Bank of America said consumer spending and borrowing continues to power the U.S. economy, even amid soaring inflation, festering uncertainties imposed by the pandemic and Russia’s destabilizing invasion of Ukraine.
During the first quarter, strong consumer banking results helped BofA to weather a sharp decline in investment banking fees. The Charlotte, North Carolina, banking giant reported 4% growth in consumer loans, in contrast with JPMorgan Chase and Wells Fargo, both of which posted declines.
“This quarter, our resilience was tested,” Chairman and CEO Brian Moynihan said during a call with analysts Monday after the company posted
Moynihan acknowledged concerns caused by the pandemic’s impact on supply chains and business opportunities, coupled with inflation and sky-high energy costs. But he said BofA does not anticipate a recession this year or next.
“Right now, the size of the economy is bigger than prepandemic levels,” he said. “Consumer spending remains strong, unemployment is low and wages are rising.”
Economists warn that with inflation at a 40-year high, Federal Reserve policymakers may have to boost rates aggressively though this year. With this change in policy —
Historically, when the Fed has raised rates, the economy has often cooled quickly. Over the last 35 years, the Fed engineered five rate-tightening cycles, and the U.S. economy went into a recession on four of those occasions, according to Wedbush analysts. Loan losses tend to pile up when the economy falters.
But BofA said Monday that it expects 3% economic growth this year and 2% growth in 2023, with pent-up consumer demand after the pandemic caused changes to spending behavior overpowering both inflation and higher rates.
The $3.2 trillion-asset bank said spending among its consumer clients — BofA has the largest consumer customer base of any U.S. bank — reached $980 billion in the first quarter, up 14% from a year earlier. Credit and debit card spending increased across various categories — travel, entertainment, retail and food. As gasoline prices reached record levels this year, spending on fuel also rose.
BofA’s average total loans and leases rose 8% from a year earlier to $978 billion. Consumer loans rose 4% to $435 billion after the bank posted notable gains in each of the three prior quarters.
Moynihan said that borrowing likely would have been even stronger if not for the savings that Americans amassed during the pandemic. As consumers burn through that cash, many of them could turn to credit, driving continued loan demand throughout 2022, he said.
“What it means is a long tail to consumer spend growth,” Moynihan said. “And in April through the first two weeks, spending is growing faster at 18% over April 2021.”
Wells Fargo and
At BofA, commercial loans also bounced higher during the first quarter,
Dave Wagner, portfolio manager at Aptus Capital Advisors, said asset-sensitive banks such as BofA have cause to be mindful of inflation, but are nonetheless likely to reap significant benefits from the Fed’s actions to tame rising prices.
As the Fed raises rates, most banks can charge more for loans, he noted, driving up bread-and-butter interest income.
“Inflation — and higher rates to contain it — is actually good for banks in the near term,” said Wagner, whose firm invests in BofA.
BofA posted net interest income of nearly $11.7 billion during the first quarter, up 13% from a year earlier.
Meanwhile, credit costs remained low. First-quarter net charge-offs declined 52% from a year earlier to $392 million. The company released $362 million in reserves, reflecting executives’ confidence in borrowers’ ability to repay their loans throughout the year.
BofA reported first-quarter net income of $7.1 billion, down 12% from a year earlier. Amid market concerns about the war in Ukraine and rising rates, investment banking fees fell 35% from a year earlier to $1.5 billion.
Still, BofA’s net income of 80 cents per share exceeded the 75 cents that analysts polled by FactSet Research Systems had expected.
