Bank of America Q1 2024 Earnings Call Transcript

Morning, Steven.

I think you should expect that we're on a cushion. Whatever rules come out, and when they come out, get clarity, we'll expect to run the requirements plus 50 basis points, up to 100 basis points of excess, and anything above that will be either used to continue to grow the company if needed; if not, it will be returned. And so we're just, as all of us are, waiting for the finalization of these rules. Right now we're sitting on $30 billion under the old rules. We have enough under the new rules as previously proposed. Obviously, they're talking about changing them, so you should expect clarity on that. What you'd also expect is, as we think about it, beginning now, you're basically at the point where you're sitting on the capital, the very modest need to build a cushion to the rules as proposed, and any changes would be more favorable that I assume. So expect us to continue to return capital at a fairly strong rate as we move through the second quarter and beyond and the rules become clarified.

Yeah. So first thing I would just say, Steven, is we've been up against QT now for the last couple of years. So the deposits are beginning to settle in now. And if we were to go back to -- if you take, for example, consumer, if you were to go back to pre-pandemic and think about what long-term sustainable growth rates look like for consumer, if you just extended that through from the fourth quarter of 2019 to today, given that the economy is 30% larger, we kind of feel like consumers are approaching that floor. So we're still in this belief that Q2 is going to be -- Q3 maybe the turning point for consumer. You can see that slowing now. The rest of our business, if you look at the exhibit we put together on deposits, if you look at that bottom left chart on wealth, you'll see it slowed and grew this quarter. And then in Global Banking, on the right-hand side of that page, they're back to pre-pandemic growth rates. They're up 7% year over year. So we're seeing some structure now in the deposit base. Even with QT, over the course of the past year, our deposits are up $100 billion. So it has been a point of conviction of ours that as we get towards Q2, we should see the consumer side begin to stabilize. That's what's driving our conviction that NII will go up in Q3 and Q4. We're in that transition period right now.

Yeah, Mike, I think as NII moves along the path Alastair mentioned, all that flows through because there's no more activity attached to, as you're pointing out, and we continue to reduce marginal expense on that activity because largely that's Consumer, Wealth Management, and Global Banking, which don't add lots more clients and stuff and lots more activity, even though the numbers go up, its matter of efficiency. So that continued to improve our efficiency ratio. As you also well know, when the revenue growth is coming through the Wealth Management business, which by definition, because of the way the compensation process works, has a lowest efficiency ratio in the company. That's a good thing because it grows, and we get good profitability growth out of it. But we're fighting that trend. And as one of the largest Wealth Management business in the world, if not -- it's a higher percentage of our revenues and our expense base. And so we're continuing to drive it down. We're at 64%. You'd expect that to improve as the deposit balance has stabilized for many quarters now and starting to grow, the rate paid has really flattened out sequentially by quarter, and the yield of the portfolio and the yield of the assets continues to grow. So we feel good about how it's going. Our focus is really on deploying expenses in operating leverage. And as we get through the twist in the NII, you should start to see us return to that again, and that will then obviously drive down the efficiency ratio.

Well, last year, remember, Mike, we told you we thought we could drive expense down every quarter. We believe this year the expense will trend down over the course of this year. And obviously, Q1 is inflated a little bit with just payroll tax and some of the revenue seasonality, but underneath that there's pretty significant revenue strength. So I think that probably cost us $100 million or so this quarter. If this environment continues, we're looking at another $100 million per quarter going forward. But, to Brian's point, it's the good expense that comes with revenue growth over time. That's really the only change, I'd say, with respect to how we think about the expense picture.

Yeah, John, I think if you look at 7, you can see the mix in the left-hand corner. Remember that one of the things we all have to be careful about is in the Global Banking area, the way the fees are paid, the earnings [Phonetic] credit messes up the simplicity of noninterest bearing and interest bearing, so it's complex. But if you look at the quarters coming across from the first quarter '23 through the first quarter '24, you can see that you're seeing the rate of change slow dramatically and settle in. So a lot of the money has moved. If you look at the seven-day average for a consumer going all the way back to the early part of October, it's been relatively stable at $950 billion, $960 billion. So we're just getting through the tax seasons and the ins and outs in the Wealth Management business consumer, people are paying taxes out on the wealthier side and receiving benefits in on the tax refund side. So as we're stabilizing that, we expect it to grow. We don't expect a massive change in how the deposits are structured from what's in money markets, what's in savings, what's in checking, what's in that. It's really slowed down and been relatively stable. So things bump around, but it's all very good value. Even the highest paid balances in the Wealth Management business are good value for the company. But if you look at what really drives the value, it's the $950 odd billion in the checking balances, you can see on page 7, the core checking balances, that's what drives it.

