Retail Banks May Feel the Brunt of BofA Cuts

Following a recent reorganization that realigned its operating units and axed some top executives, Bank of America (Charlotte, N.C.) broadly outlined on Monday the next phases of its Project New BAC cost-cutting initiative that launched last April. The bank says it plans to eliminate some 30,000 jobs and cut costs by $5 billion per year over the next three years.

Although Bank of America's plan may seem extreme to some, industry analysts say the measures are not surprising and are even necessary. "The regulatory changes alone have eroded some 10 billion dollars from Bank of America's balance sheet," says Bob Meara, senior analyst in the banking group at Boston-based research and consulting firm Celent. "The bank had to take these actions."

"I think you have to face reality in a tough market," agrees Gwenn Bézard, research director at research and advisory firm Aite Group (Boston), who adds that the bank's move to realign operations by customer segment makes sense to him. "At the end of the day, the customers pay the bill," he says.

Although Bank of America has not yet disclosed exactly where in the company these massive job and cost cuts will happen, it's likely that the retail banking sector will take a hard hit as foot traffic in retail branches decline and regulations continue to reduce fee revenue, says Meara. "Retail branches are contributing to the bank's costs but not its earnings. I fully expect that there's going to be more branch trimming going on," he says.

Meara also suggests that the type of large branch that is prevalent at Bank of America, with five or six tellers and very little automation, is out of place in today's market. "In general, the industry is overbranched," he says.

The measures Bank of America has announced are indicative of what is becoming a growing trend among U.S. banks, according to Bézard. "I think banks have been hit hard overall by the financial crisis and the new regulations," he says. "I wouldn't be surprised to see more banks making cuts and dropping jobs and following in the footsteps of Bank of America."

Meara agrees with that outlook, noting, "The fundamentals of eroding fee revenue, declining foot traffic and growing costs per transaction are an industry-wide phenomenon." However, he suggests that many of these changes will probably happen under the radar and will not be announced to press.

Meanwhile, smaller banks may be able to gain market share and profit from Bank of America's situation, as Bloomberg reported Wednesday. "There might be some great deals for smaller banks to acquire branch assets, and those opportunities will continue," Meara says.