The Bank of America headquarters in Charlotte, North Carolina.
Joe Daniel Price | Getty Images
As banks reported second-quarter earnings, one thing stood out: Banks that focus on Wall Street were pessimistic about the outlook, and banks that primarily serve consumers and Main Street were much more optimistic.
The reasons for this aren’t hard to pinpoint, especially with a close look at Bank of America’s published numbers as well as its earnings – which actually missed Wall Street’s forecasts, a fact glossed over as investors focused on his optimistic view of the American consumer. . The bank painted a picture of a consumer in much better shape than before the Covid pandemic or the last recession of 2007-2009.
It starts with a single number that appears on page 23 of B of A’s supplemental charts accompanying their earnings report: 771. That’s the average credit score for new second-tier credit card and mortgage borrowers. largest U.S. bank (behind JPMorgan Chase), CFRA said. Research Analyst Ken Leon. The average new car loan in the quarter came in with a score of 791. The average home equity borrower was 797 and 800 in the first quarter.
In contrast, the average FICO score in the United States is 698, according to a mid-2021 study by credit reporting agency Equifax. And the subprime mortgage crisis of the late 2000s focused, at least initially, on people with scores below 620. Bank of America learned that the hard way when it bought out the mortgage lender focused on Countrywide Financial subprime in 2008.
“What didn’t kill Bank of America made it stronger,” said Mike Mayo, an often contrarian banking analyst at Wells Fargo who has long criticized Bank of America. “You have a history of win over loss here. They had a responsible growth plan, and that plan continues today.”
Bank of America has adopted a series of strategies to ensure that the next economic downturn does not lead to a near disaster, CEO Brian Moynihan said during the company’s conference call with analysts Monday. As another set of charts in the presentation shows, this is now a different bank.
The bank holds $29 billion less in mortgages than at the end of 2009, when the economy had just survived the worst of the financial crisis. That’s despite the median home price doubling, according to personal finance site DQYDJ, which mixes data from sources including the National Association of Realtors and the Case-Shiller Index. Its portfolio of home equity loans, a line of business blamed for many banks’ troubles with overstretched consumers, is just $27 billion, down from $154 billion.
And its overall consumer loan portfolio is both smaller than in 2009 and a smaller share of its lending business, as commercial loans have moved to the fore.
More remarkably, the average Bank of America mortgage is currently only about half the value of the home backing it, Mayo said. And his average credit card borrower only used 18% of his line of credit.
Big Banks and the American Consumer
From the bank’s perspective, the happy consequence of lending to financially stable consumers is that they can continue to spend, when much of Wall Street wonders whether a recession caused in part by lower spending consumption is close at hand. Total spending by Bank of America customers rose 13% this year to $2.1 trillion, the bank said.
“American consumers remain quite resilient,” Moynihan said. “Overall average deposit balances for most cohorts are higher than they were last quarter and even increased in June compared to May … and importantly, we see no deterioration in the quality of assets from our customers, and they have the ability to borrow.”
For the first two weeks of July, spending rose more than 10% on a stronger base, Moynihan said.
The bank’s long-standing conservative restructuring helped B of A’s consumer business gain $2.9 billion in the quarter. Adjusted for changes in credit reserves and taxes, this represents a 26% increase over last year.
One of the reasons the bank is so healthy is that high borrower credit ratings have translated into low default rates. Although Bank of America set aside $350 million in the quarter to manage future defaults in its consumer businesses — money it could claw back if defaults are lower than expected, or add if delinquencies accelerate – its consumer overdue ratio is just 1.2%, less than before the pandemic.
Higher interest rates will boost core earnings by $4 billion a year over the next two quarters, a development the market reaction to the earnings report failed to factor in, said Mayo. He said Bank of America would likely grow pretax profits faster than nearly all companies in the Standard & Poor’s 500 stock index over the next two years, also helped by a cost-containment campaign aimed at enticing consumers to use digital platforms more often and with low loan losses.
Banking stocks were higher in trade on Tuesday, with Bank of America among the leaders, and the sector outperformed broader market gains on a rally day on Wall Street.
Bank of America and JPMorgan are poised to be slower in their Wall Street-oriented activities, such as merger advice and initial public offerings of stock during the third quarter, Leon said. If that persists, cost cutting at those businesses is likely, even assuming consumer units continue to do well, he said.
JPMorgan CEO Jamie Dimon had positive things to say about the U.S. consumer and labor market, but was optimistic about risks to the economy in his outlook. Last week, JPMorgan built up larger reserves for bad debts and suspended its buyback program.
“Bank of America has a different sensitivity to rising interest rates than JPMorgan, and that makes them more exuberant,” Leon said. Loan growth at Bank of America was also stronger than at Chase, he said.
Assuming there is no recession that cuts growth and explodes credit losses, Bank of America is trading at 7 times likely earnings next year, says Mayo, who notes he called to the dismissal of Moynihan at the start of the bank’s post-crisis recovery.
“I didn’t think he grew into the role,” Mayo said. “He grew into the role. It’s the reward of a decade of work and the market has turned a blind eye to it.”