Yeah. If you look on the consumer business, and you think about tracking those deposits accounts from pre-pandemic to now, which is one thing we talked about for different purposes, but if you look at where all the deposit balance is, if people with lower average balances are still multiples of where they were pre-pandemic, people in the higher balances are actually lower because obviously they were sitting on cash when the pandemic and accumulated more cash and when rates came up, they moved it. And all in, that gives you what you see in consumer, which is, at the end of day, $200 billion over where it was pre-pandemic. But the people moved, and you're seeing it month to month relatively stable, as we track that every month. And on both sides, frankly, the lower average balance accounts from pre-pandemic are basically bouncing around at the same level right now. Not going down, not going up. And the higher ones are stable, but they are down 15%, 20% for people with $0.5 million and $1 million balances largely because they moved it in the market. So we feel it's stabilized enough. There'll be ins and outs, and we'll see it play out, but it's extremely valuable no matter how you look at it.

Sure. We've talked about the fact that the net interest yield, obviously, this quarter benefits from the NII growth. So you're getting in the numerator. But we inflated the denominator in terms of the average earning assets last year as we just made the balance sheet more liquid. So that's going to allow us to continue as the deposits grow to grow the net interest income over time without necessarily growing the other earning assets. So Q2 was a little more of a challenge. But going forward, I expect all the NII improvement in Q3 and Q4 to drop into that net interest yield. And part of things supporting that, John, as you pointed out, is we do have loans repricing. Because we've got loans coming off the balance sheet, we're booking new loans at higher rates. So that's one element. Second element is we've got securities that we're reinvesting underneath all this, too. So obviously, we're sweeping the held-to-maturity paydowns and reinvesting those at much higher rates. And then third, the teams have been working hard at repricing the balance sheet broadly for things like loans, and I believe we've now had seven quarters in a row of improving loan pricing. So we just got to keep grinding away at that.

Good morning.

Betsy, before Alastair answers your question, it's good to have you back, and we wish you good luck with everything. So, Alistair, why don't you hit that?

It's good to have you. So I guess a couple of things. The first thing is we haven't changed our perspective in terms of this idea of Q2 being the low point in the trough for the year. We haven't changed our point of view on growing in terms of Q3 and Q4. I think the important thing we're trying to convey is because of the continued stability in pricing rotation and because of this continued stability in deposits, we feel like that extra $200 million in Q1 is something that should flow through in Q2, Q3, and Q4. And then there'll be a second dynamic to watch for as well, Betsy, which is if we have less rate cuts, we're going to benefit from that. We won't necessarily benefit a lot in Q2 because there isn't enough cuts or time in Q2, but I think by the time we get to Q3 and Q4, we'll know more about the rate structure at that point and we'll be able to tell you more about what we expect for the growth in the back half of the year. But we're reasonably optimistic there.

Yes. We've deliberately worked on that over time, but we've always, I think, had a pretty good program of hedging the fixed rate securities in the FS book so that they're swapped. And that means that if rates go up, we obviously benefit from that. It doesn't necessarily hurt us in terms of AOCI. So most all of the treasuries that you see in our portfolio are swapped. So I would expect very little in the way of AOCI impact there.

Yeah. So, Glenn, ultimately, we'll use the same philosophy and strategy that we do to this point. We are in obviously a very good position where we have substantial deposits in excess of loans. That's what creates this excess in the top left of page 8. And it's what allows us to put everything to work in the top right. The balance that we try to strike, you can see in left hand side, we're trying to make sure that that cash and securities yield, compared to the deposit rate paid, performs in any environment. So in an environment like this one, where there's an awful lot going on with rates, we feel like if you look at that spread, I think it was one basis point different quarter over quarter. So we're trying to make sure that we lock in the value, monetize the deposits regardless of whatever rate environment turns out to be. And we feel like we're pretty balanced now. We've got a pretty good balance of short dated, long dated, fixed, and floating. That should allow us to perform whether rates go up or down from here. One final thing I'll just say, and I think you know this. Underneath all of this, obviously, we've got some securities repricing. And to the point, I think it was John asked earlier, we've got the loans repricing as well. And all of that gives a little bit of underlying resilience to this.

