Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: For Bloomberg audience worldwide. I'm David Weston. Joining us now
Speaker 2: is Brian Moonton, and he is the chair and CEO
Speaker 2: of Back of America. So welcome. It's good to have
Speaker 2: you on earnings day.
Speaker 1: Brian, that's great to be here. David, good to see
Speaker 1: you again.
Speaker 2: So let's start with lending, which is so important to
Speaker 2: Back of America, really a leader in commercial lending, and
Speaker 2: that interest income is something we've been talking about an
Speaker 2: awful lot. You had said it would be a trough
Speaker 2: in all likely the second quarter, coming back fourth quarter.
Speaker 2: But I'm curious about when you look at it, what
Speaker 2: are the things driving that right now? Up or down?
Speaker 2: Is it loan demand? Is it the cost of deposits?
Speaker 2: What are the things that are feeding into that right now?
Speaker 3: Yeah, So I think make it straightforward, we have at
Speaker 3: one point nine to one trillion dollars of deposits and
Speaker 3: we have about a billion fifty loans, a trillion fifty loans,
Speaker 3: and so the money we earn on spread and that
Speaker 3: instincome is the difference between what we deposit rates paid,
Speaker 3: loan rates received and then ultimately investing in cash. The
Speaker 3: other eight hundred million dollars you have to invest. So first,
Speaker 3: what's driving demand? I think is actually an interesting thing.
Speaker 3: So if you look across the loan categories, credit card
Speaker 3: growth was decent, home akery growth is kind of bouncing
Speaker 3: along because consumers aren't using their home acry loans yet
Speaker 3: they may. Mortgage lending activity relatively flat. There you go
Speaker 3: on the commercial side. The great news is we grew
Speaker 3: small business and business banking, which is our fifty mini
Speaker 3: Hutter segment. It grew for small business of the twentieth
Speaker 3: consecutive quarter with the number one small business lender. Despite
Speaker 3: what you hear, we are the largest small business lender
Speaker 3: in America and that grew, which means there's activity. But
Speaker 3: when you get in the middle market in the upper end,
Speaker 3: you start to see there's a soft level of softast
Speaker 3: loan demand because of opportunity and cost the beer point
Speaker 3: the cost of borrowings higher and the opportunity what to
Speaker 3: do with the money with economic certainty hire. But you
Speaker 3: put that together, we believe that I would trough this quarter.
Speaker 3: We called that we should have bridged. Where it goes
Speaker 3: from thirteen point nine billion this quarter to fourteen point
Speaker 3: five billion in the fourth quarter, and we showed the
Speaker 3: steps to get there, which I think gave the market
Speaker 3: confidence that part of this requires a little bit of
Speaker 3: growth and loans and deposits continue discipline and pricing, and
Speaker 3: a lot of it comes from mechanical repricing of assets
Speaker 3: that are rolling off their fixed rate and having repriced
Speaker 3: to current rate structures.
Speaker 2: Yeah, and those mechanical things you're reasonably certain of as
Speaker 2: far as much as you can be. But when you
Speaker 2: talk about growing, for example, small and medium sized business loan,
Speaker 2: is that what I would call organic growth. Is that
Speaker 2: more customers or is it current customers actually borrowing more.
Speaker 3: Well, it's both, but it's probably weighted in the small
Speaker 3: business area to more customers. Now in the middle market area,
Speaker 3: it's driven a little bit by line usage the percentage.
Speaker 1: Drawn on the line on average, and that's our average loans.
Speaker 3: And so it's small business we're adding customers, and middle
Speaker 3: market writing customers, and in large corporate really people don't
Speaker 3: use their lines much in the markets being strong for
Speaker 3: fixed income underwriting take the assets away from it. So
Speaker 3: it's across all that. So if you look at small business,
Speaker 3: they are our activity. IU New borrowers is high. We
Speaker 3: have a big practice lending to dentists and doctor and
Speaker 3: that's been growing pretty well. And we have you know,
Speaker 3: just the general small business small business credit card, which
Speaker 3: is to use to do their operational stuff, a business
Speaker 3: credit card.
Speaker 1: And small business you can see that growing.
Speaker 3: But middle market line draws are basically relatively bouncing around
Speaker 3: at a level that is still about five percentage points
Speaker 3: below where it was pre pandemic, which means that is
Speaker 3: cost of barring what. People aren't being quite as aggressive
Speaker 3: and that's why the economy is slowing down. They're not
Speaker 3: hiring quite as many people, they're not buying that piece
Speaker 3: of equipment.
