Brian Moynihan: Inside the Mind of America’s Banker

0:00And they picked Bank of America and that was a great name and it does it it not only presents an opportunity They think, if I'm going to open a bank account at the Bank of America, but it comes with responsibility, and the responsibility to run the company in a way that they can be proud of it. Every day out there, there's the right loan to make and there's the wrong loan to make. And so the key is always be growing. No excuses. Winning the market, you've got to grow. That's the first principle. The second is to deal with the right risk. And those two things always have to be imbalanced. And so the goal of doing it with the right risk is you can sustain it.

0:31The worst thing is if you get it too far extended and have to pull back, that's when you take a lot more hits where your clients get really mad at you. But we've got to make sure that the capitalism and the business community works for all of American people. We work with every administration. We don't work any differently with a Republican or Democrat. Because at the end of the day, we have one interest. If America's strong, the Bank of America is going to be strong.

0:56Welcome to the Master Investor Podcast with me, Wilfred Frost, where we celebrate and learn from the success of the greatest investors, business leaders, and politicians in the world, giving you, our listeners, the edge. The Master Investor Podcast is sponsored by Interactive Brokers. Please do remember the views expressed in this podcast are for general informational purposes only. Nothing in the podcast constitutes a financial promotion, investment advice, or a personal recommendation. More on that in the show notes.

1:31My guest today is the chairman and CEO of one of the biggest and most important financial institutions in the world, Bank of America, which he has led since January 2010. Incredibly rare to lead a company of that size and import for quite so long, guiding it through extraordinary periods of our recent history, and with it, gaining extraordinary wisdom, which we are so lucky to be able to share in today. I am, of course, talking about Brian Moynihan. Brian, welcome to the Master Investor Podcast. It's great to be here, Wolf. Good to see you again. It's really great to catch up after quite a few years.

2:08So many topics we want to get to, I want to talk big picture Bank of America, big picture Brian Moynihan first. And what I find so interesting when we talk on this podcast is how you differentiate yourselves. And to what extent does being called Bank of America make your job easier to attract customers than the many other brands that exist across the country? Well, so there's a little history of the name. So the name came from the California company that was Bank of Italy and APG and Indy and he formed it. It became Bank of America. It merged with a company called Nations Bank, which are both good names when you think about it.

2:46And they picked Bank of America and that was a great name. And it does. It not only presents an opportunity because when somebody comes to the United States to go to college from the UK, they think of I'm going to open a bank account at the Bank of America. But it comes with responsibility and a responsibility to run the company in a way that – that name can be affixed to us and they can be proud of it. And when you are making that proposition to someone arriving in the country or born in the country to bank with you, how do you sell it to them? What's the pitch? It depends on the customer. We cover a kid opening his first account to wealthy individuals.

3:23We cover small business, a large business, and we cover investors from individual investors, the biggest investor. Well, the pitch is really, it's, we have a question of frames, how we go to market. What would you like the power to do? And our job is to listen for an answer and fulfill that answer and to help you live your financial lives. So that, that idea of customer in customer first is the way the company's culture goes to market. And so we've been consistent with that. It's the tagline, our advertising. If you look at my identification card to get in the building on the back of what we'd like the power to do, we ask it of our teammates.

3:54We ask our clients. We We ask it to our communities, our shareholders. And that frames how we go about it. And then there's the product differentiation, the great talent teammates we have to serve. That all comes. But the first is the attitude, which is to go meet the customer and figure out what they need to do. We're in a service business. We're not selling products. We're in a service business. What do you need to help you with your estate plan? And I've got to figure that out and deliver it. What do you need to buy a company? Let's figure out why you want to buy the company, help you think it through, and then do it.

