BofA sees consumer spending rebound in Q3

October 14, 2020.

Improvements in customer spending from the depths of the COVID-19 downturn helped to propel to a nearly $4.9 billion profit during the third quarter, suggesting a faster recovery on the consumer side than on the commercial one as the bank continues to take a hit from low interest rates.

Largely driven by the consumer side rebound, the bank’s profit was up from the second quarter but still down compared to the third quarter of 2019. And there may be reason for even more optimism on the consumer side. Bank of America CEO Brian Moynihan, who pointed out the spending rebound on an earnings call with analysts Wednesday, said that activity was actually up in September year over year.

“In the third quarter, we have seen a full restoration of spending by Bank of America customers when compared to last year,” Moynihan said. “Overall, the customer payment levels in September 2020 were larger than September 2019.”

Moynihan, who said that consumer spending heading into October was 10% ahead of the same period a year ago, also noted that the firm’s in-house economic projection shows a sizable gross domestic product rebound of around 30% for the third quarter, bringing total GDP closer to its pre-downturn amount.

Bank of America had a growth in accounts for consumer credit cards and auto loans, the CEO said, with mortgage activity holding up.

Overall for the third quarter, the bank reported a profit of around $4.88 billion, up about 38.15% from approximately $3.53 billion second quarter, due mainly to this recovery. However, profit was still down by about 15.51% from the nearly $5.88 billion reported the year before. 

The bank reported that its earnings per share was $0.51, which missed Zacks’ estimate of $0.53. Additionally, it was up from $0.37 during the second quarter and below $0.56 from the same period last year.

Revenue was at nearly $20.34 billion, down by about 8.91% from the nearly $22.33 billion reported in the second quarter and 1.34% under Zacks’ estimate. Additionally, the third-quarter revenue figure was down by about 10.83% year over year from nearly $22.81 billion.

Nonetheless, Moynihan said that with the context considered, the results were strong.

“Overall, a solid performance given the operating backdrop we face,” he said.

Bank of America also set aside roughly $1.39 billion as its credit provision, a steep drop from about $5.18 billion for the second quarter, while still above $779 million for the third quarter of 2019. The provision included $972 million for overall net charge-offs and $417 million for a net reserve build. The bank attributed the build to the commercial side as travel and entertainment spending continue to be affected by COVID-19, while the consumer side had a net release as credit card balances fell.

In another sign of consumer-side strength, net charge-offs dropped significantly, going from $734 million during the second quarter to $564 million during the third quarter. The figure was also less than the $622 million reported in the third quarter of 2019.

Commercial net charge-offs, in contrast, dropped modestly from the second quarter, going from $412 million to $408 million, while remaining above the $189 million reported for the same period a year ago. Chief Financial Officer Paul Donofrio attributed the amount to an increase in losses in commercial real estate, naming malls as an example, although he added that commercial and industrial losses dropped.

debt deferrals have also fallen, executives said. Donofrio, citing credit cards as an example, said deferrals were more than $7 billion at the end of the second quarter but plummeted to about $400 million. Moynihan, who gave an overall remaining deferral figure of $9 billion, said that $7.5 billion was for mortgages, and noted that about 100,000 customers were involved in the program as of the end of September.

Meanwhile, a key metric for commercial debt, called reservable criticized utilized exposure, sharply increased compared to the second quarter, rising from $25.95 billion to $35.71 billion. Donofrio, who noted that the metric shows a significant impact from COVID-19, said that exposures to industries in airlines and hotels were the biggest drivers.

Donofrio said, however, that Bank of America’s commercial-side asset quality remains healthy overall.

“Overall, given the environment, the asset quality of our commercial book remains solid, with 88% of exposures, excluding small business, either investment grade or collateralized,” he said.

The CFO also said that the amount of commercial-side nonperforming loans was flat compared to the second quarter.

Bank of America also reported a continued decline in net interest income, which was $10.13 billion, down from $10.85 billion in the second quarter and from $12.19 billion a year ago. Donofrio said that net interest income is expected to improve, although he said this assumes that situations with interest rates and COVID-19 do not deteriorate further.

“Having said that, we believe Q3 will likely be the bottom for NII and we are optimistic it will move higher in 2021,” he said.

This improvement is expected, the CFO said, because commercial loan utilization levels and credit card spend, which are low, are likely to pick up. Donofrio also noted that the bank has been moving some of its cash and repos into securities.