What’s Worrying BofA’s Brian Moynihan in 2022: Wages, Inflation & The Economy

The fourth quarter of 2021 finished strong for most sectors in the U.S., and especially for banking. However, Bank of America's CEO is concerned about the duration of this exponential growth and how long inflation will continue to rise before leveling out. Here's what he's watching out for.

2022 could be a growth year for the economy, following two uneven Covid-impacted years. But, even growth is worrisome if it happens too quickly, and Bank of America’s CEO Brian Moynihan is wary of the rollercoaster.

“This is trickier because of the velocity of the change here, which is much different than what we’ve seen,” Moynihan told Bloomberg’s David Westin following release of the megabank’s fourth-quarter earnings. “The velocity down and the velocity back up has been unbelievable — 30% down in a quarter, 20% or 30% back up and then moving more.”

Those economic gyrations from quarter to quarter demonstrate the twisting road the economy has been traversing, and points to the challenge the Federal Reserve faces in managing the unusual economic forces.

When inflation slows down, “we should get back to a normal economy,” Moynihan maintains. He points out that U.S. economy, already bigger than it was in 2019 on nominal terms, is predicted to grow at twice the rate. “Of course we have to worry about inflation and that’s why [the Fed has to] raise rates.”

Rate increases will have cascading impacts across the board. Wages will need to rise, as will the prices of housing and goods, especially if supply chain issues persist in the year ahead, Moynihan says. Wage growth is where banking will feel the pressure in particular. Bank of America — which Moynihan says pays some $30 billion to $33 billion in compensation and benefits — is raising its workforce’s wages.

If You Haven’t Yet…

Some banks and credit unions have already increased wages to account for inflation and worker expectations. Those that haven’t may lose out to large institutions, like Bank of America, who have.

“It is the biggest expense — by a lot,” says Moynihan. “You have to be competitive, you have to pay people.” One thing that could alter this upward trajectory for some institutions is if the equity markets drop, changing financial advisory revenues, which can also bring down wages. “That is not something we ever hope happens — we’d rather pay people more and grow the business,” the CEO states.

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What Moynihan Hopes For

Even though it should happen proportionately, Moynihan says he is also keeping an eye on consumer spending, which he thinks could ultimately offset the impact of rising rates.

“Consumer spending was much stronger in the fourth quarter than the third quarter” of 2021, BofA’s CEO says. “Consumers are spending money and that’s good for the economy.”

This has had an impact on overall loan growth, which too is rising and is expected to climb further in the new year. “The fourth quarter represented the strongest quarter of organic loan growth we have experienced at Bank of America,” Moynihan said in a call with analysts.

The bank year over year had a 3.2% average loan growth rate (not including PPP loans) and a similar increase of 3.4% from Q3 to Q4 in 2021.

“We always have thought that our loan growth should be slightly better than the economy,” Moynihan told Bloomberg. “We should grow mid-single digits or better which we have been doing before the pandemic.”

As the second largest bank in the United States with $2.4 trillion in assets (as of Sept 30, 2021) — Bank of America reported over $50 billion in loan growth for the fourth quarter in 2021, which brought its total loans and leases to $939 billion.

“We note these borrowers, both consumer and commercial, have strong capacity to continue to borrow,” Moynihan said on the analyst call.

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It’s Not Just Bank of America

Bank of America was not the only bank to report such growth, nor the only executive team to expect similar results in 2022. Fitch Ratings analysts say they witnessed this loan growth in 2021 across the board in both commercial and consumer segments. The firm reports that management teams are optimistic the loan growth will continue, which is consistent with its 2022 expectations.

“This momentum is supporting net interest income and helping to offset lumpy, normalizing capital markets and trading revenue. Increased line utilization in commercial loans is supporting growth,” Fitch Ratings reports. “Credit card loans, while still below 2019 levels, are expected to see high-single-digit growth this year at some banks, supporting net interest margins (NIMs).”

As one example, Fifth Third Bank says it expects its commercial loan growth to be around 12% to 13% in 2022 whereas consumer loans are estimated to be closer to 6% or 7%. But, as President Timothy Spence also points out, there could be constraints on loan growth due to supply chain issues or other factors.

“I think the supply chain issues are still real,” Spence said on Fifth Third’s fourth-quarter earnings call. “We have many clients who say they’d like to be running at inventory levels that are above where they’re at.”

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