4:21So it's a service business. So what we'd like the power to do is the way we frame it. But Bank of America is a great brand, and we invest heavily in it, but it helps carry the day. And what would you say the DNA of the company is? And on this, I'm kind of getting to Wall Street versus Main Street a bit. You've got the Goldman Sachs, Morgan Stanleys of this world, very clearly Wall Street first. Wells Fargo and many regionals that are very much Main Street first. You and J.P. Morgan, perhaps City 2, you cross both of those avenues. Is it fair to say J.P. Morgan is more of a Wall Street mindset, even though it's full service, and you're more of a Main Street mindset?

4:58I'm just interested in how you think about it. You know, I think if you look across the businesses, our biggest businesses are consumer business, which is a U.S.-based business. But we're also the largest commercial bank in the United States, and we're also a small business lender in the United States, and we're probably second largest wealth management firm in the United States. And then we're the third largest investment bank in the globe and the third, fourth largest capital market. So we're big in every business. So the balance is a little bit different in other firms that you mentioned. But each business is discrete.

5:29We have eight sets of customers that we go after. The business model is discrete. But the key to make the thing really work is to knit it together. So the entrepreneur that sells their company is a private client customer. The entrepreneur that is starting to build up wealth or the entrepreneur wants to start a company who is already a private client becomes a business commercial client. And so the idea is to knit it together. But it's discreet. I'd say people would think of our brand as being more of a broad brand in commercial and consumer banking just because of the heritage, how we got there.

5:59But remember, oddly enough, the Merrill Lynch brand was about bringing Wall Street to Main Street. That was the positioning of that company. And it has – our branches are 3 ,700, but there's 600 mayoral offices out there. In my little town I grew up in Ohio, there was a mayoral office, three people in it. But it's very much a Main Street application of Wall Street. So it's a very blended thing. Frankly, I never think of it that way. It's funny you mentioned that aspect because we talked about that in the last episode with Greg Fleming. So I would refer our listeners back to that one as well. In terms of your career, Brian, which is not unique in banking, particularly in the US, but it's, I guess, a little bit rare.

6:39Your original training and your background until 20 years ago or so was as a lawyer more than initially as a banker. Does that help you, do you think, in the job today? Did it give you some things you had to learn on top that you didn't have immediately? Well, so two things. One is I practiced law and then got invited by the CEO of one of the companies that ended up being part of Bank of America called Fleet, a fellow named Terry Murray said, you ought to leave. And that was 1993. So it's been a long time. The only other time I was a lawyer, practice law again was for about 40 days around the financial crisis.

7:12So that can be thought of in a lot of ways, 40 days and 40 nights. But, um, and so I hadn't been in law, but look, as we sat around the table one night with eight of us, a large bank CEOs, four of us went to law school. And, and so the critical thinking, the learning, the curiosity, uh, the desire for knowledge, those are all great skills that play in any field. And I think, you know, honestly, when you get a topic like AI today, you know, what should we teach kids? Well, if people are curious and learn and learn a lot about something that then they can learn a lot about other things because they know how to take a subject apart, it's great.

7:48I think law does that. You learn a lot about constitutional law, criminal law, in a way that most human beings would probably say, that's not what I want to know about. But because you learn that critical thinking, and that precision of decision and words mean something and preciseness, it's clearly applicable in other things. And in a heavy regulated industry, it doesn't hurt to understand the principles by which some of this stuff came about. Interesting for me. I started in finance and then left and went to another. And I kind of think in a similar way, finance helped me with that critical thinking.

8:16I think what's interesting is we hire 2 ,000-plus kids into our summer programs and then a vast, vast majority of them get offers. We hire another couple of thousand kids outside our summer program, our summer intern type programs. But they come from all different types of backgrounds, MBA and undergrad. But you can teach them a lot. And one of the challenges for us is how do we move them around the company? So the skills they learn in those first three years are just really critical thinking skills, how to model, how to learn, how to analyze credit, how to analyze, you know, securities types of activity.

