobile payments represent less than 1% of total payments now—implying far more costs can be saved for the bank as BofA’s digital platforms grow stronger.

Separately, a team of Sandler O’Neill analysts also said they expect Bank of America to turn around by 2017, as the company begins to show revenue growth.