Bank Of America Corp (BAC) — Q2 2017 Earnings Call Transcript

Good morning. Thanks for joining us this morning to discuss the second quarter 2017 results. Hopefully, everybody's had a chance to review the earnings release documents that are available on the Bank of America website. Before I turn the call over to Brian and Paul, let me remind you we may make some forward-looking statements. For further information on those, please refer to either our earnings release documents, our website or our SEC filings. With that, I'm pleased to turn it over to Brian Moynihan, our Chairman and CEO, for some opening comments before Paul Donofrio, our CFO, goes through the details. Over to you, Brian.

Good morning and thank you for joining us for our second quarter results. This quarter represents another solid example of driving responsible growth here at Bank of America. We're staying the course and executing against our responsible growth mantra which has allowed us to gain market share and grow revenue. That mantra drives the way we manage our cost effectively while at the same time making continued large investments in people and technology for the long term value of this franchise. That mantra allows us to manage risk well, whether it's credit, market, operational or reputational risk. That mantra also drives an appropriate pace of growth in a modest GDP environment while holding credit costs down. All of this has resulted in significant operating leverage, leading to strong earnings growth and supports our plan to deliver more capital back to shareholders. Through the first six months of 2017, we have more than doubled the amount of net share repurchase and dividends to shareholders compared to the first half of 2016. As a reminder, with successful CCAR results behind us, we announced plans on June 28 to deliver $17 billion in capital back to shareholders over the next 12 months through higher dividends and net share repurchases. For the quarter we produced net income of $5.3 billion after tax, growing 10% compared to last year's second quarter. Now that was driven by continued strong operating leverage across the franchise. Our efficiency ratio reached - touched 60% this quarter. In addition to the net income improvement, a 2% reduction in diluted shares resulted in a 12% improvement in diluted EPS. Year-over-year net interest income improvement of nearly $900 million drove revenue growth proving the value of this deposit-rich franchise. We continued also to make progress on our returns and our return on tangible common equity moved above 11%, the first time despite increasing capital levels. As we look at the next slide on first half line of business results, I'm going to let Paul talk about the details of the quarter in a minute but I wanted to highlight basically two things. First, momentum in the businesses has comparing the first half of this year versus the first half of last year, and second, a focus a bit on our Consumer business as it reached $2 billion in after tax earnings this quarter. So the broad statement each business segment grew earnings and capital and it had its reporting returns well above our cost of capital. Consumer banking produced $3.9 billion in after tax earnings for the first half of the year growing 14% from 2016. This was achieved with good revenue improvement in controlling costs and driving operating leverage while maintaining great credit quality.

Thanks Brian. Good morning everybody. I'm starting on Slide 6. As Brian said, we earned $5.3 billion or $0.46 per diluted share with EPS increasing 12% versus Q2 '16. Revenue of $22.8 billion is 7% higher than Q2 '16 and expenses of $13.7 billion was 2% higher than Q2 2016. The quarter included a few noteworthy items. First, we completed the sale of our U.K. consumer card business during the quarter resulting in a small after-tax gain. The transaction added roughly 12 basis points to our advanced CET1 ratio through both additions to CET1 and reductions in RWA. A pre-tax gain of roughly $800 million recorded then all other reflects a number of factors, including a premium on credit card receivables sold and the monetization of goodwill. It also reflects the recognition in other income of currency hedging gains and transaction losses from currency fluctuations that were previously recorded in OCI. Lastly, we recorded tax expense associated with the currency hedging gains, which drove our effective tax rate higher in Q2. After tax, the gain added about $100 million to earnings. The sale completes the transformation of our consumer credit card business from a multi-country, multi-brand business to a single brand business serving core retail customers in the United States. As usual, we also note DVA for you. This quarter net DVA was a negative $159 million, which was similar to Q2 2016.

I appreciate all the detail on the net interest income discussion. One piece of it on the repo borrowings part of it, financing - the equity financing side. I'm curious if you think of that as a little episodic and you just go with the flow. Or is it more a permanent part of the strategy where you are using your strong balance sheet to help grow? The tag along to that is if it is more permanent why do it through repo? Is that more expensive?

I think it's a little bit of both. So we did make a decision to invest more on our equities business this quarter. That's going to go up and down depending on client activity in every quarter. We could always change our mind. But generally we've made a decision to add more balance sheet to equities because we see an opportunity there and because our customers would like us to do that. In terms of how we add that balance sheet that definitely can change one quarter to another. This quarter it was a lot of synthetic which tends to happen when you have clients overseas who have some demand. Next quarter it could be more plain OPB and that does change the mix of NII when that happens. But it's based upon client demand not necessarily how we want to manage one part of our P&L versus another.

