BofA breaks ranks and paints upbeat picture on consumer trends

Despite a new spike in coronavirus cases and uncertainty over a new round of government stimulus, Bank of America is hopeful that the economy has absorbed the worst blows from the pandemic.

Consumer banking is already rebounding, Brian Moynihan, the $2.7 trillion-asset company’s chairman and CEO, said during a Wednesday conference call to discuss quarterly results.

Spending in September and for the first nine months of 2020 were higher than that of a year earlier, indicating increased confidence. And deferrals are down significantly from the earliest days of the pandemic.

“This has occurred even as some of the summer … stimulus programs have run their course,” Moynihan said.

Only 100,000 of the 1.8 million deferral requests BofA processed for credit cards, auto loans, mortgages, home equity lines and small business loans remain in place. The amount of deferred consumer loans outstanding has fallen by 77% since peaking in May, to $9 billion on Sept. 30, or 2.8% of that portfolio.

“The deferral story, which we talked about the last couple of quarters, is largely over,” Moynihan said. About $7.5 billion of the consumer deferrals are mortgages that are “well secured with low loan-to-value [ratios and] … are accounted for in our reserves based on the expected losses that might come.”

Early indications are that consumer credit and spending are continuing to bounce back.

“What are we seeing as we turned in October? The spending by our consumers is still solid, about 10% ahead of last year,” Moynihan said, including increased credit card usage. “We are seeing loan demand stabilize. We may have seen a trough in September.”

BofA’s earnings fell by 16% from a year earlier, to $4.9 billion, because of lower lending levels and weaker net interest income. The loan-loss provision was nearly double that of a year earlier, at $1.4 billion.

For perspective, the provision decreased by nearly 73% from the second quarter. And all of the funds set aside reflected ongoing concern about commercial lending, primarily tied to industries such as hospitality and retail that have been harmed the most by efforts to slow the spread of coronavirus.

BofA released $269 million of its reserves for consumer loan losses.

The provisioning strategy stood in contrast to JPMorgan Chase. The New York company boosted its reserves for consumer loans while releasing funds set aside for commercial exposure.

“There are a lot of people who are under a lot of stress and strain who won't be able to survive another year of complete closedown,” Jamie Dimon, JPMorgan’s chairman and CEO, said during Tuesday’s earnings call.

While stimulus efforts have helped many businesses and consumers navigate the downturn, many bankers are pressing for a new round of government assistance. But negotiations in Washington are stuck in limbo, leaving industry observers and bank investors wary about the prospects for a sustained recovery and banks’ credit quality.

“The long-term unemployed are experiencing significant hardship,” said Scott Brown, chief economist at Raymond James. “A lot will depend on the amount of further fiscal support, but there is likely to be more long-term scarring as additional aid is delayed.”

Bank stocks, which have been under pressure most of this year, remain vulnerable largely because of a murky outlook on credit quality and future governmental action, said Mike Matousek, a trader at U.S. Global Investors.

“Banks are dependent on a full recovery,” Matousek said. “Are we getting to that point? I, or most anybody, would only be guessing.”

While deferrals are falling, BofA did report a rise in delinquencies.

Consumer loans more than 30 days past due rose by 12% from a quarter earlier. While charge-offs are low, Moynihan said the company is braced for loan losses to continue climbing until mid-2021 as customers dependent on government stimulus exhaust their resources.

Still, based on BofA’s experience to date, Moynihan said he does expect overall credit losses to swell beyond what the company has already planned for with its loan-loss allowance.

“We expect that the reserve builds are behind us,” Moynihan said.