Yeah. Well, I think we're probably getting closer now because remember, in the big macro, we're in that transition period where post-pandemic, the economy is recovering and rates are settling in, and it's changing people's behaviors. So we've actually got pretty good credit card growth, and that's just offset by the fact that, for example, with securities-based lending at rates that are 5% higher, people are doing less of it. Or in commercial, we've got some loan growth, but the revolver utilization is still suppressed because revolver costs a lot more. So as the Fed has raised rates, it's changed some of the borrowing patterns of our clients. But that's not going to last forever, because as you point out, if the economy powers through at 3%, 3.5%, whatever it ends up being, loan growth is going to catch up to that over time. So for right now, we're in that transition period, but we're anticipating that loan growth will pick up at some point in the future. But it's not an enormous part of our NII guide at this point.

And just remember that the capital markets opened up and a lot of the larger clients accessed them as they frankly have gotten used to the higher rate structure and need to refinance that debt. If you look across the businesses, you've got the commercial run. But if you look across commercial businesses in the middle-market and business banking, the segment up to $50 million in revenue companies and up to $2.5 billion, they actually saw progress in loan growth. It was really in the high-end global corporate investment banking business where you saw paydowns to bring that down. That phenomenon is one that occurs from time to time. It's probably stabilized now. We'll see it play out. But we are fighting for loan growth. And frankly, line usage stabilized and is better than it's been for the last few quarters in terms of trend. And so again, that all speaks to people feeling fine, but they're not quite as aggressive as they would be when you read the economic statistics. And that's one of the great debates that you can read about in the paper every day.

Sure. Well, I'd say, generally speaking, higher for longer is probably better for banks as a general statement. The question will become, why are rates higher? Like, what's going on in the economy? Are we talking about inflation? Is it under control? Is it coming down? Right now that appears to be the case. So that's obviously a good place. And the Fed's in a good place because they appear to have a real rate that's high enough to make sure that inflation stays in a good place. Things can change, Matt. So an awful lot will depend upon just the why for rates. But generally speaking, if it's just because it's taken a little while longer for the inflation to nudge down before the next set of cuts, that's probably a good environment for us. I would expect us to perform relatively better than we've disclosed so far. And then you're asking a second question, which is around what does the sensitivity look like to plus 100 or minus 100, we've tried to just make sure that we continue to stay balanced. If anything, that corridor of plus 100, minus 100 has gotten narrower and narrower over time as we're trying to lock in NII that's $4 billion or $5 billion higher per quarter today than it was three years ago. And just make sure that the shareholder benefits from that through the course of time. So we'll have to see how the environment plays out. It's only been a quarter since we were last here talking about six cuts. Now it's three. So we just have to watch this play out and stay patient.

So I think about it, if you go back in the period prior to the run up in the couple of years after the pandemic, you had mid-$1.5 billion type of numbers a quarter. We think we're fundamentally stronger in the market position, as you said. So we feel very good about the work Matthew and the team have done. And as we look at it, we believe that they'll continue to gain share. And I think this is a more normalized level, and whether it's pulled forward or not, we'll find out. But it's a more normalized level, given those dynamics and one we should be able to build off, especially, as I said earlier, the penetration in the middle-market side of our business, whether those clients working up our wealth management in the markets generally, plus working across the globe, and we've done better work international. So we feel good everything the team's done, the combination of corporate and investment banking is very strong. So we don't think this is like an unusually high-water mark, and we should be able to build from here.

Well, Wealth Management, I think Lindsay, Katy, and Eric highlight for us regularly just the elevated levels of cash that our clients have. A lot of that is on us, and you can see that in our deposit chart. But there's a lot that we captured in the investment area, too, where a lot of their flows are coming into maybe it's money market funds, maybe they're short-dated treasuries, but there's a lot of cash at this point. So that would tell you it's supporting the ability to see continued assets under management flows going forward, depending on how obviously the stock market shakes out over time, but we're all struck by just the sheer amount of cash on the sidelines at this point.

Hi, Gerard.

I think, Gerard, so you've been around long enough to understand some of the dynamics. So as we moved through the post financial crisis, we had, in terms of that chart, if you looked at it, you had a lot of loans that we ran off because they weren't core loans anymore and troughed out at $900 billion level and then grew off from there. And in 2015, that's where we started driving responsible growth. It was a call to grow now that we pushed out a lot of stuff in the financial crisis and got it behind us. So the loans then start picking up. But if you remember back then, I think we had almost $300 billion, if I remember right, if you looked at the slide on loans and the non-line of business loans are $200 billion or something like that, it's down to $10 billion. So think about that dimension. So as we ran that down and could grow, we could overcome it. And so then on the growth on loan size is driven by discipline where we want to play and the card business is getting positioned right now, we could start to push from there, whether it's on home equity business, on the auto loan business, and on the commercial side, we had less issues after financial crisis in commercial, but getting through all that, it was getting to the credit quality we wanted. And a source of great growth for us from 2010 and beyond has been, we've probably gone from, I don't know, $20 billion, $30 billion of outstanding loans in the international part of Matthew's business in GCIB to almost $100 billion type of number. So our expansion of our international capabilities and done with great credit work by Geoff Greener and the team and Bruce Thompson teams. So put all that together, that's the loan side.

