Bank of America strikes upbeat tone on lending, profitability

Bank of America’s sprawling customer base is ramping up borrowing just as interest rates are poised to rise, setting the stage for increased profits in the year ahead even as the omicron variant surges.

The fourth quarter “represented the strongest quarter of organic loan growth we have experienced at Bank of America,” Chairman, President and CEO Brian Moynihan said on an earnings call Wednesday. That fueled a jump in interest income and “sets us up nicely for 2022,” he said.

The outlook from the Charlotte, North Carolina, bank is an encouraging read on the U.S. economy and bodes well for banks’ earnings prospects in 2022.

The fourth quarter “represented the strongest quarter of organic loan growth we have experienced at Bank of America,” CEO Brian Moynihan said Wednesday.
The fourth quarter “represented the strongest quarter of organic loan growth we have experienced at Bank of America,” CEO Brian Moynihan said Wednesday.
Bloomberg

Futures markets now expect the Federal Reserve to raise interest rates multiple times this year as it seeks to tame inflation.

When rates rise, banks earn more interest income on loans. The year ahead is likely to prove particularly promising, BofA executives said, as banks are flush with deposits and can afford to allow some of them to roll off their balance sheets before they would need to raise rates on deposits. As such, the margin between what banks pay on deposits and earn on loans could widen, boosting profitability.

Moynihan said BofA is upbeat on the economy based on its customers’ spending and borrowing data, which suggests Americans, while concerned about the pandemic, are adapting to new variants of the coronavirus without significantly altering their lifestyles.

The $3.2 trillion-asset bank’s 67 million clients made $3.8 trillion in total payments during 2021, Moynihan said. That was an increase of 24% over prepandemic levels and marked a record for the company. Fourth-quarter payments were up 28% over 2019, he said.

Moreover, spending across all categories through Jan.17 was up more than 11% from the first 17 days of 2021.

“That bodes well for the rest of the year,” Moynihan said.

At the same time, Moynihan said, borrowing for cars, homes and consumer goods and services is on the rise and businesses are poised to make investments needed to meet that growth.

Mike Matousek, head trader at U.S. Global Investors, noted that Federal Reserve projections point to economic growth of about 4% this year, while the unemployment rate finished 2021 at 3.5%, creating a “historically tight” labor market that is driving up wages and boosting consumer confidence.

“Things are hot right now, and it makes sense to expect a burst” in borrowing as a result, Matousek said. “But the banks will want to stay conservative, to a degree, because these boom times never last forever, and you don’t want to be made a fool by a bunch of bad loans.”

BofA said its outstanding loans and leases totaled $979 billion in the fourth quarter, up 6% from a year earlier, driven by growth in both commercial and consumer lending. Its fourth-quarter net interest income jumped 11% from a year earlier to $11.4 billion.

BofA posted fourth-quarter net income of $7 billion, up from $5.5 billion a year earlier, on revenue of $22.1 billion, up 10%. Earnings per share of 82 cents climbed from 59 cents a year earlier and eclipsed the 77 cents that analysts polled by FactSet had forecast.

The banking giant earned $32 billion for all of 2021, up from $17.9 billion in 2020.

BofA released $851 million in loan-loss reserves in the latest quarter, and it earned $2.4 billion on investment banking fees, up 25% from a year earlier. Both helped bolster its bottom line. But the nation’s largest retail bank said its profit got the most notable boost from increased lending and interest income.

“Earlier last year, we talked about the green shoots of loan growth we saw in the first quarter, and we saw that turn into growth as we moved through the quarters, culminating with $50 billion in record loan growth” in the fourth quarter, Moynihan said. “We note these borrowers, both consumer and commercial, have strong capacity to continue to borrow.”

Every loan category advanced in the fourth quarter except for home equity, he said.

Chief Financial Officer Alastair Borthwick said during the earnings call that BofA expects “robust” net interest income growth this year compared to 2021, assuming rising rate expectations bear out.

At the same time, he expects costs to be flat in 2022.

Fourth-quarter noninterest expenses rose 6% from a year earlier to $14.7 billion, driven by higher incentive compensation for bankers. While compensation costs are likely to remain elevated, Borthwick said costs tied to pandemic disruptions are expected to slide. He also expects that, as increasingly more customers manage their daily banking transactions online, the bank’s branch costs will come down.

The key to profits in 2022, Wells Fargo Securities analyst Mike Mayo said, is keeping expenses steady. BofA’s expense projections show that it “will not be spending the likely rate windfall” and instead push gains to the bottom line.

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Consumer lending Commercial banking Earnings Bank of America Brian Moynihan
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