As the Federal Reserve gets set to start raising interest rates in 2022, the financial sector could be a big beneficiary. However, in this Fool Live video clip, recorded on Jan. 20, Fool.com contributor Matt Frankel explains to colleague Jason Hall why he thinks Bank of America (BAC -1.03%) could be an especially big winner.
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Matt Frankel: We heard from most of the big banks, they generally kick off earnings season, so first I want to talk about my personal largest bank investment, which is Bank of America, ticker symbol is BAC. Just to run down the numbers, Bank of America beat expectations on earnings due to a big reserve release. Remember, all these banks set aside billions of dollars because they thought COVID was going to make people default on loans, things like that.
That didn't really happen, so they released a lot of those reserves. But they missed expectations on revenue, which is why the stock didn't really respond to that positively. But the revenue miss is really the only bad thing I can say about the bank.
Earnings and revenue were up significantly year-over-year, despite the fact that we're still in a low interest rate environment. Wealth management revenue was at an all-time high, which is a big part of Bank of America's business. Investment banking fees were up 26% year-over-year, which is pretty good considering that last year, investment banking was going crazy.
Jason Hall: Last year was a bananas year.
Frankel: Right. That's on top of an already good year in 2020 for investment bank. One kind of key point about Bank of America's report as we go through these other ones, expenses are a big concern among banks. Wage pressures is on the rise, benefits are on the rise, things like that. Bank of America expects its non-interest expense to not increase in 2022 unlike a lot of its peers. The reason is Bank of America has really been on the forefront of these wage hikes. I think their minimum wage, don't quote me on this, is something like $25 an hour right now or they just announced they were raising it to $25. They've really been ahead of the curve with that. I feel like this wage pressure isn't hitting Bank of America as much as others.
Hall: I think they've also benefited from the fact that they do continue to lean out in the retail organization so less banks open, less people to pay. You can raise the hourly wage, and it doesn't affect your expenses as much.
Frankel: I don't know about your market, but my local market, Bank of America is the only big bank I know that has killed the drive-through. You can't go to a Bank of America drive-through anymore. You can do that at Wells Fargo.
Frankel: They replaced their drive-throughs with ATMs. But if you're paying your people $25 an hour and you have to figure out how to make your business more efficient in order to do that, I'm on favor. Here's a crazy statistic that I saw. Bank of America bought back over $25 billion worth of its stock in 2021. Twenty-five billion, I bet biggest shareholder, Warren Buffett, is really thrilled about that. Aren't you excited, Jason?
Hall: I'm going to share just a quick slide here from the presentation that highlights that because they showed this net payout ratio of 99% when I first saw that and I'm like, start setting off some alarms, but then you follow the note here and that was a combination of dividends, which usually when we see a payout ratio we think dividends, but also share buybacks.
This is a company that has really prioritized returning, essentially all of its earnings back to investors. I think it's wonderful, particularly Matt, you, and I both, I think agree the stock is fairly valued right now. It's not buying at the top. It might turn out that way in the short term just because markets get weird sometimes, but I think they're buying the stock back at a reasonable price which is really important to capital allocation and returns for investors.
Frankel: Sure, I wouldn't call it a screaming bargain that it was a few years ago.
Frankel: But for good reason and I'm glad Jason brought up their presentation. I would add some to just scroll down one slide. Here it is. This is the next slide on that presentation. This is comparing Bank of America to pre-pandemic levels. Look at that, net new checking accounts up 64% since 2019. The average checking account balance is up 37% since 2019. If you just look at all these numbers on here, the investment banking market share has gone up. Assets under management, net inflows, $73 billion. Digital sales are up 45%.
Hall: Matt, how's Bank of America competing against fintech? Fine.
Frankel: Just fine.
Hall: Just fine, right.
Frankel: Bank of America, I thought that was a trick question for a second. Bank of America consistently is rated No. 1 mobile app, No. 1 online banking platform. They were one of the companies that created Zelle to compete with Venmo and Cash App are doing a good job. I think last time I saw Zelle's payment volume was right on par with those two. They're doing just fine in the fintech competition.