BofA's plan to sustain its consumer banking mojo

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Brian Moynihan says Bank of America has a strategy to offset revenue declines if the Fed cuts rates as expected this year — lean heavily on the relative economic health of the U.S. consumer.

During a discussion of the $2.4 trillion-asset bank’s second-quarter earnings, its chairman and CEO acknowledged lower interest rates would eat into revenue and profit margins. But BofA has reported steady growth in its consumer businesses and says it can sustain the momentum by originating more home loans in a lower-rate environment, taking more market share among younger customers, relying more on wealth management and other fee-based businesses, and offering appealing cards rewards.

“If you think of the U.S. economy as two-thirds driven by consumers, and if you think about employment levels … and wages … are much higher … we don’t see anything consistent with a recession,” Moynihan told analysts Wednesday on a conference call. “We feel it’s very solid.”

Revenue from consumer banking rose 5% from a year earlier to $9.7 billion. Average consumer deposits climbed 3% to $707 billion. Those results set the table for a 7% increase in BofA’s overall net income to $7.3 billion.

Even residential mortgage, a problem area for banks since the Fed started raising rates in December 2015, showed signs of life. Originations of home loans jumped 56% to $18.2 billion, as lower long-term rates sparked a wave of refinancing activity, Chief Financial Officer Paul Donofrio said during the call.

“Lower interest rates stimulated more originations and allowed many of our customers to lower the cost of owning their existing home or buying a new one,” Donofrio said.

There is no reason to think that the strong performance from consumer banking cannot continue throughout the bank sector, said Brant Houston, senior portfolio manager at CIBC Private Wealth Management, where he has oversight of $10 billion in assets under management.

“The consumer looks pretty healthy currently,” Houston said in an interview after BofA released its quarterly results. “Initial jobless claims are quite low, unemployment is quite low, and the stock market is close to all-time highs.” Houston declined to identify the stocks in his portfolio.

Moynihan attributed some of the strength in consumer banking to making inroads with millennial and Generation Z customers, largely through digital channels. BofA now has about 16 million customers in the millennial generation, and their combined account balances are about $400 billion, Moynihan said.

“You look at the rate we sell to millennials, it’s 40% of our sales,” Moynihan said in reference to new account openings. “We are gaining share in that class, and it's because of our digital capabilities.”

Digital account openings as a percent of total new account openings rose to 25% in the second quarter, compared with 18% in the second quarter of 2016.

BofA has also collected more wealth management business from consumers. Consumer investment assets, which include client brokerage assets, rose 15% to $220 billion.

However, if the Fed cuts the federal funds rate, yields on variable-rate loans will decline. Investment securities that carry floating rates will also have lower yields, Donofrio said.

If the Fed cuts rates twice this year, that will reduce the company’s estimate for growth in net interest income in 2019 to 1% from its previous forecast of 2%, Donofrio said. But it’s not possible yet for BofA to project net interest income growth for 2020, he said.

“We don’t know what rate cuts we’re going to get,” he said. “As we get a little closer, we’ll be more likely to be able to talk about that.”

Since net interest income growth is poised to slow, Glenn Schorr, an analyst at Evercore Group, questioned Moynihan’s strategy of relying on costly rewards programs in its credit card business.

Moynihan responded that rewards programs are a cost of doing business in credit cards and BofA has been successful deploying rewards.

“You could have $20,000 of deposits from these customers, so you reward them with a card because that’s the way you can do it,” Moynihan said. “But you’re actually getting the deposits, so we’ll keep working that.”

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