Following is the unofficial transcript of a CNBC interview with Bank of America (NYSE:BAC) Chair & CEO Brian Moynihan on CNBC’s “Power Lunch” (M-F, 2PM-3PM ET) today, Monday, October 17th. Following is a link to video on CNBC.com.
Current Consumer Environment Is Quite Strong, Says Bank Of America CEO Brian Moynihan
SARA EISEN: Thank you very much Tyler and Brian, good afternoon. Thank you for joining us fresh off these results that the market appears to like very much. Stock is up 6.3%. How much of a driver do you think rising rates are for your business right now?
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BRIAN MOYNIHAN: Well Sara, thank you for having us. And, you know, at the end of the day, the banks make about more than half their money through the balance sheet and that's the difference between the spreads we lend money at.
And pay our depositors and that as rates rise up our zero interest deposits which are a core part of our franchise, and our low interest checking, obviously become a lot more valuable and that's where you saw the strong gain.
And not only year over year, but also like quarter up over a billion plus from second quarter third quarter and we told people would be up over a billion in the fourth quarter, billion a quarter and that that's the earnings power coming back as the rate structure comes off the floor it was at for a couple of years during the pandemic.
EISEN: Yeah, that guidance people appear to like as well. So what level of rates do you need to see Brian to get expanding operating leverage and margins?
MOYNIHAN: Well the level of rates is going to be determined by what the Fed’s doing to take out monetary accommodations so you have to back up and we're working against an economy which is still solid now in terms of customer activity and what we're seeing.
But our experts in our research team who often appear on your show have, the third quarter still positive. They had the fourth quarter, the first quarter, second quarter, third quarter next year is all slightly negative and it comes back to positive and that, they have a rate structure that gets up to about 5%.
So we don't need a rate structure. We're in this much money day with the current rate structure and some of that still to kick in. But, but the reality is the rate structure is there because inflation has gone too far and they can’t get it under control.
You know, that that has other issues in the balance sheet because you got to be careful what you wish for in the world that we're in, in financial services. So our job is to meet anything, be prepared for everything. But the good news is the consumers and the commercial activity still remains very solid, deep into the, deep into the post pandemic era.
EISEN: No, I think your comments on the consumer are really important Brian and they stand in in contrast to what it feels like following the markets lately and in other industries. So, what are you seeing right now that's giving you so much confidence to talk about a strong consumer?
MOYNIHAN: So if we if we back up we have 60 million consumer households, we have 35 million Americans core checking accounts where the money comes in from getting paid and they distribute to pay their bills and we have there, you know, 35 million plus credit cards and all the other things that come with that.
And so if you look at that spending for the third quarter of 2022, versus the third quarter 2021, it was up about 10% and transactions are up five and a half percent or so. As we look at the first couple of weeks of October, it's still up 10%. Now that's a, you gotta be careful because earlier in the year, it was growing faster.
And as, as the, you know, the environment’s changed, they've slowed down a little bit, but still much faster. So if you think about maybe 2017 or ‘18, it might have grown five or 6%. It's still growing faster, which shows the consumer has money to spend. So number one, they're spending.
Number two, they have as much money in their accounts today as they did at the end of September as they did at the end of August. And that's interesting because most people believe they're spending it down and you don't see that yet.
Now, is there stress for certain consumers out there? No question, but they're employed and earning money and their account balances at Bank of America continued to be flat August to September, for cohorts say who had 2,000, 2,000 to 5,000 before the pandemic an average of 3,400.
They're sitting with 13,000 account and it's not going down and continues to be flattish and it was growing early in the year and now it's flat. That means they have money to spend and then on top of that they're employed and you can see the unemployment numbers are still very low.
So you put that all together in the current environment, the consumers are quite good and strong. When you go to the credit side of it, they have plenty of credit availability and our charge offs and our credit delinquencies are still way below they were pre pandemic, but if you look at the best five-year averages across the last, you know, 30 years, there's still below that.
And so that means the consumer because they're employed, they're paying their bills. That's, that's sort of basic stuff. Where it goes in the future, we're not reflecting on today as much as talking about what we see today.
At any given commercial, it’s the same. Charge offs low and commercial continued improvement in reserve criticized loans or non performers, all good stuff, because the environment is still strong.
Now, aren't we dealing with issues all over the place? Absolutely. Are we given a higher rate structure will drag the economy that's what the Fed is trying to do. But right now as you see in the third quarter and the first part of October, the consumer is hanging in there.