Speaker 1: They're not doing it because they're a.
Speaker 3: Little worried about final demand and therefore to being careful,
Speaker 3: which is unpleasant for your bank. But it's okay because
Speaker 3: the companies don't make them profitable and the credit quality
Speaker 3: is good.
Speaker 2: Yeah, and the fact needs to slow down a bit,
Speaker 2: be given. We're inflash at the same time from where
Speaker 2: you say, because you have such a vantage point into this,
Speaker 2: is that a straight line that's going down? Do you
Speaker 2: see it leveling off or is.
Speaker 1: It it's a flat line.
Speaker 3: So loans grew a first quarter, second quarter a few
Speaker 3: billion dollars on a tree and fifty base, you know,
Speaker 3: so say eight billions.
Speaker 1: So they grew a little bit.
Speaker 3: All the business lines grew loans, but the wealth management
Speaker 3: business grew faster, which is good because you know, wealthy people,
Speaker 3: as their asset base goes up, tend to use it
Speaker 3: to do something a little more faster than a corporate might.
Speaker 1: There's not a lot of leverage finance going on. There's some,
Speaker 1: not a.
Speaker 3: Lot because deals, the higher prices and multiples and getting
Speaker 3: it all straight.
Speaker 1: That'll work itself through the system.
Speaker 3: And you have a lot of people on your show
Speaker 3: who are private equity colleagues that you know they're sitting
Speaker 3: there saying, you know, I've got lots of money.
Speaker 1: I can't find the deals at the right price. That's
Speaker 1: the key.
Speaker 3: At the right price, I can find deals. And so
Speaker 3: that's a little bit muted. But if you look across
Speaker 3: the board, it's it's solid, growing a bit, but growing
Speaker 3: consistent with the lower growth two percent type growth, lower
Speaker 3: inflation economy. It's not growing as fast as it was coming.
Speaker 3: You know, the pandemic shot up, went down and started
Speaker 3: growing faster. Same with the posits went up and drained
Speaker 3: down or stable. The activity is kind of normalizing now
Speaker 3: and that's where I think the risk of the next
Speaker 3: turn in the track is actually getting the timing right
Speaker 3: to bring the rates down to create a little more
Speaker 3: accommodation in the system, are a little less restriction.
Speaker 2: What are you rejecting on the rate cuts?
Speaker 1: Are companies? Projection?
Speaker 3: Our research team which is terrific Canadas Bounding Plant and
Speaker 3: Research team, the best arsearch TUM has really won this year.
Speaker 3: They had just in their last report said we're probably
Speaker 3: going to come off of that. So, like they usually do,
Speaker 3: they I get on TV the.
Speaker 1: Next day they change it. But the markets at three
Speaker 1: were one somewhere and that was where they'll come out,
Speaker 1: is my guess.
Speaker 2: But maybe more important that is where do you think
Speaker 2: we end up? Because that's the question. We could do
Speaker 2: it this year, next year, but where's the long term
Speaker 2: interest it's going to end out?
Speaker 3: So if you think across time here, that's what's important
Speaker 3: is that our teammates think that we end up around
Speaker 3: three and a half and that's where the FED stops.
Speaker 3: That is a wholly different environment than the last fifteen
Speaker 3: twenty years, where you know, basically there was no interest
Speaker 3: rate got up in sixteen, seventeen, seventeen, eighteen nineteen to two.
Speaker 1: And a half, and then it was cut.
Speaker 3: If people forget at the end of nineteen, we never
Speaker 3: got back to quote a normal rate environment that you
Speaker 3: would have seen in our early careers for years, David,
Speaker 3: where the Fed funds was three and a half are
Speaker 3: sometimes even.
Speaker 1: A lot higher. Ten yure rate was four and a half.
Speaker 3: That normalized rate is where our teammates think it gets to.
Speaker 3: And Cannas and our team's saying, look, they bring inflation
Speaker 3: down and then they'll stop. Because the core underligne growth dynamics.
Speaker 3: The amount of money in the system, the fiscal borrowing
Speaker 3: that went on is still being deployed, the IRA, the
Speaker 3: Infrastructure Act, all this stuff going on is going to
Speaker 3: still be coming through the system.
Speaker 1: A lot of it's not spent.
