WHEN: Today, Wednesday, February 21, 2024
WHERE: CNBC's "Squawk on the Street"
Following is the unofficial transcript of a CNBC exclusive interview with Bank of America Chairman & CEO Brian Moynihan on CNBC's "Squawk on the Street" (M-F, 9AM-11AM ET) today, Wednesday, February 21. Following is a link to video on CNBC.com: https://www.cnbc.com/video/2024/02/21/bank-of-america-ceo-3-rate-cuts-this-year-will-bring-economy-into-equilibrium-by-the-end-of-2025.html.
All references must be sourced to CNBC.
LESLIE PICKER: Hey, good morning, Carl. Thank you so much. And thank you to Brian Moynihan, the chairman and CEO of Bank of America for joining us from your Financial Services Conference here in Miami. Appreciate your time.
BRIAN MOYNIHAN: Oh. Thanks for coming down. It's a great group of investors and companies and the team's done a great job pulling it together, so.
PICKER: Yes. The event is great so far. You just came off of your fireside chat where you talked about some big macro themes you're watching. You say that the consumer is really kind of firing on all cylinders, that there's a lot of strength there still. They're still borrowing. Activity is high. But you juxtapose that to kind of the commercial sector. And you see that kind of moderating a little bit. And as we look ahead to the Fed minutes later today as kind of a news peg here, I'm curious what you think all of this means for, you know, the Fed's kind of decision-making as it pertains to monetary policy.
MOYNIHAN: So I think if you -- if you think about the consumer, the consumer is still spending more out of their accounts at Bank of America this year versus last year, about five -- four to five percent. Last year, at this time, that had been 9-10 percent. So it's slowed down and it's consistent with a lower growth, lower inflation economy. And that's good news because the consumer isn't going, you know, south and is not spending. They have money in accounts. Their capacity to borrow. There's a lot of concern about the aggregate debt levels. But if you actually normalize them for the growth and economy, they're kind of in the same place as they were pre-pandemic, so that's good. Commercial companies have to look at the world around them. And everything they read, whether it's the, you know, wars and whether it could escalate, whether it's the Fed, you know, is going to hold longer, whatever the news of the day is, and you'll hear more this afternoon, or whether it's just worried about final demand, you know, that's what's more concerning. So they're not using their lines aggressively, which is an indication that they're not putting money to work quite the rate because it's more costly. The decision to borrow on your line now at 200 basis points spread over, you know, short-term funds is a 7.5 percent decision versus a 2.5 percent decision, you know, 36 months ago, 24 months ago. So they're going to be more careful. And that means that the investment rate has slowed down.
PICKER: So putting this all together, there is this grand debate out there. I heard Steve Liesman's been talking about this on the morning program on "Squawk Box" this morning. Just about this idea of whether the Fed needs to cut kind of preemptively to make sure that some of these cracks that are kind of percolating under the surface don't come to fruition and push us into a recession. And others say, no, you need to -- you need to follow the data. You need to make sure that you are, you know, not being too easing in order to make sure that inflation is officially stamped out. Based on kind of your vantage point, where are you on that debate?
MOYNIHAN: So our team, the research team, which is number one in the world, has three cuts this year, four cuts next year. And they've revised theirs from four cuts down to three cuts. And that's this debate about whether the data that just came out in the last few weeks shows the economy and the inflation is coming down, but not quite the rate people had hoped. And so they've got to have a clear path. The Fed's not being mysterious. They're saying we have to have a clear path down there, the two percent -- the target. We have to be well on the way before we cut. Now, the air potential is actually to not bring rates down and normalize soon enough. Just like it was not to raise rates fast enough. And you can hear the Fed governors and the chair talk about, well, maybe we didn't move fast enough back before when you saw signs of inflation. They have the same possibility. And so that's what they're wrestling with. Our view is that they -- you know, our team's view is three cuts this year, would bring the economy back into sort of equilibrium at the end of '25 with a Fed funds rate in the, you know, the mid, you know, the 3, 3.5-ish.
PICKER: My colleague, Jim Cramer, has a question for you back in studio. Jim.
JIM CRAMER: Yes. Brian, what price of anything, anything, is down from two years ago?
MOYNIHAN: I'm sorry, Jim. I didn't hear you. Quick --
CRAMER: I'm trying to figure out what price, house, car, rent. What is down so that we should feel confident that the Fed should cut?
MOYNIHAN: You know, the end of the day is the pricing went up and wages went up. They just went up in two different cycles. And so, the wage growth had occurred early in the post-pandemic cycle and the -- and the contribution from the government to them added a lot to consumers' firepower. The problem is then the pricing caught up with it. And now we're trying to get that back in equilibrium. So whether how -- you know, it'll take people get used to mortgage rates of, you know, seven, six, seven percent. Jim, you well know, because you're about as old as I am, so we've been around a while, that that was what we used to think was a good mortgage rate. It's just that for 15 years, we had no real rate structure -- you know, rate structure in the United States and around the world. And so people get used to lower rates. It'll take time to do that. That'll work itself through the system and as rates normalize. The inversion of the curve has to be corrected. There has to be some changes made. But when you think about it overall, Jim, you know, they're obvious. Yes, prices are up, but wages are up, unemployment's down, people are earning money. And so that's the tug of war that's going on. And they've moved the consumer to a different level of spending and capabilities. Will that hold is going to be an interesting question.
CRAMER: Yes, right. Twelve percent mortgage for me first time, Brian. So, yes, we are similar age. Yesterday, kind of an amazing tie-up, Capital One with Discover Financial. Is this something that you think should be investigated for -- by the FTC because it might actually cut back competition in the credit card business?
