Bank of America headquarters in Charlotte, North Carolina.
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As banks reported second-quarter earnings, one thing stood out: Wall Street-focused banks were pessimistic about the outlook, while Main Street and consumer-focused banks were more optimistic. much.
It’s not hard to pinpoint the reason for that, especially when looking at the numbers Bank of America given together with its income — practically ignored Wall Street’s forecasts, a fact covered up as investors focused on its upbeat view of the American consumer. The bank paints a picture of a consumer in much better shape than it did before the Covid pandemic or the last recession in 2007-2009.
It begins with a single number that appears on page 23 of B in A’s supplemental chart accompanying their income statement: 771. That’s the average credit score of mortgage and card borrowers new credit at America’s second largest bank (after JPMorgan Chase), said CFRA Research analyst Ken Leon. The average new car loan in the quarter was 791 points. The average home loan borrower stood at 797 and was 800 in the first quarter.
In contrast, the average US FICO score is 698, according to a mid-2021 study by credit reporting agency Equifax. And the subprime mortgage crisis of the late 2000s was concentrated, at least initially, on those with scores lower than 620. Bank of America learned the hard way by acquiring the company. The subprime-focused mortgage lender was Countrywide Financial in 2008.
“What didn’t kill Bank of America made it stronger,” said Mike Mayo, a often-opposed banking analyst at Wells Fargo who has been critical of Bank of America. “You have a story of victory over defeat here. They had a plan to grow responsibly and that plan continues to this day.”
There’s a set of strategies the Bank of America has put in place to ensure the next recession doesn’t lead to an impending disaster, CEO Brian Moynihan said at the company’s conference call, CEO Brian Moynihan said. company with analysts Monday. Like another set of charts in the presentation, it’s a different bank now.
The bank holds $29 billion less in mortgage loans than it did at the end of 2009, when the economy was just going through the worst of the financial crisis. That is even though the median house price doubled, according toe-personal finance website DQYDJ, which provides data from sources including the National Association of Brokers and the Case-Shiller Index. The home loan portfolio, a business blamed on many banks for problems with over-consumer, was down to $27 billion, down from $154 billion.
And its overall consumer loan portfolio is both smaller than it was in 2009, and a smaller portion of its lending business, as commercial loans move upwards.
Most notably, the average mortgage at Bank of America is now about half the value of the home that secures it, Mayo said. And its average credit card borrower uses only 18 percent of their credit limit.
Major banks and US consumers
From the bank’s point of view, the welcome consequence of lending to financially stable consumers is that they can continue to spend, as much of Wall Street is debating whether a recession is due to spending. consumption decreases or not. Total spending by Bank of America customers has grown 13% this year to $2.1 trillion, the bank said.
“American consumers are still pretty resilient,” Moynihan said. “Overall average deposit balances for most groups were higher than they were for the whole of the previous quarter and even increased in June compared to May … and importantly, we see the quality of our clients’ assets. airlines are in decline and they have the ability to borrow.”
In the first two weeks of July, spending jumped more than 10% on stronger gains, Moynihan said.
The bank’s lengthy cautious restructuring helped B of A’s consumer business earn $2.9 billion in the quarter. Adjusted for changes in credit and tax reserves, this is up 26% from last year.
One reason banks do well is that a high credit score for borrowers translates into a low default rate. Although Bank of America set aside $350 million during the quarter to settle future defaults in its consumer business – the amount the bank could get back if defaults were lower. expected or further increase if defaults grow rapidly – their percentage of consumers who are behind on payments is just 1.2%, lower than before the pandemic.
Higher interest rates will boost core earnings by $4 billion a year over the next two quarters, a development that has seen the market reaction to the earnings report disapproving, Mayo said. He said Bank of America has the ability to grow pre-tax profits faster than almost any company in the country Standard & Poor’s 500 stock index over the next two years, also aided by a cost-saving campaign to get consumers to use digital platforms more often and reduce loan losses.
Bank shares traded higher on Tuesday, with Bank of America among the industry and industry leaders outperforming broader market gains during a day of protests on Wall Street.
Both Bank of America and JPMorgan experienced more sluggishness in their Wall Street-facing businesses like merger advisory and IPOs in the third quarter, Leon said. If it continues, cost-cutting in these businesses is likely, even assuming the consumer units continue to perform well, he said.
JPMorgan CEO Jamie Dimon had positive things to say about the US job market and consumer, but optimistic about risks to the economy in its prospects. Last week, JPMorgan build larger reserves for bad loans and suspend its buyback program.
“Bank of America has a different sensitivity to rate hikes than JPMorgan, and that makes them more buoyant,” Leon said. Loan growth at Bank of America was also stronger than at Chase, he said.
Assuming no recession hits growth and increases credit losses, Bank of America is trading at about seven times next year’s likely profit, Mayo said, according to Mayo, the saver. Note that he had called for Moynihan to be fired early in the post-crisis banking period.
“I don’t think he developed the role,” Mayo said. “He’s evolved into this role. It’s a well-deserved payoff for a decade of work and the market has closed its eyes to that.”