Speaker 3: It's being spent that will create you know, you know,
Speaker 3: demand and things like that. Therefore, there's probably going to
Speaker 3: be a little more inflation pressure, but it would be
Speaker 3: good for America if we ended up in a more
Speaker 3: normal rate structure in a growing economy. You know that
Speaker 3: three and a half didn't become too restrictive. That would
Speaker 3: be good because that's a much sort of healthier place
Speaker 3: for us to be over time.
Speaker 2: At the same time, if we're three and a half
Speaker 2: is where we're ending up, let's assume there for a second.
Speaker 2: That suggests that where the fit is now is maybe
Speaker 2: not as restrictive as some people think it is.
Speaker 3: Yeah, and there's great debate about our star and a
Speaker 3: naturally the long term rate at which the economists can
Speaker 3: go on, But I think they're restricting. When you hear
Speaker 3: from clients, they're saying, hey, it's costing me what used
Speaker 3: to cost me, you know, two hundred basis points over
Speaker 3: fifty basis points or three hundred bas points over fifty
Speaker 3: base points three and a half percent is now three
Speaker 3: hundred basis points over five and a half eight and
Speaker 3: a half percent. You know, they're like, so it has
Speaker 3: a restrictive effect. They've got to slow that down. And
Speaker 3: that's why you're seeing the barring demand come down and
Speaker 3: deployment of that barring. You're seeing consumer movement of money
Speaker 3: in our franchise come more consistent with a lower growth,
Speaker 3: low inflation economy. All that is going on, and that's
Speaker 3: where the next turn in the track is a trickier one.
Speaker 3: They've put inflation right path where you know, what's the
Speaker 3: debate about too far or not far enough? And that's
Speaker 3: going to be what the market's going to eb and
Speaker 3: flow on a give a day.
Speaker 2: So what about the cost of funding for you for
Speaker 2: your deposits because you don't have to.
Speaker 1: Spend some two are three basis points.
Speaker 2: But I read some accounts in some places people are rotating,
Speaker 2: as they say, in the higher yield products, which costs
Speaker 2: presumably Bank of American others more money. Are you seeing
Speaker 2: that rotation? Do you see it tapering off or ending?
Speaker 3: It's so we showed some pages today. It's kind of
Speaker 3: It depends on the business and the use of money.
Speaker 3: If you look at the core consumer business, the rate
Speaker 3: paid really reflects a huge amount of non interest checking
Speaker 3: as a percentage. So it's a mix of it's a
Speaker 3: mix of what the customer users the money for. You
Speaker 3: go to the investment business, we're still seeing a little
Speaker 3: bit of rate increase.
Speaker 1: You go in the.
Speaker 3: Customer the client business, the banking business, global banks, corporate customers. Basically,
Speaker 3: the year of a year, the quarter of a quarter
Speaker 3: change is next to nothing because it basically priced up
Speaker 3: to the difference between it and the Fed funds rate
Speaker 3: and sitting there. So it really is business and how
Speaker 3: the customers in the money. We sort it by transactional money.
Speaker 1: And investment money.
Speaker 3: And then if the customer is in transaction money, that
Speaker 3: money is moving around. They don't see it in the
Speaker 3: investment money. They're making a discrete decision to want to
Speaker 3: leave it with you or to want to put it
Speaker 3: in a money market account. And that's where you saw
Speaker 3: some of the movement happen. And that's what's been going
Speaker 3: on in wealth management business across all our platform to
Speaker 3: positive growing for the last four or five quarters, ever
Speaker 3: so slowly, which means the stability and pricing is there
Speaker 3: because the rate increases link quarters ten to twelve basis points,
Speaker 3: which is really just a little bit of mixture.
Speaker 2: You have a unique perspective on the consumer, us consumer.
Speaker 2: Give us your take right now. On the consumer. I
Speaker 2: see in your numbers, you're taking more provisions than you were,
Speaker 2: you have more charge you offs. Do you see that continuing?
Speaker 3: So if you talk about it from a credit standpoint,
Speaker 3: a credit card charge of right for cards was like
Speaker 3: three point eight eight I think this quarter or something
Speaker 3: like that.
Speaker 1: We underwrite to stay under four and a half in
Speaker 1: normal times.
Speaker 3: So the point is that it's just been coming back
Speaker 3: up to the level that it was in prior periods.
Speaker 3: It's a little bit higher it was in nineteen, but
Speaker 3: those are very I was like a fifty year credit
Speaker 3: low in company's history.
Speaker 1: So it's normalized, but the rate of increase is interesting.
Speaker 1: Year of the year.
