Bank of America CEO Brian Moynihan speaks with Yahoo Finance's Brian Sozzi about the outlook for an economic slowdown, Fed rate hikes, and the strength of the consumer despite inflation.

Video Transcript

BRIAN SOZZI: Welcome back. Bank of America CEO Brian Moynihan tells me spending remains strong among consumers and that a recession may not be imminent. Take a listen.

BRIAN MOYNIHAN: Nice to be with you, again, and my teammates produced a great quarter again. And I thank them for that. But I think if you're talking about what we saw at our customers in terms of consumer spending, for the third quarter of 2022, the consumers spend about 10% more than they did in the third quarter of 2021. So 2022, third quarter, 10% over third quarter of 2021. And frankly, for the first couple of weeks in October, we've seen that same 10% increase.

Now, when you think about that spending, think about two things. One is, it's still very strong on a relative basis. Even the transactions are up 6%, outpaces inflation. Travel being a very growing part because coming from last year, when we had the Delta COVID variant, so this year, people are traveling. But on top of that, though, be mindful that early in the year, it was probably more like a 13%, 14% than a 12% to 10%. So it's being mitigated. So I think the Fed's changes in rates, the concerns about what's going out there, people are slowing down a bit, but not slowing down consistent with a real slowdown in the economy yet. And that's the good news.

BRIAN SOZZI: Brian, that's interesting that you're calling out 10% growth through October. And I just talked to Procter & Gamble's CEO after their earnings. They're talking about a resilient consumer. Are you surprised by the resilience we're seeing in US consumers here?

BRIAN MOYNIHAN: Well, we talked in our earnings materials about resilient consumer, frankly. And you think about that along two or three dimensions. First is the unemployment. Obviously, it's still very low. People are working. Second is, do they have money in their bank accounts? And the money in the bank accounts of our consumers, our 35 million core households at Bank of America at the end of September was the same as it was at the end of August.

And in fact, it's multiples, multiples over where it was before the pandemic, especially for those consumers who are in the $100,000 and under income bracket. That means that they haven't spent down the stimulus and stuff. And when I say multiples, I'll give you an example. Consumer had about an average of $3,500 in account pre-pandemic, now has $13,000 in that account. And it's not going down, so that's good news. So, one, they have money in accounts.

Two, they're spending. Three, they are employed. Four, they have capacity to borrow. Our credit card borrowings are still about 12% below where they were pre-pandemic. Home equity line draws are down about 25%, 30% still. Now, mortgage finance has slowed down because rates went up, but the people who have home equity lines in place or have capacity to borrow, the house values are still strong. So all that bodes well.

Now, inflation hurts consumers, especially consumers in lower moderate income because of inflation in goods and services they spend a lot of their income on. But, you know, so we have to be careful about the overall position versus certain types of consumers. But generally, the American consumer is very resilient.

BRIAN SOZZI: Brian, a lot of your peers on the Street over the past few weeks have come out and warned about a recession sometime over the next six months. So of course, that brings us into 2023. Where does Brian Moynihan sit?

BRIAN MOYNIHAN: Well, I don't make those projections. I have this talented research team, one of the best in the world, if not the best in the world, run by Candice Browning Platt and the team. And they've basically been consistent. They have this quarter, meaning past quarter, third quarter of '22, growing. Then they have the fourth quarter, the first quarter, the second quarter, and the third quarter all in negative territory. It's around half a percent, 1 to 1 and 1/2%. So a slight shallow downward trend, and then growing at the end of next year.

They have pushed that projection for a recession out a little bit into '23. But their core belief, it's a mild recession. It's coupled with unemployment. That gets up to 4 and 1/2% to 5%. The Fed funds rate, likewise, around 5%. But inflation does get under control, and we come out of that recession. That's the core projection. Now, against that, though, the real facts are today, the consumers are spending. Commercial credit is in great shape. Consumer credit's in great shape. Even though things like housing and stuff like that have flattened out because that's the way the Fed slows down the economy, the reality is that consumers still are employed earning money.

