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Material Loan Growth May Not Be Here Yet, but Bank of America Is Seeing Promising Signs

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As earnings from the big banks roll in, analysts and investors will likely have to continue to wait for material loan growth, which will result in more net interest income (NII) and therefore higher profits. It’s not a surprise, considering what bank CEOs have been saying at industry conferences throughout the second quarter.

Banks are seeing a rebound in spending, but it hasn’t yet translated into strong loan growth. Consumers are flush with cash from savings and stimulus, and businesses are still not ready to pull the trigger on new inventory spend and other investments.

Despite the delay, Bank of America (NYSE:BAC) is seeing promising signs that loan growth will pick up in the second half of the year, and management seems optimistic, as well.

What happened with loan growth in Q2

In the second quarter, Bank of America saw period-end loans grow 2% from the first quarter of 2021 to roughly $916 billion. But average loans and leases, which are more of a driver of NII, were flat from the first quarter of the year. NII was also flat from the first quarter of the year.

There were a few bright spots mixed into the lack of growth. For one, both average loan and period-end loan balances stayed flat or grew, even as Paycheck Protection Program (PPP) loans were forgiven and those balances declined in the quarter. Additionally, the bank saw commercial, credit card, and residential mortgage loans start to creep up in the second quarter.

Loan growth trends at Bank of America.

Image source: Bank of America Q2 earnings presentation.

Loans in Bank of America’s global-markets division jumped 14% from the first quarter, while loans in the bank’s global wealth and investment management division climbed 4% from the first quarter. But the bad news is that usage of commercial lines of credit remains very low, and consumers continue to prepay their loans at high rates. Long-term interest rates — like those on the 10-year Treasury bill, which many loan yields are linked to — also fell in the second quarter, cutting into NII.

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Image source: Getty Images.

Promising signs

The good news is that Bank of America CEO Brian Moynihan said that even though it’s not substantial, nearly all of the bank’s various businesses have seen some loan growth. Moynihan also said he doesn’t think line usage on the commercial side can really go any lower, as it’s still running in the low 30% range, which is as much as 10% lower than line usage normally runs in some segments. In business banking, which serves companies that make between $5 million and $50 million in annual revenue, Moynihan said loans are finally growing on a net basis after being stuck for several quarters.

Another piece of good news is that Bank of America’s management team also successfully predicted that NII would reach a trough in the third quarter of 2020. And while the bank is still waiting for more material growth, it has managed to hold NII despite lots of volatility and lower long-term rates.

Bank of America net interest income.

Image source: Bank of America Q2 earnings presentation.

Lastly, despite the difficulty from long-term rates, management hasn’t abandoned its NII outlook for the full year. In the first quarter, Moynihan said that some modest loan growth and the continued improvement of long-term rates and a steepening yield curve, in which long-term interest rates increase while short-term interest rates stay low, could result in NII growing $1 billion from the $10.3 billion the bank generated in the first and now second quarters.

Bank of America’s CFO, Paul Donofrio, said that while the goal is now harder to achieve, it’s still a possibility if loans continue to grow and long-term rates don’t move lower from here. Donofrio added that the bank may decide to put some additional excess liquidity into securities to help that mission.

In contrast, JPMorgan Chase has already cut its NII guidance for the year from $55 billion to $52.5 billion, although the bank has made it clear that it’s stockpiling cash and not reinvesting in securities at these low rates.

I’m optimistic

While everyone would have loved to see more loan growth in the second quarter, I’m somewhat optimistic by what we saw with loan growth at Bank of America during the quarter and sentiment from management. Prepayment rates on loans should slow and line usage should start to move upward.

Bank of America will hopefully continue to see loans march higher, as long as the economy keeps moving in its current direction. I also think long-term rates have to be at or close to a bottom, which will be a key driver of NII for the rest of the year.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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How to Build Credit Without a Credit Card – MoneyWise.com

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How to Build Credit Without a Credit Card  MoneyWise.com

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Can You Buy Crypto With a Credit Card? – MoneyWise.com

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Ask Gareth Shaw: ‘I’m scared I’ll get rejected for credit card because of mistakes I made in the past’

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‘Credit-builder’ cards can be used to demonstrate that you are a responsible borrower

Answer: Well done to you for getting back on your financial feet. Climbing your way out of debt is a marathon – it takes sacrifices and planning, so you’ve taken some really important steps in your financial journey.

The good news is that the negative information – the records of missed payments, defaults and even county court judgments – won’t stay on your credit report forever. Details of your late payments can be viewed for six years after they were settled. Searches and rejections of credit typically disappear after 12 months. So this dark cloud won’t hang over you forever.

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Before we talk about applying for credit again, there are steps you can take to improve your credit health. Firstly, you should review your credit reports and make sure there are no errors that could be holding your score back. You can get your credit report for free from each of the three credit reference agencies – TransUnion, Equifax and Experian – and can ask them to investigate errors. Lenders and credit reference agencies have 28 days to respond to disputes.

Registering to vote by getting on the electoral roll can boost your credit score, while you may even be able to add the record of your monthly rent payments to your credit score by asking your landlord to report rental payments to firms like The Rental Exchange, CreditLadder or Canopy.

Experian has launched a new tool that allows you to share information about your banking habits and subscriptions – information which is not traditionally factored into your credit score – in order to increase your score. That means paying your council tax or even paying for Netflix and Amazon Prime could give your score a boost.

If you still want a credit card, your choice is likely to be limited to a particular set of cards designed for people with poor or ‘thin’ credit histories. These are known as ‘credit-builder’ cards, or sometimes ‘bad credit’ cards.

These cards have higher interest rates compared to the most competitive products in the market, to reflect the risk that a lender is taking in by providing credit to someone with a history of repayment problems. You can expect to find an APR of around 29 per cent. They also have lower limits, so when you apply, don’t be surprised to find that the lender will initially only give you £250 to £500.

However, these cards can be used to demonstrate that you are a responsible borrower, can repay on time and stay within your credit limit.

Here’s the golden rule – avoid borrowing money on these credit cards. Purchases tend to be interest-free for 55 days, after which you’ll be charged a considerable amount of interest. So limit the use of these cards, and when you do use them, try to pay them off in full. If you don’t pay on time, you will lose any promotional offer, be hit with a fee and your provider will report your missed payment to the credit reference agencies, reversing any good work you might have done. Set up a direct debit to ensure that your minimum payments are met in advance of the credit card payment date.

When you apply, use an eligibility checker first. This will ask for some basic information and carry out a ‘soft search’ on your credit file, returning a list of cards and the probability of your application being successful. That would be a helpful guide to find a card that is likely to accept you.

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