EISEN: It's just interesting because your counterpart over at JPMorgan Jamie Dimon says that we're headed for a hurricane and even your stock is down almost as much as the market before today. It was down more than the market on on worries about a turn in the credit cycle and the economy. So it feels like even though what you're saying is good now, a lot worse is to come potentially into next year.
MOYNIHAN: Yeah but Sara, so our reserves that we put up this quarter a bill, on a 5% unemployment in the fourth quarter of ‘22 and a five and a half percent employment all during ’23, that's how conservative in the reserve building.
We put up those reserves already. So the idea is that the way the rules work and accounting works and everything you're putting up based on scenarios and our scenario is, you know, waited 40% to very adverse scenarios which have high inflation and high unemployment built in and when you average those together.
The reserve is built on five and a half percent unemployment so we are prepared for the hurricane. We're prepared for whatever happens next, but the idea is we did that by what we call response growth across the last decade.
So how we distributed between commercial mining and consumer lending, how we build capital, how we built reserves, how we have in a commercial lending, you know, multiple guardrails on how big a portfolio can become relative all real estate exposure, all that stuff.
So that's how you build a company as durable when I think the banking industry overall it's very durable right now.
You've seen it through some interesting times over the last 24, 36 months and durability is supplied and that's what's unique about the US is we have a very durable strong banking system, which is a buffer to some of these things that could go wrong. And they may go wrong and they will go wrong, but the reality is we’re all starting from a pretty good place.
EISEN: So you don't deny that that there's a hurricane coming as Jamie Dimon predicts?
MOYNIHAN: Well, I started off by saying our core estimates are negative GDP growth for the fourth quarter, first quarter, second quarter and third quarter, which but it is a modest shallow and comes out towards the end of next year, accompanied by five and a half percent employment but that's what we built the company of sustain.
And today we put up $7 billion plus in earnings year over year growth and so the environment is manageable if you are wise how you manage it, and that's what we do. We're always prepared for the next thing hopefully and we continue to ask ourselves that question every day.
EISEN: What do you think about loan growth? How much longer can we actually see growth here from from consumers and commercial?
MOYNIHAN: Well, we saw this quarter because the stress test results that you've reported on and a surprise in them, we tamped the brakes a little bit on some loan growth, especially in a large corporate business because we had to get our capital back up and we're now we have capital at the end of the third quarter equal to what we need the first quarter of ‘24 so we're in great shape.
And then we're going to drive through that so we can open things. So you're seeing you're seeing strong loan growth year over year 12, 15%, those types of numbers that's that's not going to do, it's going to move back to be more in line with single digits we've had and if you're, if you look at it.
The originations and we put that the earnings package so people can look at it, the earnings originations for whether it's credit cards or home equities, the FICO scores are 760, the loan to value of the portfolio on the mortgage side is very low. It’s, you know, we are originating strong credit and we'll continue to do that.
Is the demand going to change if the if we get more recessionary environment which is what our economists predicted and what the economy, you're gonna see loan demand shift down a little bit but that's already happened to some degree as line usage actually came down a little bit this quarter but our job and my teammates jobs, our job at Bank of America is to drive through that, get new clients to get more done with them under responsible growth.
EISEN: So as you mentioned clearly the regulators are making you hold back more capital like like what we're seeing with JPMorgan and others. Do you have any timing on that to hold hold the the timing of holding back buybacks and dividends and that use of cash given some of the regulatory requirements?
MOYNIHAN: We bought back shares this quarter, I mean, third quarter, and we'll plan to buy back shares in the fourth quarter because we’re already at the levels we need for the first quarter of 2024. So not only did we absorb the stress, capital buffer results, we've also put up enough capital this quarter 11% against the 10.9 requirement, beginning in 2024.
So we don't, we don't need to go build any capital. We may want to build a little more buffer so we are good. This quarter, we bought back shares and we'll continue, I mean third quarter, and we'll buy in the fourth quarter and continue to buy back but our capitals first uses support the organic growth of our clients.
And their efforts and then we use it to pay dividends and then we use it to buy back stock and we're already doing it. So this isn't like we have to build anything. We're past the minimums we need out there a year and ahead in the future and frankly, those minimums shouldn't change.
EISEN: Brian Moynihan, thank you so much for taking the time today on earnings day. Appreciate the conversation.
MOYNIHAN: Thank you.
