Bank of America Finally Gives Investors a Target to Shoot At

By Markets Fool.com

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Investors listened carefully when Bank of America finally shared some financial targets on its recent quarterly conference call.

Over the past four years, Bank of America has been largely silent on the issue of profitability and other financial targets. But that changed two weeks ago when chairman and CEO Brian Moynihan was pushed by CLSA analyst Mike Mayo on the bank's first-quarter conference call to reveal precisely what it's striving for:

Mayo: What are your financial targets for 2015 and 2016?

Moynihan: So, Mike, as we said, our goal is to continue to drive toward the 1% return on assets and depending on where we end up with capital between 7.5% and 8% tangible common equity ratio that we translate into a 12% to 13% return on tangible common equity. In this quarter, our return on tangible common equity was 8%, and our return on assets was 64 basis points. So we are two-thirds of the way to that goal.

Mayo: And what time frame do you expect to get there?

Moynihan: Well, I think if you adjust our earnings this quarter for a couple of things, and then we continue to think of LAS [Bank of America's operating unit that holds toxic and noncore assets dating back to the financial crisis] normalizing, you see us get close to that goal. That should happen between now and the end of 2016 because we just keep chunking away at LAS.

To be fair, this isn't the only time since becoming CEO that Moynihan has referenced, at least offhandedly, what he thinks Bank of America can earn once it has fully atoned for its sins from the financial crisis. At the bank's 2011 analyst day, for instance, he predicted that the Charlotte, N.C.-based lender would soon generate between $35 billion and $40 billion in annual pre-tax net income. Unfortunately, it's trailing-12-month earnings since then have topped out at a mere $16.2 billion.

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This aside, Moynihan's latest projections are nevertheless important because they give prospective and a benchmark against which current investors can measureBank of America's ongoing performance.

So, how does the nation's second-biggest bank by assets get from where it is today to a 12% to 13% return on tangible common equity? If you go through the math, which is illustrated in the chart below, Bank of America needs to drop its efficiency ratio (noninterest expenses divided by net revenue) from 74% today down to roughly 58% and increase its revenue to approximately 50% of its common equity from a current 37%.

It may go without saying, but these are arduous tasks. In terms of the top line, it means Bank of America must drum up around $7.3 billion in additional quarterly net revenue. And it will have to do so with positive operating leverage, meaning it's revenue must increase faster than its expenses in order to lower its efficiency ratio into the necessary range. When all is said and done, the bank needs to increase its quarterly pre-tax earnings by $2.4 billion, or 51% based on its performance in the first three months of this year.

I, for one, have no idea how Bank of America plans to meet these targets, considering the market share it has lost over the last seven years to the likes of Wells Fargoin the mortgage market and JPMorgan Chase in investment banking. While Bank of America could surprise me, and thereby produce outsized returns for its shareholders, it's safe to say that the $2.1 trillion lender has an uphill battle to fight in order to do so.

The article Bank of America Finally Gives Investors a Target to Shoot At originally appeared on Fool.com.

John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.