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