8:51How to understand leveraging the company and the cash flows and spreading the statements. Those are all skills that play into everything, including audit and HR. You can't practice in HR in our company without understanding our business is a hard thing. I said at the top, Brian, obviously you became CEO in January 2010. And I think one thing that has been key to your tenure is you were afforded time to turn around the oil tanker, if you will, obviously coming out of the financial crisis with a number of problems that you inherited. you could think about something similar maybe with with james gorman at morgan stanley in that you're both given time both created amazing and yours is continuing legacies for your company but the first period was tough um the share price performance the the the press coverage the shareholder coverage i mean how critical was it you know we're not just talking about months to turn it around years the first four five years how critical is it that you were given that time and how many times during the first four or five years did you think, I'm not going to last this?

9:53I never thought we weren't going to last it. I never thought it was – because if you looked at what we had, you had underneath there an incredible array of businesses. So the old adage, you know, Jack Wallace, you've got to be one, two, three in the business. We were one, two, three in every business. They were big businesses. They were scaled. They had competitive positions. They had good operational brands. Most of the issues we had to deal with were like getting the mortgage business straightened out because the mortgage crisis in the United States, a lot of work with a lot of customers, modified tens of thousands and millions of loans, et cetera.

10:22That was a lot of work, but it didn't affect the corner line business. And so what kept you going was you saw that business every day doing great things for customers. We grew the company all during that timeframe. We invested heavily because nobody knew it. So the stock price was about $15 when I was announced, and then it went down as low as five. And then it's basically kept working its way up into the low 50s today. And, you know, it's been a great run. But the principles we started divining, the precision in which we thought about customer service, employee satisfaction, the way that we were going to cover investment banking in a combined base with commercial banking so it could really serve large companies around the world, the idea of the markets business had to really help all the other businesses with research and execution, All those things we were doing all back then.

11:11And so, yeah, it was tough. But when you looked and – if you ever wanted to have a good day, you just went out and talked to the people in the branches and how fired up they were to come to work every day and help people. In those tough times in American society that the customer is going through, they always were saying we can help the customer. We can help them through the financial distress in the aftermath of the financial crisis, et cetera. That was good stuff. Now, some of the press and congressional inquiries and lawsuits and stuff, that was probably not as fun as other stuff. But the reality is the teammates just kept you going.

11:44And every day you came in, they were fired up. We brought them up and, you know, everything, customer scores, client scores, client growth, all that just really kept going in the right direction. And then we accelerated once we got a lot of the bad stuff behind us around 2014. And that's when the earnings took back off. The legal training helpful for the lawsuits, I guess, as well. Well, litigation is an expensive habit. People – we settled a suit once and somebody said, why just settle? And I said, this is all about risk mitigation. It has nothing to do about liability. Are you going to go to trial, spend several hundred million dollars to potentially lose this?

12:19Or are you going to settle for three times that amount? These are risk decisions. So they were business decisions. Now it helped to have great lawyers that we had. But it helped to understand the reality is that going into a jury trial as a big bank, tricky. I can imagine. Let's talk about the economy in the U.S. And obviously, you have a unique perspective. I think you serve 70 million consumers and small businesses combined. How do you frame the economy right now? So we have a research team that's one of the best in the world. And they basically – the teammates look at it every way from Sunday type of thing.

12:58So their view of the economy for 26, because 25 is kind of over now, is it will grow at about 2.4 percent. The important thing is not that number. It's actually what's gone on over the last 12, 15 months. So before the election last year, projections for 26 have been sort of one and a half. After the election, they moved up saying, okay, the administration was going to come in with lots of pro-growth policies. Here we go. Then Liberation Day came and they started bringing it back down, the impact of tariffs, the uncertainty around that, et cetera. And then they started putting it back up. The other thing is we've gone all the way around to basically back to where we were.

13:34And so their view and the team's view is economy growth about 2.4 % next year. And that's one part. But we also have Bank of America's. We can see what the 70 million consumers are doing. And the U.S. economy structure is the consumer's drive the economy. And those 70 million consumers are spending more money in November of 25 than they did in November 24 by 4 or 4.5%, 5 % level, depending on how you cut the days because the weekends fall differently. So very healthy, consistent with a 2 % plus growth economy. Spending it on all kinds of things. And over the holiday weekend, Thanksgiving weekend, Black Friday, all the things that happen in the U.S.

