BofA CEO explains inflation is shifting consumer spending

Bank of America (BAC) reported better-than-expected first quarter earnings on Tuesday, though its net interest income fell 3% from a year ago.

Bank of America CEO Brian Moynihan joined Yahoo Finance Executive Editor Brian Sozzi to discuss the results, the state of the US consumer, and the Federal Reserve's inflation fight.

On the consumer, Moynihan says that, from the data he is seeing, "US consumer activity is slowing down, but that is not stopping" and that the data is consistent with a more normalized US economy. He notes that "if you thought the consumer was really holding back because of inflationary prices they wouldn't be spending on things that have price flexibility... but they are. They are spending on entertainment, restaurant spending is growing faster than food and store spending." He argues that means consumers are making discretionary purchases and necessary purchases at about the same levels as they were before the pandemic, which is a sign of normalization.

Overall, Moynihan believes the Fed is "winning" the fight against inflation, it's just going to take time.

Watch the video above to hear Moynihan explain why Bank of America's credit card business is seeing such success.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Stephanie Mikulich.

Video transcript

- Let's go right to Bank of America CEO Brian Moynihan after these results. Brian, always nice to spend some time with you. Thank you for joining Yahoo Finance. Really we've been getting some mixed reads on the health of the consumer-- retail sales, inflation is still high, how financially challenged are US households?

BRIAN MOYNIHAN: Well, Brian, it's good to be with you again. And congratulations to all my teammates on another strong quarter. And underlying our company obviously is we do business with every other American household so it's a deep dataset we've tracked it for many years along multiple dimensions, among their borrowing, among their spending, and among the money in their accounts, among their investing patterns those that invest.

And so if you look at it all together, we'll see a couple of key things. First on the spending behavior, which is what we see every week basically we get it rolled up, it's across $4.5 trillion for a year, more or less. And it's growing at about a 5% rate-- 4% to 5% rate over what it grew last March and into April here.

But if you think about it going back to this time last year, it was probably double digits-- 10%, and a little bit before that it was even stronger than that. And so what has happened is it's gone from 10% down to 5% and kind of held here for the last six months. And that means the US consumer activity is slowing down, but that is not stopping and that is consistent with a lower growth, lower inflation, more normalized US economy. And you're seeing that go on even as we-- not only in March but in the first quarter but also as we enter April.

- Do you think just this sticky level of inflation, a lot of us keep looking at, is that causing some of the consumer spending slowdown?

BRIAN MOYNIHAN: Well, if you think about it, inflation makes things cost more. So the dollar value come up, the real levels will come down. If you look at where they're spending and it's kind of interesting because if you thought the consumer was really holding back because of inflationary prices, they wouldn't be spending on things that have really price flexibility to them, but they are. They're spending on entertainment, restaurant spending is growing faster than food at stores spending.

And that means that they are making choices. Spending sort of discretionary and necessary in the same percentage as they spent pre-pandemic, and that means they're kind of in a normal pattern. So I would say inflation is on their minds because things became more expensive and they can remember when. And remember when what means when it was 10% cheaper, 15% cheaper, they can remember that because it's not that long ago.

And yet they're adjusting to that and that's what happens and that's why they slowed down the growth in spending and that's why they're still spending. But the question is, what happens next? And that's what we'll find out as we move through the quarters this year.

- Brian, you've been at this for quite some time. You've seen a lot of different economic cycles. Are you surprised inflation is just maybe not coming down as quickly as some had hoped?

BRIAN MOYNIHAN: Well, when we talk to our experts in our research team, which is the best in the world, they've done research about how long it takes to win the war on inflation definitively from inflation down to the target levels. It takes two or three or four years, it's not something happens overnight.

And especially given that coming out of the pandemic, the amount of stimulus that went in that was needed and any amount of stimulus that went in that may not have been so needed according to the economists and the amount of other stimulus that went on top of that when all the borrowing the federal government did in the United States, the state governments did, and the governments around the world did, that put a lot of money into the economy and we're still ringing that impact out.

So taking a few years from starting in '21 into '25 to get it down to trend growth is really kind of consistent with the past. That's what the economists tell me. We'd all like it to be over tomorrow so we can have certainty to where the Fed's going and what the terminal rate, the front end rate would be, or the neutral rate would be, and all the different debates.

But the reality really is that they've got to win the war on inflation. And they are winning. And it's coming down and they've got it on the right trend, and that's the great debate are the gold rates a little higher to make sure they've got it on the right trend. And so it's always been sticky. The past would tell you, it would take longer period of time, especially when they started late and they admit that, therefore it took a little longer to wring out of the system or will take a little longer to wring out of the system.

- Brian, I always love reading your company's earnings reports. It's probably the most detailed banking earnings report out there in the game. So many great stats. And one that caught my attention was you added-- I hope I'm right here-- 1 million new credit cards. And that is a mind blowing figure. Who is opening these credit cards? And what do you think they're coming to you for?

BRIAN MOYNIHAN: Well, in the end of the day, if you think about our credit card capability, it's not a stand alone credit card company. It's integrated into the way we do business. So we have a customer model. A consumers and wealthy people, they use credit cards, we give them rewards on those credit cards for using them. They prefer rewards. As we call it about 90% of our consumer balances are attributed to preferred rewards customers.

So the affinity that we reward them for is being part of Bank of America, money off of their loans deposits. And it's people in the market see that offering that we have cashback programs like everybody else, but we really have this preferred rewards program where they can save money on their home loan, and higher interest rate environments on their car loan, they can get higher savings rates.

They basically bring their credit card over to so they get the entirety of the reward program. And so it's integrated across all products, and that's why people come to us. It's the value proposition. It's a very competitive market, the credit card business is. So if they're taking a million new cards, that means we're offering something they want.

- There was a graphic that went around on Twitter, Brian, right after your earnings showing the FICO score in your various lines of business, and they are just amazing. I mean, they're close to 800. Is this some of the best FICO scores you've ever seen amongst your consumers? And what do you think has been driving that?

BRIAN MOYNIHAN: Well, the American consumer is employed and they are earning more money and they're fighting with inflation, especially at the median income levels. And it's tough on people and food prices and all that not to make anything out of the human issues that go on with this kind of inflation and as it tames and stuff and that's why it has to be done.

But at the end of the day, they're employed and they're earning more money and earning substantially more money they earn pre-pandemic, they have more money in their accounts. And so their FICO score scores should be very strong honestly, and they are. We've always been a prime underwriter, we've always underwritten to the very prime end of the spectrum because just who we are and how we run our company.

And so if you see I think a 77 on some of the scores on the credit cards, the scores at origination and a very strong and we're very proud of that. The reality is our credit card charge offs are back to where they were pre-pandemic, and it's taken four years to get back there. That charge off rate, it's really in the all time lows of the company's history what was going on in '19 and '18. So it's not like we're normalizing to bad credit, we're normalizing to good credit, and we feel very good about the portfolio.

- Brian, I'll just say this have a large following here within the Yahoo Finance community, and it's really because you always keep it real first. Brian Moynihan, the CEO of Bank of America, thank you so much for giving us the time here. We greatly appreciate it.