Yes, look we're watching it closely. I guess I would point out that Bank of America and the industry really haven't increased as you point out deposit rates on traditional bank accounts. I think we believe we deliver a lot of value to depositors. Transparency, convenient safety, mobile banking, online banking, nationwide network, rewards, advice and counsel. There's some real value to having a relationship with us and I think there's value plus the fact that there's been a lack of market pressure so far. There's a lot of on traditional accounts to leave rates relatively flat. We are starting to see some rate increases on some account types in GWIM and in Global Banking. And if you look at our models, they anticipate that we're going to have to start raising eventually based upon historical experience. But the bottom-line is, we're going to balance our customer needs and the competitive environment with our shareholder interest and do the right thing. So we'll just have to wait and see.

Just to follow up on the NII, Paul, it sounds like when you net a few positives and negatives in terms of your NII outlook for next quarter you are expecting a modest increase in the third quarter as of now. Could you put any size parameters on that?

No, I think we want to get out of the game of putting size parameters on it. I've given you all the inputs I can run through them again, if you'd like. But look we feel good about where we are that we had some transient kind of things this quarter. There are a lot of variables that go into this. One of the biggest one is by the way predicting people's behaviors, predicting customer. So I wouldn't want to give you a number, if you want to be happy to go through kind of all the different ins and outs again, if you want, but…

Brian, two questions. One on the consumer banking efficiency ratio. You mentioned that there still is room for that to fall from the 52%, which is obviously very efficient as it stands right now today. And you indicated all various opportunities to drive incremental revenues at a much improved expense ratio with all the digital that you outlined earlier. But could you speak to how the branch network could also impact those numbers? I mean, your branch has been coming down about 3% the last couple of years. Is that the kind of pace that you think you are going to continue? Or does the digital improvements enable you to move even faster there?

Well I think Betsy be careful. There you have to go back to the broadest context which is the 6100 to 45. We got after this relatively early, and - and so we've got to down a level. We don't know where it goes from here, because it will be based on customer behavior demands. But if you go back, if you think about it, over the last several years, we've been adding branches in places like Denver and we'll continue to build out there. We have been refurbishing branches heavily across the whole franchise. That's all in this run rate you see. And that will continue in this is in - in an expectation I'm talking about. So we'll - think we'd have to down 15, 17 branches linked quarter, a 100 odd year-over-year, that'll continue to happen. But I think what you would expect is the efficiency of that system continues to improve dramatically.

Look, let me just run you through the whole picture, okay. If you want to build any models, but on the revenue side, it's primarily interest income, think about $10 billion of receivables at 9%, plus you got a little small amount of card income I think that was around 30 million in the second quarter. The efficiency ratio for that business is around 40%. If you look in our supplement, you can see I think the net charge-offs ratios it's been running a little bit less than 2% call it $40 million, $45 million per quarter.

We've always been clear that we in the guidance still relative the large banks is out there sort of 30% earnings to dividends and 70% to share buybacks. We think that the shares are a tremendous value and will continue to do that. And with $17 billion over the next 12 months we can make some headway. So think about 30/70 split for us in the large bank category I think that's a responsible place to be. Right now we're moving up towards that but we're not quite there.

I just had a question first on the lending environment overall. Could you give an update of the pipelines? And I know last quarter you said middle market revolver, you were at record levels there. Were you able to increase utilization rates there? Just give a sense of where your clients are if optimism is waning?

We feel good about loan growth unless the economy changes significantly we wouldn't expect much change from the past quarters. We did see a little bit of dissemination this quarter in commercial that could slow growth in the future. But having said that, we haven't changed our medium term outlook on our ability to grow loans, we expect total loan growth for the company to be a low single digit. And we expect to grow mid-single digits in our lines of business. That obviously excludes the headwind from loans and all other mortgage one-off and now U.K. card is gone.

Thank you for joining us this quarter. I think if you think about this quarter it's a quarter which shows you responsible growth. It's solid earnings growth, very solid operating leverage. Each business grew first half of this year versus first half of last year and did it the right way, did it while maintaining great risk and did it while we invested heavily in technology and invested in our people. So we look forward to next quarter and talk to you soon.