CEO Chat: Bank of America

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If I have 4 clients in 4 cities and I'm trying to get to them, it's going to take me a week to get to all 4 clients. Could I go to one, have the meeting, get on a plane, go to the next one, have the meeting? If I can do it by Zoom, I could do all 4 by lunchtime and start thinking about that.

Welcome to the Barron Streetwise Podcast. I'm Jack Howe, and the voice you just heard, that's Brian Moynihan. He's the CEO of Bank of America. Brian spoke with us about how video conferencing is making investment bankers more productive and how he plans to fend off digital age challengers like PayPal and why he thinks the Federal Reserve will raise interest rates sooner than you might expect. This is episode number 4 in a series of 6 chats I recently had with top CEOs. We're going to play these conversations with limited narration The episodes will be short, but we'll do 2 a week on Tuesdays and Fridays until we return with regular episodes at the end of next week. On to Bank of America. Brian Moynihan was made CEO of Bank of America in the wake of the global financial crisis, and he's run the company conservatively with a focus on retail banking and wealth management. And his shareholders have been well rewarded. Bank of America stock beat the returns of the S&P 500 over the past 1, 5, and 10 years. During the pandemic, when the economy all but shut down, Bank of America provided its customers with $75 billion of what Bryan calls panic borrowing. The company set aside massive sums to cover projected losses on those loans, but losses have remained modest, and now economic activity is picking up. Meanwhile, Bank of America has profited from a flood of trading activity over the past year—lots of mergers and acquisitions on which it earns fees. One last thing to know is that banks stand to be key beneficiaries of interest rates rising from these levels. They make money from loan spreads—the difference between what they pay customers on savings accounts and collect on loans—and those spreads have been squished for a long time. When interest rates fall low enough, the rate banks pay on savings accounts tends to hit a floor of 0%. Otherwise, banks would charge customers to deposit money. But even after rates on savings accounts hit that 0% floor, mortgage rates kept falling and the result was a squeezing of loan spreads. So when interest rates begin rising, you can expect lending spreads to eventually widen again and banks to make more money from their core consumer lending. That's enough jibber jabber from me. I started my conversation with Brian by asking about digitization.

When many people look at the consumer digital experience, that was already massive. You know, it kept growing at a good rate, the activity grew, but what happened was the types of consumers who were hesitant for whatever reason used it. And then the whole interface, the customers on the relationship side digitally, just like we're doing this right now, you know, over Zoom or something like that. Changed completely. So we had record investment banking quarters and investment bankers couldn't go in a client's office. And if you just sort of step back from that, that's a lesson that actually changes dramatically how people thought this business had to be.

That's interesting, that change. What has it changed most? The costs of doing that business?

You know, in the broad context, you call it productivity, right? If I have 4 clients in 4 cities and I'm trying to get to them, it's going to take me a week to get to all 4 clients because I go to one, have the meeting, get on a plane, go to the next one, have the meeting. If I can do it by Zoom, I could do all 4 by lunchtime and start thinking about that. It is not as good as being there in person, but it's better than the alternative, which was a phone call or sending documents and trying to get them on the phone and trying to get people to go through Page Six or emailing them and they're finding them. It's a much more real-time interaction.

I suspect a lot of investors think about a bank like yours as already being everywhere and they think, okay, the business has its ups and downs, but is there still growth there? Do you think of yourself as a growth company and what are the opportunities for growth that excite you most? We're a growth company.

And so in the near term, when rates move around on banks, they lose revenue because the squeeze in interest margin that comes from a zero floor on rates. But you grow activities, you grow customers, you grow transactions, you grow trades, you grow depth of wallet. And in those areas, we had, you know, very strong growth in new customer checking accounts, very strong growth in customer acquisition in the wealth management business. So we are a growth company. In a very big shell. And that is a tricky execution. And just like in '16, '17, and '18, as the interest rate environment normalized a bit, you saw our earnings just explode. You'll see the same thing happen because underneath that we have a million more checking account customers today than we had last year at this time. That's a big growth in the context of those are core accounts and it's basically 3/4% growth in households.

