8 Things I learned from Bank of America’s Q4 2022 Earnings Call

The bank reporting season is underway. Last week, it was the turn of Bank of America (NYSE:BAC) to step up to the line.

Here are eight takeaways from Bank of America’s fourth quarter earnings call.

1) Profits Surpass Expectations

Revenues and earnings per share beat forecasts despite setting aside more for credit losses.

Analysts had forecast revenues of $24 billion for the quarter. These came in at $24.53 billion, an 11% year over year.

Earnings per share was $0.85, beating Wall Street’s expectations of $0.76.

Net interest income is up $3.3 billion, or 29%, to $14.7 billion, driven by benefits from higher interest
rates, including lower premium amortization expense, and solid loan growth.

Non Interest income dropped $799 million, or 8% to $9.9 billion due to declines in investment banking and asset management fees as well as lower service charges.

2) High-Interest Rates Helped Boost Profits

Net Interest Income (Source: Bank of America)

High-interest rates have had a major positive effect on BAC’s results. As interest rates have increased, BAC has managed to improve its margin on its loan business from 1.92% to 2.81%. Should interest rates continue to increase (which looks to be on the cards at the time of writing), those margins are going to widen further.

BAC has calculated that a 1% increase in benchmark interest rates will add almost $4 billion to its annual interest income.

3) Consumers Are Still Spending

Despite high inflation and the possibility of a recession, consumers are still borrowing and spending.

The bank saw growth across all its major credit businesses. And for the sixth consecutive quarters, BAC has produced more than a million new credit cards.

Net income in the consumer banking division increased by 15% to a record $3.6 billion, as debit and credit card spending increased by 5%.

On the earnings call, Alastair Borthwick, CFO, remarked:

“Credit card growth reflects increased marketing, enhanced offers, and reopening of our financial centers, delivering higher levels of account openings. Mortgage balances were up modestly year over year, and linked quarter were driven by slower prepayments. Commercial growth reflects a good balance of global markets lending, as well as commercial real estate, and to a lesser degree, custom lending in our Private Bank and Merrill businesses.”

4) Bank of America’s Digital Transformation

BAC’s digital sales continue to grow strongly, accounting for half of BAC’s sales in the consumer business. It says that almost three-quarters of its consumer household customers are now fully digitally active, and the number of verified digital users has increased to 56 million.

With its virtual digital assistant (Erica) now managing almost 150 million interactions a quarter, the bank has reduced the workload of its workforce. Its digital sales now account for more than half of all its sales.

5) Total Deposits Were Down

On a year-on-year basis, average deposits of 1.93 trillion are down 5% due to higher tax payments to the governments in Q2 2022.

Deposits were also mostly moved to products seeking yield in certain customer segments due to the accelerated rate hikes in 2022. In the course of Quarter 4, this has somewhat stabilized as more normal client activity resumed.

6) Headcount Outpaced Attrition

Even though the bank and its customers are shifting rapidly toward digital banking, headcount has increased in the fourth quarter. Like many other businesses, BAC suffered from higher employee attrition because of the Great Resignation in early 2022.

As this attrition has slowed, BAC’s accelerated pace of hiring has led to an increase in workforce numbers – 3,600 more workers over the quarter.

7) Dividends & Share Repurchase

Shareholder’s equity increased 3.7 billion from the third quarter.

BAC also paid out 1.8 billion in common dividends and repurchased 1 billion of shares.

Over the past five years, the company has reduced its shares outstanding by 21% and its dividends have increased by 83%. And as of this writing, BAC’s dividends have increased for nine straight years.

8) Looking Forward, BAC Prefers To Be Conservative

In looking forward to the coming year, BAC’s management is focused on a baseline scenario of a mild recession. Consequently, it is slowing its rate of hiring and increasing its focus on digital banking. It forecasts that unemployment will peak at 5.5% and remain around 5% or higher through the next two years.

If that happens, we should expect its provisions against poor debt to rise – though the bank is happy with the quality of its debt at present.

Final Thoughts

BAC has benefited from high-interest rates and a low-cost deposit base. It has grown its reserves and its loan book, thus allowing room for higher debt provision.

CEO Brian Moynihan says:

“Our investments over the past several years and our people, tools, and resources for our customers and our teammates, as well as renovating our facilities, have allowed us to continue to enhance the customer experience to record high levels and fuel organic growth… Digital sales are also growing, and they now represent half of our sales in the consumer business.”

Alastair Borthwick, CFO, remarks:

“Let me offer some highlights. At this point, we have the leading retail deposit market share. We have leadership positions among the most important products for consumers, and we’re the leading digital bank, with convenient capabilities for consumer and small business clients. We also have a leading online consumer investment platform and a great small business platform offering for our clients.”

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