Watch: Bank of America CEO 'not surprised by the resilience of the consumer'

Bank of America's second quarter results beat Wall Street estimates on both the top and bottom lines. In an interview with Yahoo Finance Live, Bank of America Chairman and CEO Brian Moynihan credits "the power of our franchise" for the bank's (BAC) strong results.

When it comes to the consumer, Moynihan says he is not surprised by how strong the U.S. consumer has been, saying "our customers still have multiples in their accounts" than they did pre-pandemic.

One of the big areas of concern for banks has been commercial real estate. Moynihan says "there is stress going on in the system, but we underwrote assuming someday there was going to be stress."

Moynihan also cautioned on efforts to raise capital requirements, highlighting the importance of maintaining international competitiveness and "making sure that we keep the balance right of how we treat the U.S. economy."

Video transcript

AKIKO FUJITA: Chairs of Bank of America sing a pop today after reporting a very strong quarter. Bank of America beating Wall Street's expectations, profits jumped 19% year over year to $7.4 billion and $0.88 on a per share basis. BofA's net interest income also rose 14%, meeting expectations at $14.29 billion. But it fell short of JP Morgan's 44% jump last week. For more on the bank's latest earnings, we're joined by Bank of America Chairman and CEO Brian Moynihan, and Yahoo Finance's Executive Editor Brian Sozzi. Brian, take it away.

BRIAN SOZZI: Thanks so much Akiko. Brian, always great to get some time with you especially on this earnings day. I was queuing into the earnings call, and the stock price, your stock price really got to move or push higher when you and the team start to talk about a higher or a more, I think, more upbeat outlook for net interest income this year. What gives you that confidence in that outlook?

BRIAN MOYNIHAN: Well, Brian, it's good to be here. And yes, Alastair Borthwick led the investors through the idea that we basically said that since last earnings call we felt more comfortable that we'd have a better outlook for NII in the second half of the year than we did then. And that it'd be basically flat flattish quarter to quarter between 14/2 and 14/3, and then be above 14 in the fourth quarter.

And that really comes from just the sheer power of our franchise, whether it's we're getting 4% annualized loan growth which is good on the commercial side especially, we're seeing some card growth. We're seeing the deposits hang in there, even though you know because we have such excess funding position, we're not competing for high cost deposits.

We put those customers money into the market and money funds and other things, and we actually even raised money from our customers for other banks to give them those rates because we don't have a use for the cash. And so even with all that going on, we feel good about the NII, and that's basically due to the power of our deposit franchise.

BRIAN SOZZI: Is this outlook Brian your way of signaling to markets that this economy is going to see a soft landing from the various actions that the fed has taken?

BRIAN MOYNIHAN: Yeah. It's a little chicken and egg. We built our outlet based on the market expectation for rates, but let me back up Brian and talk about we have our research team led by Candace Browning-Platt that does tremendous work. And they basically have a the first two quarters of 24 to be slightly recessionary negative 1% GDP growth rate in the first quarter and a half a percent in the second quarter.

So that's a pretty light recession at this point, and they've moved it out from this year into next year and they've removed it, they've moved the duration to be shorter. So as you think about it, it's a, whether it's a soft landing meaning it never goes negative or it goes slightly negative, I'm not sure people will feel the big difference.

And what we're seeing in our customer base is the economy, the spending that goes on in our customer base which is 4 trillion plus a year, which was growing at 10% a year for all the year '22 over '21 for example is now slowed to 5%. And that 5% is very consistent with a low inflation, more normalized growth economy in the US, kind of what it was in '17, or '18, or '19. , And that's good news frankly because that means the economy is getting back in line even though we haven't had massive dislocation of employment, although employment markets are softer than they were a year ago at this time.

BRIAN SOZZI: Are you surprised by this consumer resilience?

BRIAN MOYNIHAN: I'm not, honestly. And we've been saying this for a long time. This is going to be the fed's hardest job was to slow down the US consumer because the end of the day, the amount of stimulus the consumer had, the fact that unemployment has run as low as 3.4%, the fact that wage growth you see a lot of talk about what's caught back up to inflation, but if you go look at from the pandemic for the wage growth from '19, '20 '21, was very fast and then it fell behind inflation but cumulatively it's, it's ahead of inflation.

