Interests rates deal blow to Bank of America profits, but digital investments continue to pay off

(Image sourced via Bank of America )

One of North America’s largest financial institutions, Bank of America, saw its profits fall 18 per cent in Q1 2024 as a result of increased expenses, largely due to higher interest rates. However, the bank is continuing to see its hefty digital and technology investments pay off, which are helping reduce its cost base, and the company did manage to still beat analyst estimates for the quarter. 

Bank of America’s leadership team said that technology had enabled it to keep the organization’s headcount costs down, whilst still seeing its digital engagement across multiple platforms increase in recent years. 

CEO Brian Moynihan said that the bank had a desire to increase its technology investments and that its annual spend in this area had increased from $3 billion annual to $3.8 billion annual over the past couple of years. Commenting on this, Moynihan said:

Our operational excellence platform continues to deliver and improve processes. These savings from that growth help fund the future growth in the company and lower the risk. Second, we managed headcount, as we eliminated work. 

Our headcount at the end of first quarter 2024 was down by more than 4,700 people from the first quarter 2023. It declined 650 people just from the end of 2023. 

The digitization activity is also driving ongoing expense cost savings, customer retention and market share improvement, driving across all three factors. It also supports the ever-increasing volumes of client activity with little increased cost. 

The key numbers for Q1 2024 include: 

• Net income of $6.67 billion, or 76 cents per share, compared with $8.2 billion, or 94 cents a share, for the same period last year. 
• Revenue, net of interest expense, stood at $25.8 billion, down $440 million compared to the same period last year, or the equivalent of 2 per cent. 
• Consumer banking, its largest division, saw revenue fall by 5 per cent to $10.2 billion, whilst global wealth and investment management saw revenues increase by 5 per cent to $5.6 billion. 

Moynihan said that Bank of America would remain committed to building up capital, with a primary focus on technology investments:

Our primary interest is the capital to support our businesses…that is a multi-year process of building up not only the balance sheet and capital committed to the business, but importantly also the investments in systems and technology and risk management …they continue to make money almost every trading day over the last several years, so that’s where we’d like to use it, supporting that business and supporting the loan business, supporting all the businesses.

Digital growth

Despite a mixed bag of earnings, what’s becoming increasingly clear at Bank of America is that its digital investments are fuelling increased uptake, and usage, across digital platforms. This is true for a variety of the bank’s divisions, across consumer, global wealth and investment banking. Moynihan said: 

We continue to invest and enhance our digital platforms. We provide our customers with convenient and secure banking experiences. By leveraging our technology and continuous investment in that technology, and putting customers at the center of everything we do, we have successfully deepened our relationships and expanded our customer base across all our businesses. 

Some of the key numbers for digital growth include: 

• 76% of overall households7 actively using digital platforms
• Record 47 million active digital banking users, up 5%, or 2.1 million
• More than 1.6 million digital sales, representing 50% of total sales
• Record 3.4 billion digital logins, up 9%
• New Zelle records: 21.9 million active users, up 12%; sent and received 348 million transactions, worth $106 billion, both up 27%
• Clients booked more than 832,000 digital appointments

Zelle, Bank of America’s digital platform for receiving and sending money, has quickly overtaken checks as a method for customers to exchange cash. Moynihan said: 

Zelle continues to grow. It wasn’t long ago that we noted that the number of Zelle transactions in a quarter had surpassed the number of checks written. Shortly after that, Zelle transactions reached two times the number of checks written. This quarter, Zelle transactions have now passed the combined number of checks written plus the amount of cash withdrawals from tellers and from ATMs. That is a rapid adoption and represents continued cost savings and convenience and security for the customers. 

Elsewhere, Moynihan said that the bank’s digital assistant is also seeing success with customers. He added: 

Erica, our virtual banking assistant, reached a key milestone of more than 2 billion interactions since its introduction about six years ago. It took four years to reach 1 billion interactions; it took just 18 months to reach the second billion. In August, we extended Erica’s reach and launched Erica in our global treasury services business and CashPro. Erica has resolved 43% of the CashPro chat inquiries automatedly, demonstrating more and more clients are able to self-solve. This is a great example of best practices being shared across the scale of our company.

My take

Tough macro conditions, particularly higher interest rates, are proving difficult for Bank of America to boost its profits. However, what’s clear is that its earlier technology investments are helping to stave off some of the worst implications of this, by reducing costs and improving experiences with customers. As and when the economy settles, this suggests a positive starting position for the bank.