Banking giant's risk profile has been methodically shaped to repel inflation
Despite inflation and supply chain issues, commercial activity “looks terrific,” a top Bank of America official said at a conference this week.
Alastair Borthwick, CFO of Bank of America (BofA), spoke of the mood of US clients amid times of inflation. He made his comments during the BofA Securities CEO Conference on Tuesday. He was joined by namesake Alastair Ryan, BofA Securities, head of European Banks Equity Research.
Ryan asked Borthwick to assess commercial clients’ collective mood: “How would you characterize?” Ryan asked during the conference. Answered Borthwick: “Well, they’re definitely concerned with inflation. How could you not be, just given all the headlines that we see every day. And it’s not just in the United States, obviously; it’s in the UK, it’s in Japan. Today, it’s a global phenomenon. And so commercial companies are thinking about inflation. They think about supply chain because that’s obviously a part of the inflation story.”
And yet: “At the same time, the activity of commercial clients looks terrific.” He noted BofA has actually added new clients, even against the backdrop of inflation: “We’re adding net new clients,” Borthwick said. “And the asset quality of commercial clients is and remains close to the best we’ve ever seen. So the commercial activity at this point remains pretty good. I’d say confidence is probably a little lower. One metric for that tends to be our revolver utilization metrics.”
He expounded on the concept: “We obviously provide a lot of revolving credit for companies across the United States and around the world. Revolver balances got quite low following COVID with huge inflow of deposits. They built back up though through June. They’ve come back down a point or so since June. So that’s a little bit of a headwind against loan growth at the margin. It’s probably an indicator of confidence. But I think it’s probably the commercial side that’s more impacted by the headlines than anyone else at this stage.”
Ryan asked if global pressure from disparate economies was having an effect on business. “Well, they have the same challenging operating environment that all companies face right now,” Borthwick said. “Most of our American clients operate in multiple countries around the world, so we’re following their activity, banking them in different parts. Similarly…most of the big European companies have got presence in the US and in Asia. So, this supply chain dislocation is a global issue. It’s not a Japan issue, or a UK issue, or a Sweden issue, or a US issue. It feels more global now.”
In terms of lending activity, Borthwick felt confident in spite of the economic downturn spurred by inflation: “We felt pretty good about the loans environment all through the year,” he said. “I think this quarter will be a little slower, partly because, like we talked about on the consumer side, you’ve – or the wealth management side, you’ve got a little bit less in the way of securities-based lending partly because, on the consumer side, with rates having gone up, our mortgage activity has slowed. And partly because, like I mentioned earlier, the commercial side, revolver utilization has come down, and 1% is worth a few billion for us. So those things are a little different than the prior quarters, but we still feel good about high single-digit growth for the year.”
Borthwick noted the positive risk profile in the present economic crisis for the banking giant, a status that has been built methodically: “If you look at our balance of consumer versus commercial, we’re more balanced,” he said. “If you look at the diversification, we are more global. We’re less all US. So we feel like we’ve reduced our profile – our risk profile generally - by spreading bets in a different way. And, in addition, if you look at the underlying piece - like if you were to step away from mortgage, for example, look at commercial real estate, we do so much less in the way of construction lending. We tend to lend to fully leased up projects, and our LTVs there have changed also.”
The banking firm has, over the better part of a decade, “fundamentally” changed the composition of its book and underwriting standards, Borthwick added: “So the bank that you buy today or the bank you’re invested in today, when we talk about responsible growth, we’re just positioned very, very differently.”