Bank of America to benefit from the ‘best growth in Main Street banking since the 1980s': Analyst

Wells Fargo Sr. Analyst Mike Mayo joins Yahoo Finance Live to discuss banking growth and the outlook for Bank of America.

Video Transcript


BRIAN SOZZI: And here is our Call the Day. And it is a big call on Bank of America by longtime analyst, banking analyst Mike Mayo over at Wells Fargo. Mike, let's bring you in here. Good to see you as always. Looking at your note right now, you say Bank of America is your number one pick. Make your case.

MIKE MAYO: Well, look, you're looking at the banking industry. You're about to see what we think will be the best growth in Main Street banking since the 1980s. And Bank of America is the best play on that.

Now, there's almost no professional money manager who was in place in the 1980s during this last time when you saw traditional banking revenues grow the way we expect them to grow over the next three years. I mean, think back to the 1980s. You had Madonna, Michael Jackson, MTV, you had Ronald Reagan, yuppies. You had long hair. You had neon everything.

And you had some amazing growth in what's called net interest income, traditional banking revenues. And now, over the next three years, we think Bank of America and the industry as a whole will have the best growth in that category in over three decades. And that's super-powerful. And it's even more in place after the news from the Fed yesterday, when they announced they're going from six rate hikes through the end of next year up to 11.

And the greatest big bank beneficiary, among our universe, is Bank of America. So we think the top line will be better than expected. And part of that is Bank of America getting rewarded for growing deposits over the past couple of years equal to the sixth largest banks. So they gathered all these deposits. And now they get to put that money to work.

So they've front-loaded the expenses. The revenues are back-added. But it's not just that cyclical tailwind, it's also the tech revolution at banks. And Bank of America is one of the greatest fintech players on the globe.

And what we think will happen is that these new revenues, more of that will fall to the bottom line due to the benefits of technology. So you have the cyclical factors of more Fed rate hikes at a time of loans growing, helping what's called net interest income. At the same time, the tech revolution at banks allows more of those revenues to fall to the bottom line.

So the business model that Bank of America has put in place over the last decade now bears more fruit than you've seen for, really, any period, we think, under Brian Moynihan.

JULIE HYMAN: Hey, Mike. It's Julie here. I feel like we need the "Wayne's World" style doo-doo-doo for your flashback there to the '80s at the top.

To me, when you look at the broad economic backdrop, particularly for consumers, I wonder how much of a fly in the ointment that's going to be for your thesis here. I mean, we just saw today Freddie Mac saying that mortgage rates are now the highest that they've been going back to 2019. Now, that's good, to your point, about the interest margin for the banks. But what about for demand? What about the health of the consumer going into this period?

MIKE MAYO: Well, that's a great question. I will say, the big word that's coming up today is the R word, and that's recession. And as you know, a lot of times when the Fed is done with their rate hiking cycle, you're either in a recession or close to one. And that brings up concerns about banks and credit quality.

As it relates to our number one pick, Bank of America, their subprime loans have gone from 20% to 25% to single digits, all right? So it's night-and-day over the last 10 to 15 years. And by the way, of the subprime loans they have, most of those customers have many relationships. So these aren't fly-by-night customers that came by so.

And the other point about Bank of America, the Fed's stress test has Bank of America with the lowest level of loan losses of any large bank in a recession-type scenario. But having said that, yeah, higher interest rates can reduce demand. They can increase loan losses. And that's something to be watched.

But I will say, I think it's more important to watch for the non-banks, the new entrants that don't have as much experience through different interest rate and credit cycles.

JULIE HYMAN: So let's pick up on that for just a second, Mike, because I'm curious about that. So then, in a recession scenario, or even in a sharply slowing scenario, who in the financial universe is most at-risk?

MIKE MAYO: Well, I would say, as a category, I think a lot of the non-bank competitors have pushed the limits far past where banks would go. So on the consumer side, you have a lot more of, as a percentage, subprime loans being made outside the banking industry.

