Bank of America is swimming in a sea of deposits, a reflection of pandemic-era saving and stunted loan demand.
While the situation is pinching the Charlotte, N.C., banking giant’s net interest margin, executives said there are signs of life in its sprawling consumer lending business as vaccinations mount and economic momentum builds. And there is hope BofA can put more of its excess liquidity to work later this year.
The consumer business is in “full recovery mode,” Brian Moynihan, the $3 trillion-asset company’s chairman, president and CEO, said during a Thursday call to discuss quarterly results. He said credit card applications — an early indicator of consumer loan growth — rose during the first quarter.
Total spending by BofA customers in the first quarter, including with debit cards, increased by 13% from a year earlier to $172.5 billion. The amount even surpassed the spending that took place in the first quarter of 2019.
“This is a key element of the economic optimism you're seeing reflected in the market,” Moynihan said.
With the company’s research team forecasting 7% gross domestic product growth this year, Moynihan said he expects consumers will start to borrow more as the economy steadily reopens and vaccinated Americans travel, shop and dine out more freely.
Most banks need to see that shift to relieve pressure on their net interest income. Banks are sitting on piles of deposits that have been increasing at a far faster clip than loans.
In BofA’s consumer division alone, first-quarter average deposits increased by 25% from a year earlier to $924 billion. At the same time, average loan balances fell by 8% to $291 billion, and revenue was down 12% to $8.1 billion.
Overall, BofA said net interest income declined by 16% to $10.2 billion, reflecting light loan demand and low interest rates. The margin compressed by 3 basis points during the quarter to 1.68%.
But the company expects to make more loans over the rest of this year, with executives forecasting that net interest income could be about $1 billion higher in the fourth quarter than the first quarter.
Consumers continue to pay down debt, Paul Donofrio, the company’s chief financial officer, said during Thursday’s call. As government stimulus funding tied to the pandemic fades and the economy improves, customers are likely to borrow more and make purchases that they had delayed over the past year.
At the same time, commercial loan demand is beginning to increase.
“We’re seeing pipelines build and balances have stabilized for more than a month,” Donofrio said. “So we’re hopeful for a turnaround.”
Bank of America’s GDP forecast was in line with increasingly optimistic estimates by other banks and federal projections, said Jon Winick, CEO of Clark Street Capital.
“They aren’t seeing it quite yet, but with that kind of GDP expansion, they’re going to see loan growth this year,” Winick said.
“You’ll see it with credit cards first — that’s the quickest loan you can get — but then you’ll see it spread to other areas of consumer as well as commercial,” Winick added. “Loan growth, or the lack of it, is clearly a problem now, but a robust economy will solve that. And there’s no question we have a lot of pent-up demand out there.”
Expectations for rising interest rates, alongside economic growth, should boost lending profitably as well, said Wells Fargo analyst Mike Mayo.
“The yield curve has not yet helped but it should” in the future, Mayo said.
BofA’s first quarter earnings of $8.1 billion were more than double what it reported a year earlier. Earnings per share of 86 cents topped the average estimate of analysts polled by FactSet by 20 cents.
The company released $2.7 billion of loan-loss reserves in the first quarter, which padded its results.
The reserve release “helps the bottom line, but it’s also a show of confidence in the improving environment,” Winick said.
