Bank Of America Corp (BAC) — Q1 2018 Earnings Call Transcript

Good morning. Thanks to everyone for joining this morning’s call to review our 1Q 2018 results. Hopefully, everyone’s had a chance to review the earnings release documents on the Investor Relations section of the bankofamerica.com website. I’ll just remind you, we may make some forward-looking statements in the discussion today. For further information on those, please refer to either our earnings release documents, our website, or our SEC filings. Brian Moynihan, our Chairman and CEO will make some opening comments. Paul Donofrio, our CFO will review the 1Q results in more detail. With that, I’ll pass it over to Brian.

Thank you, Lee, and good morning, everyone, and thank you for joining us to review our first quarter results. The momentum our team has built over the last several years showed up in the strong earnings in the first quarter of 2018. We reported record earnings for our company of $6.9 billion after-tax, up 30%. On a pre-tax basis, our earnings grew 15%. This growth drove improvements in our returns. Return on tangible common equity improved nearly 400 basis points to 15.3%, while our return on assets improved to 120 basis points. Our efficiency ratio fell below 60% on an FTE basis, reflecting our disciplined focus on expenses. We achieved growth by driving responsible initiatives. As you’ve heard us say many times, responsible growth has four parts. During the first quarter, we continued to play the role that our company plays in helping economies grow here and around the world by supplying capital for debt and equity growth. In our company, we grew loans by more than 5% year-over-year in aggregate across the businesses. We grew deposits by more than 3%, while maintaining discipline in our deposit pricing. Consumer led our deposit growth with an increase of 6%, or $38 billion in deposits year-over-year, a strong showing. All this led to revenue growth of 4%, and we also increased the amount of capital we returned to shareholders this quarter. We reported credit charge-offs of $911 million, 40 basis points of average loans, lower than both the prior quarter and the prior year-ago quarter. In fact, we reported a net charge-off ratio below 50 basis points now for 13 of the last 16 quarters. Just like last year, for the whole of 2017, we made money every day in the first quarter in the Global Markets business despite the pickup in volatility. You can see that our predictable earnings provide stability for shareholders. This quarter’s results mark our 13th quarter in a row reporting positive operating leverage on a year-over-year basis.

Thanks, Brian. Good morning, everyone. I’m going to start on Slide 4. Bank of America reported net income of $6.9 billion, or $0.62 per diluted share. Net income was up 30% year-over-year. EPS was up 38%. Growth in earnings was driven by not only tax reform, but also operating leverage and continued strong asset quality, which is easily seen in our $8.4 billion pre-tax income, which was up 15% year-over-year. Revenue was $23.1 billion, improving 4% year-over-year, driven by NII improvement. With respect to returns, return on common equity climbed to 10.8%. Return on tangible common equity grew to 15.3%. Return on assets was 1.2%, and the efficiency ratio improved to just below 60%. All these metrics showed strong improvement from 2017. The effective tax rate for the quarter was 18%, reflecting the roughly 900 basis points of ongoing benefit, resulting from tax reform. Note the Q1 results included a tax benefit of approximately $200 million from deductions for share-based awards delivered during the quarter.

The financing balances grew in our markets business, as our investors invested heavily in the markets in the first quarter. This is a good business environment, a solid business environment with good economic metrics, and we continue to get our fair share in that environment, driving responsible growth and the operating leverage we talked about across all businesses.

Hi, good morning. In terms of expenses, Paul and Brian, you’re on track to get to your target of about $53 billion for this year. Is that still the view and how is that possible? Are you self-funding that with some savings elsewhere?

Yes. John, it’s our view that the investments we’ll make will be funded through diligent work in operating leverage and improving organizational health and operational excellence. We announced the investments we’re making in the retail business and it’s all contemplated within the $53 billion level, which we ought to be able to maintain in 2019 and 2020.

We did have a charge-off rate of 2% this quarter, that was expected and well within tolerance. We would expect it to be around 3% looking at the remainder of the year. Plus I would remind you that we have the hurricanes, which is now 180 days since the suspension of those charge-offs, and that would show up, but we’ll fully reserve for that.

A couple of questions. One on capital that you indicated very strong capital ratios across the board. Could you just give us a sense of post-the Fed discussion and proposals on the SLR and the SCB? How you might be able to utilize them?

Yes, it’s early to discuss, but we think it’s constructive. Growing the balance sheet and increasing buybacks or continuing buybacks makes sense. That kind of change is going to better model reality and will allow us to have more flexibility in terms of taking some of that capital in our banking entities and moving it up the chain.

The effective tax rate for the quarter was 18%, reflecting the roughly 900 basis points of ongoing benefit, resulting from tax reform. This means that as we continue to grow, we simultaneously return more capital back to our shareholders.

The tax cut was supposed to lead to a lot of loan growth, the higher rates were supposed to lead to much higher margins. The volatility was expected to lead to much higher trading. So, should we expect more of a benefit from that in the future, or what should we anticipate?

We have seen loan growth of 5% year-over-year in the core business. The projections for the economy are looking optimistic, so we expect loan demand to pick up. Our experts are projecting a GDP growth of 2.9% for 2018, and we are confident that we'll achieve this growth across our segments.

Can you give us some color? Your Consumer Banking digital trends are obviously very strong. Can you tell us what advantage that is giving you over the smaller banks?

We’ve been investing heavily for many years. This mobile platform just didn’t appear overnight; it’s been a significant investment over the last six years. Our job is to be better than anyone, whether traditional competitors or new entrants. We continue to focus on investment to maintain our competitive edge.

Brian, you’ve kind of eliminated the tracking of mortgage banking as even a line item on the income statement for fees. So just thinking strategically from where you come from and not being a business segment, can we get your thoughts on the shift?

We continue to deliver mortgage loans for our customers. We did $9-plus billion this quarter in mortgage, and our focus remains on our customer base. It’s part of our strategy to increase revenue over time and we will drive that forward using our digital capabilities.

Do you have to be more careful at this point on share repurchase and other capital actions just to keep the hit to TBV from not being extreme on a quarter-to-quarter basis?

If stock price warrants, we will deploy the capital back to shareholders through substantial stock buybacks. The OCI issue is a near-term risk, but overall, we are confident in our trajectory and our capital deployment strategy.

In summary, we had a strong quarter and achieved record earnings for our company. We did that by driving responsible growth across our segments and maintaining a disciplined approach towards expenses. We look forward to the next quarter. Thank you.