BofA predicts consumer spending will drive loan growth in second half

While ultra-low interest rates crimped Bank of America's revenue during the second quarter, the company expects interest income to rise along with consumer spending in the back half of the year.

Chairman and CEO Brian Moynihan said Wednesday that consumer spending accelerated during the spring and early summer alongside successful virus vaccination efforts. Total consumer and small business payments at BofA reached $976 billion in the second quarter, up 41% from a year earlier and 23% from the same quarter in 2019.

"Consumer spending has significantly surpassed pre-pandemic levels,” Monihan said during a call with analysts after BofA posted its second-quarter results, “and loan levels have begun to grow."

The upbeat forecast on loan growth was in contrast with remarks Tuesday by executives at JPMorgan Chase, who said that U.S. consumers are unlikely to take on meaningful amounts of leverage this year.

At Charlotte, North Carolina-based BofA, outstanding loans and leases totaled $919 billion at the close of the second quarter — still down substantially from $999 billion a year earlier, but up 2% from the first quarter. That total partly reflected growth in credit card loans, which rose 4% from the first quarter to $75.6 billion.

“We are seeing our organic growth engine kick back in,” Moynihan said.

Still, BofA’s second quarter net interest income was flat from the prior quarter at $10.3 billion and down from $11 billion a year earlier on a fully taxable-equivalent basis, reflecting unusually low interest rates.

Low rates have been constricting the margin between what Bank of America pays its depositors and what it charges borrowers — a predicament that is also bedeviling many competitors. BofA’s net interest margin of 1.61% for the second quarter was 26 basis points lower than a year earlier.

That downward margin pressurecarved into revenue, which dipped 4% from a year earlier to $21.5 billion.

But the increased customer spending and uptick in total loans suggests that Bank of America’s revenue “could soon begin to turn higher,” said Moody's Investors Service analyst David Fanger.

Spending among Bank of America’s customers was 22% higher in the first half of this year in comparison with the same period in 2019 – prior to the coronavirus pandemic and the economic malaise it imposed. That data includes credit and debit card spending among both consumers and small business owners.

BofA’s economists estimated that gross domestic product grew by 10% in the second quarter.

Moynihan said that he expects more customer spending and borrowing to pay for everything from cars and homes to small business expansions, as the economy and supply chains normalize over the back half of this year and into next. He cited government stimulus payments – including direct checks to U.S. households – as one accelerant.

And even with rates low, increasing loan volume should drive up interest income in the third and fourth quarters on both a quarterly and annual basis, Moynihan said. He expects more loan demand from both consumers and businesses.

“This quarter, we saw loan levels across most every business move past stabilization and begin to make progress,” Moynihan said. “Companies need to build inventory, hire workers to meet the growing customer demand.”

He argued that the combination of hiring by businesses and higher customer spending will create a “virtuous circle” that will likely drive greater credit line use by business owners.

Wells Fargo analyst Mike Mayo said that BofA, like much of the banking industry, is in an “intermission” between a period in which credit quality improved and a second act that will feature revenue growth, and that last quarter provided positive indicators.

“Even if this time between acts might be somewhat longer than expected,” Mayo said, improvement in revenue “is a matter of when and not if."

Moynihan said he expects credit quality to remain strong as lending grows, given the brightening economic picture. BofA’s second-quarter net charge-offs declined 28% from the first quarter and 48% from a year earlier to $595 million.

Bank of America posted net income in the second quarter of $9.22 billion, or $1.03 per share. That was up from $3.53 billion, or 37 cents per share, a year earlier. Analysts surveyed by FactSet Research Systems had forecast second-quarter earnings of 77 cents per share.

The improved profitability was driven largely by BofA’s decision to release $2.2 billion of loan-loss reserves, which dropped to the company’s bottom line.

In 2020, the bank had set aside billions of dollars to guard against the possibility of a surge in bad loans that never materialized. Large banks such as JPMorgan Chase and Citigroup also benefited from reserve releases in the second quarter.