And so, the Fed's toughest job on inflation is also the best thing about the US economy, which is a strong consumer. So we predict-- our team predicts a recession, a mild recession. They have had that projection, frankly-- six months ago, they had the same projection, more or less. It just pushed out a little bit. But what we're not seeing is it come to fore yet. And that keeps moving it out because of that resiliency in the consumer.

BRIAN SOZZI: By all indications, Brian, the Federal Reserve is going to continue to move higher with rates over the course of its next few meetings. What does that mean for your net interest margins over the next couple of quarters?

BRIAN MOYNIHAN: Well, one of the things that people know about banking [INAUDIBLE] make half our money or more is through what they call a spread, i.e. the difference between what we lend a customer money and what we pay on the deposits, the money customers give us or we can borrow in the market. And that margin had been compressed dramatically as rates fell. And so it expands back out, getting to a more normal level, which it usually is. And that's shown a rapid increase in [INAUDIBLE] income, NII improvement over the last year.

As you look forward, we told our shareholders earlier this week that we'd expect another billion dollars plus increase from the third quarter to the fourth quarter. But that's driven by the great core deposit franchise we have. We have a lot of zero interest checking balances, which are transaction accounts, which money flows through all the time, that will stay at zero interest, no matter what the rate environment and the rest of our deposit rates move up. And the loan rates move up, and we'll get back to the 2 and 1/2% spread that we have typically made in our balance sheet.

It's been depressed for the last several-- last few years and then was OK in the [INAUDIBLE] when the rates came up. It was depressed before that. So this is really the basic structure of banking to get back to the margin in those ranges, as opposed to a depressed margin under 2% we've had for the last few quarters.

BRIAN SOZZI: I want to give your team a shoutout here, Brian. Global markets business up 30% in the quarter, strongest since the third quarter of 2010. But no trading loss days in the quarter. Despite all the market volatility we've seen, how does that happen? And do you think that can continue and just be sustained over the next few quarters?

BRIAN MOYNIHAN: Well, it happens because we have a talented team. And Jimmy DeMar that runs a business for us has been-- helped run major parts of the business for a long time, took over the whole business last year when Tom Montag retired. And so it's a great business. The team that worked for Jimmy's very solid. But it also comes from a decade-long focus on responsible growth.

We're in the business of moving risk through the system. We're in the business of managing risk. We're in the business of helping customers achieve what they want, not taking big principal risk. And therefore, even with the market volatility, the team did a good job, and we didn't lose money on a trading day. But by the way, if you look back across the last 10, 12 years, very rarely do we lose money, maybe a couple of trading days a quarter when something really changes dramatically.

But this year, what we saw is from last year to this year, the investments we've made in the last couple of years in the business in terms of talent, technology, even more capital, more balance sheet capacity has shown up in that our team has a consistent drive to it. And Jimmy and the team did a great job this quarter. And we expect them to do more next quarter.

BRIAN SOZZI: And lots there to unpack from Bank of America CEO Brian Moynihan. My key takeaway was that sales in October, consumer spending in October, up 10%. So still running at double digits despite what we're seeing with inflation and the economy slowing down.

BRAD SMITH: They had a lot of new credit card accounts that they added on during the quarter as well. They got into this a little bit more on the earnings call. 1.3 million new credit card accounts, and you know I love talking about this shift right now that we're seeing in how consumers are spending because it's so important, especially as households are really looking through where their spending capacity is.

That's why it was diving into retail earlier on because going into this holiday season, it's just going to be a huge question of how consumers are spending, where they are, trying to figure out, OK, are we in a recession, are we going into a recession, and what do I need to do now preemptively to prepare for that, too.

JULIE HYMAN: Well, if unemployment is going to 5% sometime in 20-- later 2023, 2024, they still have some time to save, to spend--

BRIAN SOZZI: Yes, save now.

JULIE HYMAN: --I guess, before that happens.