And so if people are working, and they're getting paid more, and they're spending it's going to be hard to have a tough US economy because of the amount that's driven by that. But on the other hand, you don't want them doing too much and feeling like they're getting behind on inflation therefore demanding higher wages and getting a wage inflation spiral. It looks like the fed's was probably too late and they said it themselves of getting in the game and raising rates, then they finally moved very quickly and they've caused that to slow down.

And I think, that's all good, but I'm not surprised by the resilience of the consumer because when we looked at our customer data, you can go back and track us talking quarter after quarter. Our customers still have multiples in their accounts, those same customers that were here in early 2020 today have multiples in their accounts than they did back then, especially, in the lower balance accounts.

And that's because they've spent some of the stimulus but they've been earning money and they've been managing their finances well. That doesn't mean certain ones are having difficulties and layoffs are happening, but in a broad context across 60 million customers across $4 trillion of spending, it's a pretty resilient group.

BRIAN SOZZI: Do you think spending, consumer spending Brian will surprise to the upside later this year? We are now finally starting to see inflation slow pretty dramatically in this country. And looking at your results, and to your point, you have a lot of people with a lot of money in savings and checking accounts that maybe they could get out there and spend in the back half of this year, how do you see it?

BRIAN MOYNIHAN: Well, if you think about the last few years. First it was good spending, they bought things because they were pent up in a house, and they just had money, and they bought stuff, and so they bought a new couch or a new grill or things like that, but you can only buy one of those. So then they started spending on what we call experiences, going out to eat, going out to movies, going on trips and you still see travels fairly strong and you can see the bookings.

I think, all that once people have done a lot of that, got a normal summer vacation for their kids out of school, I think, it'll sort of reach what it usually does, is sort of 3, 4, or 5% going faster than the rate of inflation because the wealth of the country grows, and I think that's good. Now, the best news is that, the credit worthiness of our customers is still extremely strong and people keep talking, I get asked about well, your credit card charge off rate went up a little bit or your 90 plus delinquencies went up some.

But if you look at that number, it's still far below where it was in '19. And if you and I were having this conversation '19, we'd be talking about 30 and 40 year record lows of credit costs in our company. And that's so we're normalizing to a very good place. And so I think, that also means the consumer has some staying power the equity in their home.

And so you know in the end of the day, if companies are making money and employing people, even though it's not as aggressive out there in the markets today on labor, people are going to have jobs and people are going to spend, but I think they're slowing down their activities because frankly, if all they read about in the papers were going into recession that kind of has an effect. And if things like a new car cost a lot more in interest rates or a new home, mortgage rates above 7%, those slow down the activity but that's what the fed intended to do.

BRIAN SOZZI: Brian, I think this is the recession that everybody's been calling for a while, just it just may not happen. But I want to go into commercial real estate. I looked at your results, when I see your results, I don't hear you calling out big negatives on commercial real estate. Why is that the case for a Bank of America but a completely different story over at a company like Wells Fargo?

BRIAN MOYNIHAN: Well, I can't reflect on other people but we disclose. It comes from what we call responsible growth. For a long time, we've looked at in the commercial real estate business, to keep that as a percentage of our loans at a size in total and even the office piece of that to work with great sponsors or people in the building, these great real estate owners. And then frankly, make sure the terms are reasonable.

And so as you look across time, that's served us well. So we only have about $18 billion outstanding in office properties about to a couple percent of our portfolio or less. We aggressively re-rate that based on the current conditions that origination it was a 50% loan to value for all the re-appraised stuff in the last six months, the average loan to value is only 80%.

And so yeah, there's stress going on in the system, but we underwrote assuming that someday there would be stress and the trends that have gone on about real estate optimization by companies, including our own, have been going on for a long time it's just they've been changed a bit by the work from home and the 3, 4 days a week, and all that stuff.

Just give you an example, when we started with the management team in 2010 in our company we had 130 million that we utilize. Today, we utilize about 60. So this is a long term trend of efficiency and use of office space that will continue, it just got it pushed ahead by the work from home dynamics.

BRIAN SOZZI: Do you share the concerns that some of your peers have on the outlook for commercial real estate?

BRIAN MOYNIHAN: I think, look that's going to be building specific, and city specific, and whether people work and so as we do a lot in New York and you look down the street, you know you walk out on sixth avenue outside the building you get run over by people in town in other areas it's not the same, and then there's places you go back and forth and so you've read about San Francisco, and places like that.

