B of A facing earnings hurdles

Sam Zuckerman

Friday, Oct. 8, 1999 | 10:52 a.m.

Bank of America faces problems controlling costs and generating revenue as interest rates rise, trends that could hurt profits, according to company documents obtained by the San Francisco Chronicle.

In a bid to meet its earnings targets, the Charlotte, N.C., bank is taking steps to curb expenses, such as restricting staff travel and hiring, employees said. The bank was created last year when North Carolina's NationsBank bought San Francisco's Bank of America and took its name.

B of A is the largest bank in California and Nevada.

B of A isn't alone in facing tough business conditions. Banks nationwide are scrambling for revenue as rivals such as brokerages and consumer finance companies steal customers. Rising interest rates also are eroding profits.

B of A is especially vulnerable because it holds a large portfolio of securities that carry fixed interest rates. When the bank is forced to boost the rates it pays depositors, the gap narrows between what it collects and what it pays out in interest.

"The squeeze on margins has had a dampening effect on net interest income, and rising rates have made further securities gains unlikely," B of A Chairman and Chief Executive Hugh McColl told managers last month, according to a recent employee newsletter.

"The current economic environment will slow our ability to grow revenues at the desired rate, so the short-term solution ... is to bring down expenses," McColl noted.

It's not clear how much the trends will show up next week when the bank reports earnings for the quarter ended September 30.

Internal B of A documents show that in July, the latest month for which data are available, loans, deposits and revenue all fell short of the bank's projections. Expenses, while down sharply from the year before due to acquisition-related savings, were significantly higher than expected.

July revenue of $2.68 billion dropped 6 percent from June and was $59 million below the bank's plan because of smaller investment banking and trading profits, the documents show. That reversed the trend earlier in the year when B of A's revenue came in ahead of plan.

Deposits as of July, though up slightly year-over-year, were $17 billion below the amount planned, due mainly to smaller balances in accounts held in foreign offices. The bank's expenses for the first seven months of the year were $10.5 billion, about 3 percent more than planned due to higher-than-expected bonuses and fees for professional services.

The bank had 161,217 full-time-equivalent employees worldwide in July, down a little more than 7,000 from the beginning of the year as the bank combined overlapping functions of its two predecessors.

The bank plans to cut another 2,437 jobs through year end, mostly from its consumer and small-business banking division. That's in line with its projection that it will shrink its staff by about 18,000 during the next few years.

A B of A spokesman declined to comment on the data.

Despite public controversy over power struggles and the clash of cultures between the NationsBank and the old B of A, the bank has kept more customers than expected.

During the first seven months of 1999, 89.8 percent of business customers and consumers in the Western territory of the old B of A stayed with the bank. That was better than the 87.6 percent retention figure posted during the comparable period the year before, and it exceeded the 87 percent goal set by the bank.

Employee turnover was a mixed picture. In California, where NationsBank systems and procedures have not yet been adopted, the annualized turnover rate for tellers was 47.8 percent through July, lower than the 52.5 percent rate the year before. But branch managers left at a 6.5 percent pace for the first seven months of 1999, compared with 2.8 percent in 1998.

By contrast, in the Southwest, where NationsBank systems were adopted, turnover rates for all categories of employees rose.

"After a takeover, there's usually a wait-and-see period," said B. Lynn Ware, an employee-retention expert with the Menlo Park firm Integral Training Systems. "The major test in California will be when employees start seeing effects (of the takeover) on a day-to-day operating basis."