Speaker 3: I think it's up eighty basis points or you know,
Speaker 3: and so everybody's like, oh my gosh, but it's just
Speaker 3: getting back. So what we showed today is that we
Speaker 3: showed the early stage of linquency, what they call five
Speaker 3: stage or thirty.
Speaker 1: Day day delinquency and ninety day delinquacy.
Speaker 3: Its basically flattened out, which means the second half of
Speaker 3: the year you'll see the charge offs flat now, which
Speaker 3: means we've reached normal four percent. So from credit, they're
Speaker 3: doing well.
Speaker 2: We haven't mentioned trading. You had quite a report on
Speaker 2: your equity trading. You're really doing terribly well. What do
Speaker 2: you do to keep that going? Are you going to
Speaker 2: invest more in it?
Speaker 3: We continue to invest along three dimensions technology. Jim Tomorrow
Speaker 3: the team run it, and they've done a great job.
Speaker 3: So five seven years ago he made the decision to
Speaker 3: give more more capabilities, technology, the balance sheet that they
Speaker 3: can use to help their customers achieve their goals and talent,
Speaker 3: and so Jimmy across the board continues to increase and so.
Speaker 1: We feel good about it.
Speaker 3: He made a billion four after taxes quarter, which is.
Speaker 1: A very strong learnings quarter.
Speaker 3: But what's happening is you're seeing back to back billion
Speaker 3: dollar plus quarters where used to be a billion dollars
Speaker 3: plus and drop to five hundred when the markets slowed down.
Speaker 3: You're seeing much more stability to break even point in
Speaker 3: the businesses on a relative basis, much lower. The best
Speaker 3: second quarter they've had since I think twenty twelve or
Speaker 3: something like that, which a lot of that was just
Speaker 3: when assets were marked up and came back to the
Speaker 3: system of profit. They've done a great job and Tom
Speaker 3: Montag six seven years ago started this, Jimmy took it over,
Speaker 3: has done a spectacle job of implementing it, and we
Speaker 3: feel confident we'll keep giving them more r WA bersuaded assets,
Speaker 3: balance sheet capital and investment in technology because that's obviously
Speaker 3: very expensive business to run from a day day basis.
Speaker 2: Right, I know, you want to grow all the business
Speaker 2: at back of the America, But do you have a
Speaker 2: strategy about the balance between what I would think was
Speaker 2: a traditional bank lending interest receipts as opposed to the
Speaker 2: fee side, whether it's investment banking or as a manager,
Speaker 2: are you rebalancing the bank?
Speaker 3: Well, this quarter happened to be half the earnings were
Speaker 3: from people, half the earnings for institutions. Out of twenty
Speaker 3: five billion of revenue, fourteen was spread revenue and eleven
Speaker 3: was round numbers. Is feed revenue because the market dictates
Speaker 3: a lot.
Speaker 1: Of feed revenues.
Speaker 3: We could do it, but if you think about it
Speaker 3: from the businesses. In the consumer business, we made a
Speaker 3: decided decision to lower feed burdens on customers and a
Speaker 3: trade off for that was long term customer favorability run
Speaker 3: eight percent across all the platform engagement places, the brand
Speaker 3: favorability into seventy percent, up twenty points over the last
Speaker 3: ten years. So we made a decision lower the fee burden,
Speaker 3: but get it paid back and transaction accounts those are
Speaker 3: these zero interest deposits that's worked wonderfully.
Speaker 1: So we grow a million counts in a year.
Speaker 3: They started two or three thousand dollars, they mature to
Speaker 3: seven to ten thousand dollars.
Speaker 1: It's all you know, zero interest rate money.
Speaker 3: It's very strong and that's if it's a young kids,
Speaker 3: the customer of the future, and that's what we're doing.
Speaker 3: So that balance and fees there and wealth manage it's
Speaker 3: all gonna be about feed driven. It has, but the
Speaker 3: incremental growth seven percent increase in fees your view, that's
Speaker 3: what we're driving there. Jimmy has a mix and the
Speaker 3: trading business and then you know, and then the commercial
Speaker 3: business is actually balanced investment banking fees which everybody talks
Speaker 3: about a billion and six, but the whole revenue business
Speaker 3: dominated by lending and deposits for corporate customers. So you
Speaker 3: have to keep your heads on and there's no we'd
Speaker 3: never say if it's this, we're happy. If it's not,
Speaker 3: we're happy. We want to grow all aspects of it.
Speaker 2: Right, and thank you so very much. That's brought back
Speaker 2: to America's Brian moynihan.