Bank of America CEO Says Its Earnings Are Poised to ‘Substantially Increase’ as Rates Rise
Brian Moynihan, chief executive of Bank of America.
Simon Dawson/Bloomberg
Bank of America’s earnings are set to “substantially increase” from higher interest rates as the bank deploys its large base of low-cost deposits into higher yielding loans and other assets while keeping expenses under control, CEO Brian Moynihan told Barron’s in an interview.
Payment volume by the bank’s huge customer base was up about 7% in the first half of March versus the same period a year ago as the economy reopens and travel spending rises, Moynihan said. Food-service deliveries are a recent exception to that trend as restaurant capacity restrictions ease.
Bank of America (ticker: BAC)—the country’s top retail bank and the No. 2 bank in market capitalization, behind JPMorgan Chase (JPM)—remains focused on internal growth while spending over $3 billion annually on new technology to provide better digital services to its customer base — and to widen a moat relative to smaller banks.
Moynihan said that the bank was eager to repurchase more stock pending approval from federal regulators. He also said that investors should expect more releases of loan-loss reserves in 2021. The company began to release them in late 2020 after sharply building reserves earlier in the year.
Bank of America shares are up 27% so far this year, to $38.46. Investors expect Bank of America to be one of the bigger beneficiaries of a stronger economy and rising rates among its banking peers.
On Thursday, the stock touched nearly $40, its highest level since before the financial crisis. The company’s earnings are expected to rise 32%, to $2.47 a share in 2021, according to FactSet, after falling 32% last year and increase another 17%, to $2.89 a share in 2022. The bank’s market value of $337 billion is much more than it was before the financial crisis because of a higher share count.
At a time of a national debate about a $15 minimum hourly wage, Bank of America moved to a $20-an-hour minimum during 2020, a year ahead of schedule. Moynihan called it one of the bank’s many employee-friendly policies. He also cited a benefit that has offered employees $100 a day to hire someone to look after their children during the pandemic so they could work. That benefit was used for 3.5 million days of child care.
Despite higher employee benefit costs and significant technology spending, Moynihan says the bank has kept a tight rein on expenses in recent years. During 2020, total expenses were $55 billion, including about $1.5 billion related to Covid-19, down from $57 billion in 2015. The bank projects that this year’s expenses will be comparable to those in 2020.
“The key is we’ve been able to invest $3.5 billion a year in technology. We’ve been able to open up branches in many new cities. We’ve been able to raise minimum wages, while we’ve kept expenses down. Now that’s the magic in a franchise, so when rates rise, which they will at some point—and when they did in ’16 and ’17—the earnings rise sharply, because we have no more expenses to deploy and all the revenue that comes in from the deposit base,” Moynihan said.
The company has $1.8 trillion of deposits, including over $900 billion from consumers. The average cost of the consumer deposits is less than five basis points, or a hundredths of a percentage point.
Bank of America is a favorite of Wells Fargo banking analyst Mike Mayo, who likes its exposure to higher rates and its digital platform that has enabled it to expand its market-leading U.S. deposit franchise.
“Bank of America is helping lead the tech revolution in banking—that’s what makes it a multiyear story,” Mayo says. He points to the “four Cs” that are helping banks and Bank of America in particular: a steepening yield curve, robust capital markets activity, credit reserve releases, and cost controls.
Mayo sees Bank of America deploying its deposits into loans and securities as interest rates rise, boosting earnings.
Moynihan says that the bank’s lending to small businesses—those with less than $5 million in revenue—may start to grow this month after contracting last year, excluding the pandemic’s Paycheck Protection Program lending.
Moynihan has won over investors with the bank’s financial performance since taking over as CEO in 2010.
The bank aims to make consumer loans to customers and that know-your-customer approach has led to some of the lowest losses among peers. One fan is Berkshire Hathaway (BRK.B) CEO Warren Buffett, whose company is the largest Bank of America shareholder with about 1 billion shares, a roughly 11% stake.
Bank of America is buying back about $3 billion of stock in the current quarter while awaiting word from federal regulators about future repurchases. The company pays a 72-cent annual dividend, resulting in a 1.8% yield. Moynihan says the bank’s capital ratios comfortably exceed regulatory minimums. A key measure of common equity is at 11.9% against a minimum of 9.5%.
“We can invest in our employees, invest in our franchise, and buy back stock. It’s not restricting our activities at all.”
Bank of America’s Merrill Lynch division is a top wealth manager, with some of the best margins in the industry. Unlike rival Morgan Stanley (MS), Bank of America isn’t interested in brokerage firm acquisitions to grow and continues to expand organically. Moynihan points out that Merrill Edge, which caters to a less affluent client base than the typical Merrill Lynch customer, ended the year with $300 billion in client assets.
“We have 40 million digital customers, $1.8 trillion in deposits, and we’re adding a million plus checking accounts a year. We’re at $300 billion at Merrill Edge. We don’t need to make acquisitions to grow,” Moynihan said, noting the bank can’t buy any company with deposits given a regulatory cap on its national deposit market share.
Moynihan says travel and leisure spending by bank customers is growing as well as business at restaurants.
“Over the last four weeks, restaurants are building. Interestingly enough food service deliveries are down. Why wouldn’t they if people are going to restaurants more?”
Moynihan is upbeat on the economy, noting that the bank’s economics group sees 6.5% GDP growth in 2021.
“This economy is basically the same size that it was in mid-2018, with three times the rate of growth, and we just dropped $1.9 trillion of money into it with the relief package. And the interest-rate environment despite all the discussion about the 10-year [Treasury note] rising is still 100 basis points lower than it was then. On the front end it’s 160, 175 basis points lower.” The 10-year Treasury note yields about 1.7%, up from under 1% at the start of 2021. Short rates are near zero.
Payments by bank customers are up 5% through mid-March in 2021 relative to the same period of 2020 and up 15% relative to 2019.
Moynihan said he sees a six-month transition to get more employees working in the office. Outside branches, only about 10% of bank employees in areas like trading and operations are in the office.
“We’re a work-from-office company,” Moynihan said, noting that the post-pandemic situation for the bank’s more than 200,000 employees will be different than before. “We’ll still have people come to the office and working like they’ve always been.”
Write to Andrew Bary at [email protected]