[Speaker:BILL TAI] What do you make of the backdrop for economic growth? We had a subtle change recently and maybe the signaling from the Fed. Do you think that we're poised for healthy enough growth as we get beyond the reopening phase after the pandemic?

I think in thinking about what the Fed said and how the markets read it or not read it, and the debate about transitory inflation and all that stuff, I think you have to step back. And what I take out of it is sort of 3 basic points from the Fed discussion. One is it's all about the vaccines, variants, and virus, right? So the reality is, is that they can't be sure the path forward and the recovery is complete until they're sure that the vaccines work on the variants and the variants don't become an issue in the United States. By the way, it's the same in all the other countries. An example of that is India had to shut down recently, seems sort of late in the game, but because of the lack of prevalence of vaccines and the prevalence of disease, it was the only reasonable take. The second thing I think in terms of the Fed versus the Street is the Street has projections for this year at 7% GDP growth and next year 4, 4.5, 5, in that type of range. But the big difference is the Fed for '22 is at 3%. So the Fed is thinking in there, this is all transitory, there'll be a recovery and then come back to sort of faster growth, but more normalized growth. The Street is saying it keeps going because all the stimulus and all the things. We'll see who's right. So I'd say to people, pay attention to that because that will actually dictate the path of the Fed more than anything else is what '22 starts to look like. The third thing is I think people have to think about this Fed is not mysterious. This Fed's been in place in the last time they had to go through a rate change cycle, '17, '18, '19, and they did, they moved rates to 2%. And so in the place where we get to full employment, they will bring rates up. My advice to people is to think about the underlying projections, think about what this Fed has done before, and think about what they're really saying is that the issues of the vaccine and virus and variants is not over yet, and when it is, we will move.

When I think about the types of banks years ago, I mean, I think about, all right, small, medium, and large, right? Now there's this swirl of fintech companies and all types of new services and financial assets that didn't exist even 10 years ago, cryptocurrency and so forth. What do you say to a young investor who says, "How's Bank of America going to play defense against all these companies trying to come after its business?" What's your strength there? How do you stay safe from upstart competition? Well, two things.

One is we look at what customers want, and some of that's evidenced in what these competitors are doing. So we're not naive. We always look out in. We always look from the customer demand to us. So that would be sort of one thing. But if I were trying to say to somebody, "Think about the investment," If I told you that you could invest in a company that earns $20 billion plus, that has 40.4 million active digital customers today, that has 2 billion logins per quarter, that has $300 billion online brokerage capability, is already doing 60%, 70% of what Venmo on its own, and you start to say, that's the difference is we are scaled big and we learn and we go after things, but we have things which people aspire to are already embedded. A $300 billion digital brokerage already exists at Bank of America growing at 20%, 25%, a year. These companies are interesting. We partnered with someone. We acquired capabilities in the payment space. We will work within the infrastructure and ecosystem and all the wonderful words people like to use, but the reality is by the time people wake up tomorrow, we'll have 500,000 people coming to our branches and we'll have 25,000 digital logins into our online banking platform in the next minute. It's a staggering enterprise.

[Speaker:BRYAN LAWRENCE] There's always been some kind of trading on the sidelines that looks like it's gotten out of control, you know, the price of something or other. But lately everybody's talking about this meme trading where you see these really unlikely assets shoot up in value. Part of that's, you know, cryptocurrency, part of that is stocks. Is that just frivolous activity on the sides? Is that something more structural that we could be concerned about? And you've got an army of financial consultants out there. What are they telling people who are saying, hey, you know, my kid just made 10 times his or her money in Dogecoin, you know?