I think over time, these things will normalize but I think, what we have found so far is, we lend to newer buildings and high quality buildings, and those tend to be doing better right now. But I guarantee you, the entrepreneurial spirit of America out there when the right real estate values come up, people will come in and and reposition these assets like they've done for many times in the past.

BRIAN SOZZI: Brian, you also called out something I think, of great interest this earnings season for the banks. The potential for higher capital requirements. And I believe this was your stat, a 10% increase in capital requirements if that does happen might lead to $150 billion less in lending. That sounds to me like a big economic blow or potential economic blow.

BRIAN MOYNIHAN: Yeah, so I think just to simplify that, if you say that we're at 10% required capital you go to 11%, that 1% doesn't sound a lot. But that's 16 billion of capital and then you multiply it times 10 again, there's your 160 billion, and some people are saying, well, how can you get there? That's how you get there.

So the reality is our lending capacity goes down. If you do this across the whole banking system, and that's why we're all awaiting these rules, but we hope that as the rules come out they're balanced in terms of international competition. In other words, that right now America and Europe appear to have the same rules, but they are advanced and we're in standardized. And if you listen they're saying well, we're going to go away from the models and all those things, that was the basis of Basel III, to get to advanced.

So our advanced RWA, our 1.4 trillion, our standardized are 1.6 so we have to use a higher under America's rules. That's not true in other locations, and so we have to be careful about keeping the balance in a competitiveness of the US banking system, which is key not only to America honestly, but it's key to the whole world because the strength of our banking system actually helps the world prosper.

The second thing then is, the capacity inside the industry versus outside the industry. And so if you think about outside the industry, you have half the mortgage loans are done by non-banking companies. You have the new private capital funds being formed. Will those companies perform like we perform when the pandemic hit in $70 billion of loans came on our books in three weeks from our customers and demand?

Will they be able to have that kind of shock absorber system? Will they be able to behave and absorb the turmoil that went on earlier this year? That's not clear to me, and the history has been paved with companies that have been in these businesses, has not been able to stand those shocks. So you know I think that it's good for the banking system to have a lot of the economy running through it, but using the capital markets to lay that off and using the investor system to lay off you know loan, syndications, and things like that.

But if you make the capital rules so tight in banking this stuff gets squeezed out. So remember, on an international basis, this is effectively a trade negotiation that's going on. If the rules are easier in mainland Europe than they are in the US, however, you get there whether it's standardized and advanced, to how you count the eggs and things like that, the reality is American companies will have a higher cost of borrowing versus European companies of which they are engaged in the same competition and the supply chain for large companies or large companies would have the same costs.

And so I think, that's why we have to be careful with these rules. A international competitiveness, and B, making sure that we keep the balance right of how we treat the US economy. And I hope and I believe and there'll be in the aftermath of these rules will be a lot of discussion about what are the pluses and minuses to these rules?

BRIAN SOZZI: Well, Brian before we let you go, and you're plugged into the regulatory scene. Do you think regulators will overreach with these rules?

BRIAN MOYNIHAN: Well, I think, I look back and the statements have been made by the chairs of the fed on many occasions and by the vice chairs of supervision on many occasions including in the Obama administration, and Trump administration, [INAUDIBLE] that the capital industry was about right. And so we worry that the idea of we need to have more capital is coming from something that just says, there's no downside to it and that's what we try to raise the attention.

But in the end of day, the rules will come out, there'll be a lot of discussion about them, there'll be a lot of understanding of what actually is in the rules right now it's speculation. And I think we have to be balanced, as you have to be balanced as-- I've been in CEO for this is my 14th year, I've been in banking my whole life, I've seen the wonderful things our industry does for America, and I've seen the downside of our industry.

And a matter of fact, the non-banking part of our industry which was the heart of the financial crisis, those weren't banks, weren't under the same capital regimes. And basically, our proof point of why you got to make sure the stuff stays in the system. And so we've seen all that happen, and my colleagues have too. And we're saying give us a fair set of rules that allow us to be competitive among ourselves with the non-bank providers and with Europe, and, and we'll deal with them go on. And but, but let's, let's think this through from the broader prospects not just more capital is better.

BRIAN SOZZI: And investors Brian have seen a lot of steady, consistent, good results out of you and your team at Bank of America a lot of those years. We'll leave it there, Bank of America Chairman, CEO Brian Moynihan, always good to see you appreciate it.

BRIAN MOYNIHAN: Thank you, Brian.