FICO Inflation, C-suite Shake-ups, and Other Earnings Call Takeaways from BofA, Wells, Citi, U.S. Bank
Beyond the headlines, Q2 bank earnings calls exposed important insights on credit score concerns, leadership changes, AI strategies and whether BofA is overearning or underearning.
By Steve Cocheo, Senior Executive Editor at The Financial Brand
Behind the headlines of every earnings season, securities analysts probe other issues that may garner only a line or two in news coverage — or are not covered at all — but which help understanding where the banking industry or individual institutions are headed.
Such issues can sometimes presage developments down the road or give a glimpse of how an institution is evolving.
Here are some nuggets from the extensive second quarter 2024 earnings briefings of Citigroup, U.S. Bancorp, Wells Fargo and Bank of America.
Citi’s Card Portfolio: Is ‘Credit Score Inflation’ Still a Thing?
Citigroup’s briefing included heavy-duty discussions about the company’s ongoing transformation, as well as an extensive discussion of its continuing issues with its regulators. Towards the end of the briefing, Gerard Cassidy, managing director, head of U.S. bank equity strategy and large cap bank analyst, RBC Capital Markets, followed up on some erosion Citi had seen in consumer credit.
"Was there any FICO score inflation back during the pandemic that might be playing into these kinds of credit losses?" the analyst asked.
Cassidy was following up on a rundown Mark Mason, Citi’s CFO, had given about consumer credit cards. Net credit losses hit 4.7% as a percentage of average card loans in the second quarter, for example, compared to 3.1% a year earlier and 4.5% in the first quarter.
Mason said that overall consumers have been "resilient" and that about 86% of the bank’s U.S. card loans had been made to people with FICO scores of 660 or better. He also said that cardholders with FICO scores of over 740 were driving spending growth and keeping up high payment rates.
However, that’s not the whole picture. According to Mason 14% of cardholders have scores under 660.
"Lower FICO band customers are seeing sharper drops in payment rates and borrowing more as they are more acutely impacted by high inflation and interest rates," said Mason. However, he said delinquency rates were showing signs of stabilizing and that the bank was well-reserved for its total card portfolio.
FICO score inflation was being talked about months ago, the idea being that people had been evaluated on the basis of better financial circumstances than normal as a result of temporary forbearance programs and government stimulus payments during the pandemic. The impact of such unusual factors seemed to be stretching long past the height of the pandemic.
"We’ve been very focused on ensuring that acquisitions that we’ve made have been appropriately analyzed in the underwriting to get comfortable with the quality of new customers we’ve been bringing on," said Mason. "In light of the environment, we have looked at moving towards higher FICO scores for new account acquisitions." He said that much of the credit issue arose among the lower FICO band customers.
Added Mason: "The FICO inflation has effectively kind of fizzled out when we look at the mix and dynamic of the customer portfolio we have at this point."
Read more: Chase Rides to a Strong Second Quarter on Consumer Credit
Mike Mayo’s ‘Tea Leaves’: What’s Going on with the Brass at U.S. Bank?
Mike Mayo, managing director and head of U.S. large-cap bank research at Wells Fargo Securities, generally goes straight to the heart of things in earnings briefings. He told U.S. Bancorp’s Andrew Cecere, chairman and CEO, that he’s been noticing some management changes, departures and reassignments.
With the bank’s investor day coming up Sept. 12, he said, attendees might say, "Wow, these are a lot different than the presenters at your last investor day."
Then Mayo said he was "trying to figure out what the tea leaves are saying." He asked Cecere how much longer he was going to be the bank’s CEO?
Cecere didn’t answer the implied succession question directly and ignored the query about his own future. But what he did say underscored that change is coming to U.S. Bancorp.
In early May, Gunjan Kedia became the company’s president, a title Cecere had held formerly. She is a seven-year veteran of the bank and has been involved in financial services at banks as well as at major consulting firms for around 30 years.
Cecere said a year and a half ago the bank combined its institutional wealth group and its corporate and commercial group. "The synergies and the customer focus that evolved from that were just terrific," said Cecere.
More of the same is coming. "Gunjan has the same objective, to do that with the entire bank, with the payments organization, with the consumer and business bank organizations," said Cecere.
Cecere said that "She’s already started to do it very fast with the entire bank, and I’m looking forward to sharing that story on Sept. 12."
Mayo followed up, curious what to make of some senior-level departures. Cecere didn’t give away much: "Mike, I would just say that’s natural activity. We’ve had a very stable senior leadership group for years and years, and sometimes change happens. But there’s no messaging in that."
Read more: Hoodies and Suits: Can Banks and Fintechs Learn to Speak the Same Language?
AI at Wells Fargo: What’s Working?
Charlie Scharf, president and CEO at Wells Fargo, told analysts that the bank’s virtual assistant Fargo launched a year ago, has nearly 15 million users and over 117 million interactions. (By comparison, Bank of America’s Erica, launched in 2018, has over 19 million users and, since introduction, over 2 billion interactions.)
RBC’s Cassidy has shown an interest in AI in past earnings briefings and followed up on the Fargo numbers to ask about AI at Wells broadly.
Scharf said Wells divides the technology into two parts, "traditional AI" and GenAI.
"We have a huge number of use cases already embedded across the company with traditional AI," he said, in such areas as marketing, credit decision-making and more. He said the technology is used to suggest to both business and consumer bankers what customers might be willing to discuss.
As for GenAI, Scharf said that initially Wells is focused on projects that can use generative AI to make aspects of the bank more efficient and to provide greater customer experiences.
Scharf said that one example is in the bank’s call centers. At present, the company has call center staff record the "root causes" of customer issues in order to identify for the company what needs to be addressed. Scharf said using GenAI to run this aggregation and analysis will take out much of the manual effort that has been necessary.
"So, any place where something is written, something is analyzed by an individual, we ‘ve got the opportunity to automate that," said Scharf.
Added the Wells Fargo leader: "To the extent they impact a consumer, we’re going to move very slowly to make sure we understand the impact."
Read more: How Wells Fargo Rebooted — and Personalized — Digital Business Banking
Bank of America Gets a Zing for ‘Underearning’
In recent coverage of the second quarter briefing by JPMorgan Chase, analysts referred to the institution’s constant argument that it is "overearning." Management’s message has been to not expect that level of performance forever.
Analyst Mike Mayo reviewed numbers Bank of America had given in its second quarter investor packet and suggested that the bank has been "underearning."
Mayo observed that the bank had provided a graphic illustrating multiple financial factors affecting the outlook for net interest income.
"But I think when you put it all together, what it’s led to is the net interest margin of only 1.93%," said Mayo. "In fact, I think you’re yield on your assets is below Fed funds right now. So would you agree that you’re underearning with that NIM of 1.93%?"
Alastair Borthwick, BofA’s CFO, answered, yes.
"I’d say right now, in terms of the 1.93%, we feel like we are underearning. We feel like that number is going to go up over time. It will go up as net interest income goes up," said Borthwick.
Borthwick said a challenge would be that the balance sheet will be "flattish" in quarters ahead.
"We think through a cycle, we’ve got to get back to a more normal number like 2.30%-ish over time," Borthwick told the feisty analyst. "That takes a while. It’s a grind, Mike, quarter after quarter. So that’s where we’re headed."
Read more: How BofA Is Driving to be ‘Local’ in More Markets
