The US economy is “healthy but slowing,” Brian Moynihan said Tuesday, while unveiling a set of Q3 results which looked ok at face value.
Bank of America’s earnings releases tend to be somewhat bland, consistent with Moynihan’s deliberately uninteresting “responsible growth” corporate strategy.
Ahead of the Q3 numbers, there was some focus on the bank’s unrealized bond losses and, more to the point, on the stock’s underperformance, which some attribute in part to investors’ annoyance with a mountain of long-maturity debt yielding less than 2.5%, lower than the average yield on the securities books of JPMorgan, Citi and Wells. The paper loss on those bonds exceeds $130 billion (that’s total unrealized losses on HTM debt securities as of September 30, 2023, from page 9 in the supplement released on Tuesday).
Does that matter? No. Not really. And, to its credit, the mainstream financial media was honest enough to concede that there’s no real risk associated with those paper losses. That’s a polite way of saying that the bank’s “wrong-way rate bet” (as one outlet put it) isn’t actually a story. Sure, it’d be better if those paper losses weren’t there, and maybe the stock wouldn’t be underperforming if the bank’s securities book sported a higher average yield, but this is a discussion that belongs in bank analyst notes. The layperson doesn’t (and has no reason to) care anything at all about unrealized bond losses on BofA’s balance sheet. They’re never going to be forced to sell those bonds. What kind of scenario would find BofA unloading bonds in a fire sale? They’ve got damn near $2 trillion in deposits spread across everybody from the barely-banked to the wealthy.
With that out of the way, net interest income was $14.53 billion at BofA in Q3, comfortably ahead of estimates. “Comfortably” might be pushing it a little bit. Consensus was $14.22 billion.
The ~4% NII increase represented a sharp deceleration from two years of rambunctious growth, but it’ll work. A +100bps increase in yields across the curve would boost NII by $3.1 billion over the next 12 months, while a 100bps decline would lead to a $3.3 billion drop.
Deposits were up “modestly” from Q2 and loitered around $1.9 trillion ($1.88 trillion versus $1.77 trillion expected). BofA, you’re reminded, pays almost nothing on those deposits — less than 2%. I can attest to that because I have some of what I call my “right down the street” money in a BofA savings account. That’s money I can go grab physically if I ever need to — I don’t know — put a bunch of cash in a duffel bag and abscond to Mexico. Or Canada. That account “boasts” the lowest yield of any savings product I own, and it’s not close. Its sole purpose is to serve as a digital safety deposit box. The point: Because the bank isn’t competing for deposits, they don’t have to pay anything on the ones they have, which means the very low yield on their securities portfolio isn’t as vexing.
Loan growth stalled. Loans and leases rose around 1% YoY, and they’ve been basically flat QoQ for a while now.
Still, $1.05 trillion met estimates, and nothing sticks out as concerning.
Trading looked pretty good. FICC revenue of $2.72 billion was a beat (consensus saw $2.62 billion) and equities revenue of $1.7 billion likewise topped estimates. All told, sales and trading revenue rose 8% YoY. IB was ok too, all things considered. Revenue of $1.19 billion was ahead of the Street ($1.11 billion). Wealth management was basically in line.
Compensation expenses came in ahead of estimates, and the provision for credit losses, at $1.23 billion, was lower than analysts expected. The results included a reserve build of $303 million. Charge-offs were up YoY, but are still below pre-pandemic levels.
“Since the beginning of 2004, the total consumer net charge-off rate has averaged 1.6%,” BofA said, in its presentation. As you can see, the pandemic-era average is less than a third of that.
The GFC average charge-off rate in consumer was 3.6%. It peaked at 6%. That rate is currently 0.7%. So, no, the US consumer isn’t in dire straits apparently.
The figure below shows debit card volumes. Nobody else seems to think this is a metric worth highlighting, but it seems notable to me.
Debit card purchase volume was $133.55 billion in Q3, a new record.
On the top line, revenue net of interest expense was $25.17 billion. That beat. Net income rose 10% to $7.8 billion. EPS was $0.90.
I’m sorry (and I don’t know who I’m apologizing to) but there’s nothing to see here. BofA’s a big, giant bank. And they’re doing fine. Moynihan said he added clients and accounts across every line of business. Consumer spending in the US is “still ahead of last year,” but like the economy, it’s slowing, he added.
I was all set to point out that Wells Fargo’s savings account rates are even worse. They’ve been under a FED mandated asset cap since 2018 on account of their myriad (and seemingly never ending) scandals. As such, they’re actively disincentivized from acquiring new deposits.
Lest I fake the funk on the nasty dunk though, I quickly googled BofA to compare and… I’ll be damned. BofA is lower. Bank of America offers lower interest rates on savings accounts (0.04% on the highest tier for those who are curious) than a bank that is forbidden by regulatory agencies from growing assets (0.25% for starting balances, growing to 1.0% when you reach 6 figures, and 2.5% for seven figures). I am honestly impressed.
Anecdotally, a few of our clients have finally noticed just how paltry the yields are at BOA, including one who called the bank was told they were a “preferred client” so were earning .025%. They are pulling money and moving it into MMFs.
The migration out of bank deposits is happening slowly, but it has not stopped or reversed by any means.