Rising interest rates and the banking crisis in early 2023 have taken some wind out of Bank of America's (BAC 0.01%) sails. Share prices are lower by roughly 15% so far this year. However, given the backdrop, Bank of America is doing fairly well in one key segment of its business, which is why the number 18 stands out so prominently.
The boring part of Bank of America
When Wall Street examines Bank of America's quarterly report, a lot of attention is usually paid to the global wealth and investment management, global banking, and global markets divisions. That makes a lot of sense, given they can all be fairly exciting. But they really shouldn't overshadow the company's far more boring consumer banking division.
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At its core, consumer banking is pretty simple. Bank of America takes in deposits and uses that cash to make loans. It pays depositors interest and charges interest on the loans it makes. The difference between the two is the bank's profit. That's actually a simplification of a complex business, but it gets the broad strokes correct.
Early in the year, however, some mid-sized banks experienced bank runs. That's when so many customers ask for their money back that a bank can't actually meet the demand. Banks in this situation often end up failing, which is what happened to some prominent banks. It was a very worrying period of time for every bank.
Despite consumer concerns about safety, Bank of America managed to add 157,000 consumer checking accounts in the second quarter. That increased its streak of quarterly additions to 18. Consumer accounts are usually the lowest-cost source of capital for a bank's lending activities, so attracting new customers is a very good thing.
Rising rates are still a headwind
That said, even though Bank of America is still winning over new customers, it is important to note that it isn't immune to the impact of rising rates. For example, average deposits in Q2 were down 7% year over year. That's likely because customers are shifting to products that offer higher interest rates. And yet, at least partly thanks to the ongoing customer growth, average deposits are still 40% higher than they were before the pandemic.
The drop in deposits is worth looking into a little more. In the second quarter of 2022, Bank of America's average interest rate paid was 0.09%. That's virtually nothing and was driven by the historically low interest rate environment that existed at the time. When financial products aren't providing attractive yields, customers just do the easiest thing possible (like leaving money in their bank and checking accounts). In the second quarter of 2023, the average interest rate paid rose to 1.24%. With rates going up, customers are starting to get a bit more demanding and are willing to move money around.
The giant Bank of America can probably be less generous than its smaller peers, since it has a countrywide footprint and is generally well-regarded by consumers. But it can't simply ignore rising rates. It has to compete on both the service front and with the interest rates it offers if it wants to keep customers happy. Some have clearly been finding other options for their cash, which accounts for the year-over-year decline in average deposits. However, the fact that Bank of America is still able to attract new customers (specifically highlighting the 18 quarters of checking account additions) despite the rising interest rate environment speaks to the resilience of the business even in the face of a negative change in business dynamics.
Boring, important, and doing fairly well
Consumer banking was Bank of America's largest business by revenue in the second quarter. It also had the highest return on allocated capital. That won't always be the case because results from the other businesses it operates can be lumpy. But in this quarter, at least, the importance of a strong consumer banking foundation is on clear display. And given that the bank also marked an additional quarter of checking account growth, it looks like Bank of America's foundation remains strong.