Well, like, what do you think about that? Well, I'd separate the digital currency as an asset class, which institutional investors are doing allocations to and others, and that's going on and our customers are doing it and we're trying to figure out how we can help them. It's not something we recommend to do. It's something they're doing anyway. So can they hold it in the same account? That's the kind of question we get, or can we custody it for them and partnership with other people? We'll see over time what happens there. But in terms of stocks that run up or down every day, I think these things tend to sort themselves out over time and underlying evaluations at some point has to be the fundamentals and companies have to to have a market share gain, a product that's compelling, profit margin, whatever the criteria are, and that'll happen sometime. By the way, there's a lot of money to be made in between here and there, and there's a lot of money to be lost in between here, and that's what makes the market every day. Our advice is to invest consistently and invest in all markets. You've got 60, 70 years to live left, Jack. Oh, bless you. You got to think about this money across time. When I talk to my kids, I say, "Just keep putting the money in the market and you'll wake up someday, it'll be a lot more money than you thought you had." How's hiring going?

I hear a lot about companies having difficulty finding workers, about rising pay and things like that, some of which seems like, you know, it was maybe a long time coming. What are you seeing as you're trying to hire folks right now?

You know, hiring is very strong, but I think if you think about it in the context of a couple things. One is we've had turnover fall to the lowest levels. Last year it was really low, but in the middle of pandemic, you could understand that. But even with the pandemic easing and more job mobility, and you can see that going on in the market, we're still much below 19 in terms of people leaving the company. And so that's That's good news, and that's due to the policies and procedures and benefits and all the work we do. And then our diversity of our hiring is strong. Last year, we hired 16,000 people in the United States, and we hired about 1.5 times the rate of population for Blacks, about 1.5 times for Hispanics, and about 1.5 to 2 times for Asian Americans. So the diversity is strong and retention is strong. And so we feel good about the ability to access people. Now, we're starting at $40,000 for the high school education, or whoever we hire starts at $40,000 plus full benefits. And so we should get strong receptivity to our hiring.

Is there anything I neglected to ask you or anything more that you would like our readers, listeners, investors out there to know about Bank of America and your focus?

We've made a commitment to invest $1.25 billion for racial social justice equities. What we've done is we're actually putting the money out. So we've invested in the minority depository institutions, and then we realized that there was a need for private equity. And so we started to say to our market presidents out in all the markets, give us private equity funds who are women, Black, Hispanic, Asian American, Native American run that invest in women, Black, Hispanic, Native American, and Asian American companies. And we have committed to 90 funds, $250 million of commitments out. All of them are— the biggest one might be $10 million. They're very granular. Those commitments then will go into 3,000 to 4,000 companies. That'll provide a lot of lift, and they'll be in bite-sized. In other words, this is not going to somebody and saying, do $10 million, $20 million single capital injections into some company valued at billions of $300,000 equity investment into the distribution company that needs to buy some more trucks and needs that equity to get the leverage from the bank to buy the trucks to go do things. And it's fantastic. And so we've seen that happen. And then we're working with the HBCUs and the community colleges on their career development programs. And these are all programs to help get more opportunity in our companies and frankly, in other companies for BIPOC populations faster. And it's worked well.

Is there any early evidence, or is it too soon to say, about returns in this business? As you put this money to work, does this become the kind of thing where you're making money, the people you invest in are happy, and a business opportunity that was missed before and will be a growing one going forward? What do you think?

They're targeting returns. This is not a terrible endeavor. This is a private equity firm, but it's where they're targeting their investments that makes a difference. And so they'll be looking for opportunities. They'll have deeper connectivity in the marketplace. On the banks, these companies are operated well by colleagues now, and we can help them also strategically on some stuff, real-time payments implementation and things like that at the same time. This is capitalism done the right way, which means it can solve the big problems, which if you build sustainable models, i.e., there are returns to these funds, they can continue to invest or roll our money in the next fund, and suddenly this will build up over time into as big as it can be. If other people who are joining and doing the same thing, you end up with a lot more capital deployed at a segment that was getting 1% of the funds over the last 10 years, as opposed to— it should be 13%.

Thank you for listening. I can't tell you which company is next after this episode, but for a clue, Jackson, our audio producer, will tell you what it rhymes with. Go ahead, Jackson. Uh, phlemeralbeletric. That's the worst thing you've ever said. I'm not— see, this is why I'm not a rapper. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. If you listen on Apple, please write us a review. And if you want to find out about new stories and new podcast episodes, you can follow me on Twitter. It's @JackHough, H-O-U-G-H. See you next week.

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