When it comes to the wholesale side, leveraged loans, you look at leverage ratios, pushing the limits are the non-banks. And one reason is due to regulatory asymmetry. So banks are required to stop and have certain prudent credit guidelines, whereas a lot of the non-banks are not required to do so.

So as it relates to my coverage universe, what I need to pay attention to and bank investors need to pay attention to, is bank lending to some of these non-bank entities that eventually led to consumers or the more risky companies. But right now, I think credit quality looks very strong. It's well below average.

We do have credit losses going up back to normal over the next two years. And remember, these higher interest rates still come from a very low level. So from a multi-decade perspective, this doesn't seem life-threatening or critical or any reason for us to lower numbers. In fact, we increased our estimates just today on Bank of America. We were already high on the Street. Now we're even higher.

And we're quite confident. And we are not even factoring the full benefit of all these Fed rate hikes.

BRIAN SOZZI: Mike, let me take a little turn here, because I know you closely follow JPMorgan and have for some time. One theme throughout our show today has been the retiring big name CEO, in large part because of lifestyle changes during the pandemic, burnout, whatever it is. How much longer do you think Jamie Dimon has atop JPMorgan?

MIKE MAYO: Well, look, Jamie Dimon is perhaps the most successful large bank CEO of our generation. Having said that, after recommending the stock and, effectively, Jamie Dimon for seven years, we lowered our rating in January. The stock well outperformed the other banks in the S&P 500 over that time.

We think they're now spending perhaps too much, or at least they have to give us more reason why they're spending that much. So whether you're Jamie Dimon or any other CEO, you need to earn the right to remain CEO every day. I think it's his intention to remain on for another five years. The board has approved that.

So as long as they deliver, then I'd say another five years. But if they don't deliver, especially with this record increase in spending, then I think he or any CEO could be at risk. And by the way, that's a big difference versus Bank of America. JPMorgan is effectively, not intentionally but effectively, spending the benefits of the rate windfall to spend a lot more in technology, whereas Bank of America is not.

Bank of America has invested consistently over the last decade. They've gained share in digital banking, online banking, their chat bot. They've gained deposit share. So it's working. They don't need to see a need to do an abrupt change with their spending. And that's in contrast to JPMorgan, which may or may not work. But we're getting on the sidelines of JPMorgan while they do this or at least while they try to explain why they're doing this, whereas at Bank of America, it's steady as she goes.

BRIAN SOZZI: Well, Mike-- and I think I remember you talking about this. Maybe it was the last JPMorgan call. That pick-up in costs, like you mentioned, and that did hit the stock. I mean, to that end, do you think it's time for fresh eyes at JPMorgan?

MIKE MAYO: Well, no. I think it's time that the newly placed people at JPMorgan-- they have a new CFO. They have new CFOs of three of their four major business lines. They have a lot of new people in new positions. I think it's time that these people stand up more forcefully to Jamie Dimon and say, hey, you should do this. You shouldn't do this. It's hard to stand up to Jamie Dimon.

You better have your facts straight. You better have done your homework. And I think it's a little bit of newness with the current management team. And I think historically, Jamie Dimon has helped his team find their way. But they lost it, for sure, on that year end 2021 earnings call in January. That was one-- that's probably the second-worst earnings call of Jamie Dimon's career, second only to the situation with the London whale earlier last decade.

But to their credit, my concern and the collective investor concern was they're not giving us enough detail about where they're spending all that money. And they're not giving us metrics. They're not even having an investor day. But now JPMorgan is going to have an investor day. And my sense is they're going to give more information to investors.

And so what Jamie Dimon has done great, better than perhaps anybody else is, when they're going in the wrong direction, he cuts losses. He helps the firm reverse course. And it looks like they're trying to do that, at least with the transparency as to why they're spending that much money. It may not ease our concerns, but at least they're correcting course.

BRIAN SOZZI: Wells Fargo senior analyst Mike Mayo bringing the fire with his call today. That call today is Bank of America, which is his number one pick.