Despite two years of higher-than-normal inflation and rising interest rates, U.S. consumer spending has remained remarkably resilient. That resilience has helped keep the economy from sliding into recession, despite the pessimistic forecasts that it would.
Because it's one of the largest banks in the U.S., Bank of America's (NYSE: BAC) metrics can provide investors with some valuable insights about consumer spending and the overall strength of consumers based on their ability to repay their debts. Here's what investors learned from the bank's first-quarter earnings call.
Consumer strength aided by credit card spending
In December 2022, a Bloomberg survey of economists found 4 out of 5 respondents forecasting a U.S. recession in 2023 or 2024. So far, those forecasts have proven to be quite wrong, and a big reason why has been the persistent strength in consumer spending.
Bank of America Chief Executive Officer Brian Moynihan has been vocal about the strength of consumer spending last year. His position gives him plenty of visibility into consumer spending and deposit activity, which has remained above average for the better part of the past few years.
One reason for the consumer strength is that people are swiping their credit cards more often. Despite interest rates on credit cards that are the highest on record, people are piling on revolving debt. At the end of 2023, U.S. consumer credit card debt stood at $1.13 trillion, according to the Federal Reserve Bank of New York.
Image source: Getty Images.
By some metrics, the financial health of the consumer is weakening. In an interview with Bloomberg TV last month, Moynihan noted that spending growth has decreased from 10% last year to 3% to 4% more recently. Not only that, but net charge-offs and delinquencies on credit card loans are also up. The overall delinquency rate on credit card loans nationwide is 3.1%, the highest rate since 2011.
What Bank of America's earnings tell us about the consumer
Bank of America's revenue fell by 2% year over year in the first quarter, and its net income fell by 12%. The bank was hurt by narrowing net interest margins -- the difference between its net interest income and interest expenses, divided by its average interest-earning assets. Banks across the industry have seen this metric dip over the past year as their deposit funding costs have climbed due to rising interest rates.
The bank also took $1.5 billion in net charge-offs during the quarter. Net charge-offs are debts that an institution determines it is unlikely to collect on, and that are written off. This metric can be a strong indicator of the relative financial health of a bank's customer base.
BoA's net charge-off rate across all its assets was 0.58% during the first quarter, up from 0.45% in the quarter before. Higher consumer credit card charge-offs were the primary culprit behind that rise. In the quarter, the net charge-off rate on consumer credit cards at BoA was 3.62%. That percentage has increased for several quarters in a row.
Chart by author.
Alastair Borthwick, Bank of America's chief financial officer, said the bank is encouraged by its delinquency trends. Although delinquencies, including 30- and 90-day delinquencies, increased, the rates of the increase in Q1 slowed down compared to the prior quarter. Borthwick said that net charge-offs for the bank would likely level out over the next quarter or two, which could signal ongoing robust consumer spending and a firm economy that will stay out of a recession.
What does this mean for Bank of America?
Although the growth of delinquencies slowed, they were still up from the fourth quarter, as were net charge-offs. Further increases in delinquencies could signal that consumers are struggling, in which case their spending could weaken, and a recession wouldn't be out of the question.
Something Bank of America has going for it is its resilient customer base. FICO scores are used in most consumer lending decisions and let lenders know how likely customers are to pay their debts. According to Experian, the average FICO score in the U.S. is around 715. Bank of America's borrowers are well above average. For example, its credit card borrowers have an average FICO score of 777, while its auto loan borrowers' average score is 801.
Consumer spending will normalize
The state of the U.S. consumer may be weakening, but Bank of America expects things to normalize as the year progresses. However, if it proves wrong and delinquency metrics keep rising, consumer-focused companies and lenders could be the most vulnerable.
Unfortunately, recessions and inflation hit people with lower credit scores harder, as high interest rates and prices make debts more challenging to pay down. In this scenario, Bank of America's customer base may be, on average, less affected by a downturn. Others might not be so lucky.
Should you invest $1,000 in Bank of America right now?
Before you buy stock in Bank of America, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Bank of America wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of April 15, 2024
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America. The Motley Fool has a disclosure policy.