14:11in the context of holiday sales, strong sales. And so it looks pretty good. And then you look at credit quality consumers, that looks good. Money in accounts, consumers have money in their accounts. There is a stress factor in the U.S., which is the inflation has been causing affordability. And if you look at a third, cut our customer base into thirds of income, just bucket one, bucket two, bucket three, clearly the growth rate in spending by the lowest bucket of income earners is lower than the higher, mid and high. And so that's, there's issues about that. Affordability, that's got to be straightened out.

14:46it's going to take a little bit burning in. Some of the inflation is wearing off. Some of the wage increases came first in front of inflation and inflation and wage increases. But there's some work to do on that. So a lot of people say, well, that's an optimistic view. And I read the papers and the surveys. I'm not telling you optimistic pessimism. I tell you what the people did this last month and it's strong. And I mean, I'm interested in that K-shaped economy factor that a lot of people talk about strong at the high end, struggling at the low end because you've got a pretty good cross-section of the country.

15:18So is the negative part of the K-shape behind us as well, or is that still a risk? The wage growth, when we look at our customers, the wage growth is solid. We look at our customers, the number of getting unemployment distribution versus a paycheck hasn't changed at all. The US unemployment rate is 4.4%, but inflation affects people differently. Higher prices affect people differently. And where you have to spend is inflated. If that's inflated, that's tough. That's the affordability question. If you want to spend at higher cost, you can decide not to spend it on. But if you're spending on oil prices are now down, actually providing some benefit.

15:58But if rents are up, I've got to pay the rent. I don't have a choice. So that's what's going on in affordability. And yes, you see a growth rate difference. All the sectors are growing their spending. But you see a rate of growth difference between the lowest third of income in our customer base versus the middle and the higher third. In terms of capital markets activity, it's been incredible of late. Is that sustainable, do you think? Or next year will that tail off? Well, capital markets activity has multiple meanings. So if you look at the investment banking fee pool, it looks like it's going to be as big as it was, say, 19 or something like that.

16:36one of the top ones. But you have to remember the economy is a third bigger. So you're saying, wait a second, every deal, you know, if you bought a company for a billion dollars back then, it's a billion three now. So it's actually still getting back to the level. What's starting to happen is more deals are getting done and the deals are getting bigger. And that's good news. So on the investment banking side, it's been a very solid year. And we expect it next year to be a very good year. The IPO market's opened a little bit, assuming the economy performs like our team does. Inflation stays under control and the Fed drops rates to the 3 % level mid next year and sort of stops.

17:08That's kind of the base case. You'd expect that IPO activity in markets. Market valuations is one thing, but then issuance and stuff is strong. Strategic activity buying companies is strong. And so the capital markets are open. On the trading side, it's been a very good year because all this up and down volatility is our job is intermediate for our customers in the middle of all that and give them advice about how to do things. And customers have a point of view when there's topics to have a point of view about, when there's nothing to have a point of view about. Low growth rate, low inflation, the volatility goes way down.

17:41It's hard to make money in trading. So Jim DeMar and the team has had a good year in trading. We've had a good year in investment banking. But next year should be better for deals and things like that just because the momentum to build back up after the uncertainty, after Liberation Day, getting the tax law embedded, which it now is, those policies fell in place. Now a business can say, I can buy your company because I can actually think through your cost of goods sold, what the tax rate is going to be, the financing is stabilized and good. So all that bodes well for good activity. You mentioned the Fed.

18:10And typically, we wouldn't think of a rate cutting cycle as necessarily good for a big bank. Is it – I mean particularly with the setup we've got, which maybe the cuts come from managing a few factors on the employment side as opposed to facing a recession. as you clearly don't expect anyway. A few more cuts from here. Is that good for Bank of America, all things considered? Well, it's good. In the end of the day, we're going to follow the economic growth. Our credit quality is in great shape. Even under stress, all the stress tests show it's in good shape. We're growing market share. The business has grown in every dimension.