On deposit side, it really started with a focus that began really in the middle of financial crisis and beyond where we said we're going to go for core checking accounts in consumer -- primary checking accounts, drive customer satisfaction, drive organic growth, and not care about the number of sales as much as the net growth in net sales And as the team, Dean and Thong, over time, and Aron and Holly now have continued to push that adding 1 million-ish net new checking accounts, all core, we've gone from 60% core to 92%. We've gone from customer satisfaction to the highest levels ever in the mid-80s, top 2 box, etc., attrition down to lowest ever, preferred rewards kicked in, and all that has led to higher and higher balance retention per account and then also more accounts. And so we've probably grown in consumer from I think around $300 billion at the beginning of 2010-'11 to now $900 billion. Now there's economic growth and the economy grows, but that's way outsized. And that's what's driven the real value of the deposit franchise.

And then Wealth Management, again, after Merrill putting it together and then driving that core aspects between the team there has kept us up to $300 billion. That's from 200-and-something pre pandemic and probably less than that, I think it was $200 billion at the time of the merger. So all these things are just part of it. And then the GTS business investments that have driven those products. So that spread is high and growing again, which is counterintuitive to the narrative that even one of your colleagues mentioned earlier, which is leave aside all the quantitative tightening and all this stuff is supposed to happen, quarter after quarter we're now growing the amount of deposits over the top of the loans. And the loans hopefully will kick back in and grow a little faster, but they still won't use a lot of those balances up. And so we feel very good about that position and those deposits, as you can see on the bottom of page 8 on the left hand side, all-in cost is 193 basis points against the Fed funds rate of 5.5% in the rate of change in those deposit prices have flattened out to be very modest linked quarter. And that's just a tremendous leverage for the company.

Look, we don't have an update on the timing yet, Gerard. We're in the same place you are. We're waiting for the rules to come out, and we're still listening for updates from the Fed Chair and the Vice Chair. And we'll wait till we see those come out.

But the key is to remember that we're sitting even under the current interpretation we told you earlier on, without any modifications, we're sitting on enough CET1 nominal amount, $197 billion. That exceeds what we need for the increase in RWA under the current version of the rules have proposed. Anything that changes in that would be positive for us. So we don't need to retain capital to meet those standards. So we're off and running.

I believe there's one more question. Okay.

Morning, Jim.

Well, number one, our primary interest is to use the capital to support our customer businesses. So you've seen that happen in the markets business. As we said, it was one of the best quarters in a decade, first quarters. That is a multiyear process of building up not only the balance sheet and capital committed to business, but importantly also the investment systems and technology and risk management and other things, 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, supporting loan business, supporting all the businesses. The reality is, outside of the capital markets business, then you go to loan growth, and that loan growth in mid-single digits, that doesn't eat a lot of the capital up. So then it's just there to be returned. And so we got two basic phenomena: one is we storehouse a bunch of capital. If you think about the last few years, between the changes in CCAR a few years ago that changed the capital dimension, then the proposed rules, and then now whatever happens with them. So in the pandemic before that, we were sitting on a fair amount of capital that should be released over time here. And then secondly, the question will be what those rules are going forward. And third would be what he needs to support the business, which again, that's our primary responsibility. But generally, that is a modest amount of capital. And so most of our desire is to really deploying more expenses in technology investments. And we've gone from $3 billion to $3.8 billion in annual technology investments across the last couple years, more branches. But that's more of an expense question than a capital question.

All right. I think that's all, Lee. Correct? Okay, why don't we wrap it up here? Thank you for your time and attention. This quarter marks another quarter of strong organic growth across every business, continued this quarter. Good fees and what we call fees and commissions in the Wealth Management business, Investment Banking, and Trading. NII continues to outperform what we told you last quarter for the quarter, first quarter, we rolled that into second quarter. And we expect continued performance in that as we go through the trough and meet the second half of the year. We can then manage expenses well under the inflation rate. And we start with strong capital and liquidity and a strong balance sheet. So the team did a great job this quarter, and we look forward to talking to you next quarter. Thank you.