MOYNIHAN: You know, Jim, it's far for me to look at somebody else's deal and reflect on it, honestly. You know, Capital One and Discover made a major transformative discussion. It will concentrate in the credit card business. We're an effective competitor, a hundred billion dollars in balances and great opportunity among our customer base to drive more growth. So I don't worry about the consolidation from a competitive standpoint, but that's someone else to judge and whether they have the feelings about it or not.
PICKER: What does it mean for your business as a credit card issuer? Because, you know, this tie-up would make them the largest credit card issuer in the U.S. as measured by card loans outstanding at 257 billion. BofA has about 102 billion. So a sizable player there. But this creates a pretty significant competitor for you. How do you kind of assess the landscape if this deal does go through?
MOYNIHAN: Well, at the end of the day, we -- if you go back and look historically after the MBNA transaction, Bank of America rose to the top of the credit card outstandings. And, you know, we've been more cautious and direct on how we do it. We do it for our customers. We drive the business to be in affinity with our Bank of America customer base. We drive the business to have great credit underwriting. And in the world where, you know, we're talking about normalization of credit, we're talking about getting back to three percent charge off rate. We -- you know, we underwrite to higher rate tolerance and higher under rate loss rate tolerance in that. We're underneath that. So that's good news. So being the biggest is not necessarily what we want to do. We want to be the best with the best rewards product, preferable rewards, which is integrated with our consumer franchise. Eleven million customers are, you know, 70 percent of the balances in our consumer business that are tied with preferred rewards through their card, their checking account, the mortgage, the home equity. And that is where you generate real economic value for your shareholders. So I don't -- we never said we were going to be the biggest in any business. We want to be the best in every business.
PICKER: But is scale important here?
MOYNIHAN: It is. It is. But the scale -- our scale and their scale is not much different. When you look at operating costs, you know, if I were a $20 billion issuer, it might be concerning, but a hundred billion plus, you know, we did four million new cards last year. We're growing exactly the way we want. And, you know, our balance grew 10 percent year-over-year.
PICKER: You mentioned charge offs. I want to pivot if we can kind of to what's going on in the regional banking world, because there has been, since we last spoke to you in Davos, a flare-up in that community with shares of New York Community Bank Corp. It's seen half their value evaporate this year. Another East Coast regional bank, Valley National, also down significantly. The concern there, once again, kind of this commercial real estate. And at this juncture, especially as the prospect of rate cuts are getting punted further and further down the road, do you think that the market is overreacting or do you think there is a real risk here in commercial real estate and that these flare-ups are going to just keep happening until something gets solved?
MOYNIHAN: So if you look at the commercial real estate out there, loans out there, half are in the industry, half aren't. And half in the industry are more heavily weighted to regional banks. And that's where the concern comes up from our research team and others. But if you look at the underwriting, people forget that the underwriting standards, you know, on commercial real estate in the late '80s and early '90s when you had massive failures have been fairly well regulated. And so, as we look at our portfolio is 60 billion on the loan book of a billion -- trillion 50, excuse me. So six percent, office is two percent. If you look at that office space, it's -- you know, it was underwritten a 50 percent LTV, loan-to-value. Reappraisal, it's only in the 70s. For current appraisals on current properties that have been rated down, i.e. that we had concerns about the cash flow. So, we feel very good about our portfolio. Will it be a constant question? Yes, because in the end of the day, what has happened in commercial real estate is evidenced by the trend in our company. When the management team took over in 2010, the team had -- we had 130 million square feet of real estate. Today, we have about 60 to 70. That's by densifying activity, concentrate, yes, less people. And so that change is going on and went on with velocity before the pandemic and then was accelerated by the pandemic and, you know, the work from home a day a week, two days a week. So if you think about it, we -- all through that process, only got about 25 percent of our floor space built to the modern environment that we have. Then the pandemic hit. Now we have people -- if you think about it, if you do four days a week out of five, that is a 25 percent reduction or 20 percent reduction in usage. So that gives you a whole another configuration plate. That's going to go on and that's what's happening in the office space market. And that's what people are concerned about. The route is, it's a slow transition that takes place. And we feel -- we feel very good about our portfolio. We -- people forget that in whether it's in the CCAR process and whether it's in the shared national credit process or whether it's just how regulators operate together, ratings integrity is a critical part of what the banking system has. All these banks have been going through CCAR and stuff.
PICKER: The stress tests.
MOYNIHAN: Thirty people going through the stress test have had constant review of their portfolios as to underwriting criteria, throwing it against a 40, 50 percent downdraft of commercial real estate prices and how do you charge off. And the last results I think we're about nine percent over nine quarters. So, think about that with a 50 percent drop in prices, instantaneously and no ability to work around it. So, you know, the banks have been pretty well regulated on this. It doesn't mean it won't be work. It doesn't mean it won't be work out. So it doesn't mean it won't be charge-offs. We took charge-offs last year. But the system is much more ahead of the problems than they were back in the late '80s and '90s when we had a last serious commercial real estate crisis.
PICKER: Right.
MOYNIHAN: And when the regulators came in and re-rated a whole portfolio overnight, that work in any of the top 30, 40 banks goes on every day now.
PICKER: Brian, I want to thank you so much for your time. Really appreciate it. Great conversation talking about just the changing landscape in the financial services industry against the backdrop of your financial services conference here in Miami. Appreciate it. Carl, I'll send it back to you.