18:528 % commercial loan growth in the third quarter, 30 % APS growth. So it's all good. But the technical question is if you have, like we have,$2 trillion deposits of which$950 billion are in the consumer business. So that's the consumer side business in U.S. dollars. And about half of that is zero interest because in checking accounts, as rates come down, it'll squeeze you a little bit. It doesn't happen as much for us now because we have such a reprice going on the asset side, which is more tech. But generally, lower rates are not as favorable for banks. But lower rates with good growth, that's fine.

19:25Yeah. Low rates because you're in recession, that's a much tougher time. So rates, we disclose our sensitivity and stuff, but we've given people that will be up 5 % to 7 % in NII over the next year. And that assumes the rate structure comes down to 3 % in the front end. And the rates coming down might affect some of your rivals a little bit more, which will be interesting to see. What about the long end of the yield curve more broadly? I mean, interesting to see what's happening in Japan over the course of this last week. Is that something that you think is a risk factor over the next 12 months, whether it's triggered in the US for all sorts of reasons with the debt outlook or from elsewhere like Japan, possibly here in Europe?

20:03Is there a chance that the bond market long end people lose control of it? No, there's always that chance in a lot of these economies. The big issue is what's going to happen in the US. And so if you look at what our team thinks is we'll have a 3 % front end rate in about a four, four and a half, four and a quarter, four and a half 10-year rate. So the yield curve will be normalized and steep and not, four and a half is not that high in historical context. I know it feels high from the last 15 years before the pandemic or whatever. So that's all good. The issue of the U.S. debt is a serious issue.

20:36And it has, but that's not new news. It has been serious. So the question is, how do you manage to keep it growing at the same rate against the growth in GDP? And so a little faster-growing economy, even with a little higher inflation in the U.S., 5 % gross growth to 2.5 % net growth to 2.5 % actually allows that to deteriorate and provides more revenue, tax receipts, et cetera. And so the higher cost of debts, you know, increased dramatically the cost to carry by the government, but the faster-growing economy will help offset that. And the key is then to manage the spending relatively carefully in every direction.

21:11There hasn't been a lot of will to do that, honestly. But I think the American people and I think American businesses are saying, hey, we've got to get this back in the box. We came out of COVID. We were running a trillion and a half, trillion dollar deficits on annual basis. Trillion eight last year. It's got to start coming down on the annual operating laws, which then will help you reduce the growth rate of the budget and the GDP can grow out of it. It's all OK. But that's probably one of the biggest sort of existential risks. And will that affect everybody's bond market? whether Japan moves from X to 10 basis points or Europe moves around a little bit.

21:45If the United States, it becomes a problem, it's a whole different kettle of fish. And by the way, going back to my first couple of years, in 2011, the United States had real debt issues, if you remember. And so they had the question of the debt ceiling wasn't lifted and they were shut down and whether they're going to be able to pay the payments. And they got downgraded at that point the first time they got downgraded. So that instability isn't what the US stands for. and we got to be very mindful. But just to round that off, I mean, you articulated all the factors very well. That's a low risk?

22:14Low risk, low risk. But it has to be managed because it's an accreting risk. And so every year you don't deal with it, it becomes a bigger, the pipe's getting clogged and then at some point it explodes.

22:37your goals with powerful tools, global market access, low costs, and unmatched financial strength. That's why the best informed investors choose IBKR. Learn more at ibkr.com forward slash master investor. I want to touch on asset quality, which you've already said is looking pretty stable. One of your peers used that phrase on the earnings calls recently, there's some cockroaches out there. Is it something, again, that you think is low risk? So let's talk about a couple of things at play here. First of all, in our company, our charge-offs in the company were down quarter to quarter in the consumer charge-offs after you come down.