Bank Of America Corp (BAC) — Q2 2018 Earnings Call Transcript

Good morning. Thanks for joining this morning’s call to review our second quarter 2018 results. By now, I hope everybody has had a chance to review the earnings release documents on the bankofamerica.com site. Before I turn the call over to our CEO, Brian Moynihan, let me remind you we may make forward-looking statements during the call. After Brian’s comments, our CFO, Paul Donofrio, will review the details of the second quarter results, then we’ll open it up for questions. Please limit your questions to one, and then you can have a follow-up afterwards. For further information on forward-looking comments, please refer to either our earnings release documents, our website or the SEC filings that we post. With that, I’ll turn it over to Brian.

Thank you, Lee, and thank all of you for joining us to review our second quarter results. Continued solid client activity in a growing economy coupled with strong cost and risk management discipline resulted in a strong quarter of results. Combined with quarter one, the earnings this quarter brings us to $13.7 billion in net income for the first six months. This is the best start to a year in the company’s history, more than 20% higher than the previous record. Driving responsible growth has resulted in consistent results for shareholders. It has enabled us to increase returns and support customer growth in a real economy, and to continue to invest through our operational excellence. Net income for the quarter was $6.8 billion after tax and it grew 33% from last year. Our return on tangible common equity was more than 15%. We delivered positive operating leverage for the 14th consecutive quarter. We drove the efficiency ratio below 59%, an improvement of 249 basis points in just 12 months. While it’s of course true the tax reform is benefiting our bottom line as well as corporations around America, income before taxes also grew. In the second quarter, reported pre-tax income improved 5% year-over-year, but after adjusting for some select items which Paul is going to cover later, a better way to look at it is pre-tax income is up 11%. Our balance sheet from both a capital and liquidity standpoint remains extremely strong. We announced following the June CCAR results in 2018, we plan on returning roughly $26 billion to you, our shareholders, over the next 12 months through a combination of share repurchase and dividends. This is a strong improvement from last year’s initial CCAR approval in June of 2017, where we were approved to return $17 billion in capital. Our immediate priority remains to use capital to buy back shares that we don’t need for business growth, but importantly we increased our dividend by 25%. Our responsible growth strategy continues to work, growing earnings returns and capital returns and doing so the right way. This quarter, we demonstrated growth within our defined customer and risk framework, and we did it organically. When you think about it year-over-year, we grew average loans by more than 5% in the aggregate across the businesses. We grew average deposits by more than 3%. This quarter marks the 11th straight quarter where Bank of America has grown its average deposits more than $40 billion on a year-over-year quarter comparison basis. We added more credit cards, more checking accounts on the consumer side, and we added more accounts and households in our Merrill Edge online brokerage. We also had a strong quarter in our wealth management business as we formed more households than we had in any quarter in the past. Importantly, we see our small business clients borrowing more. We originated $2.3 billion of loans to small businesses during the second quarter of 2018 alone. This helps facilitate the core economy and its growth. We also see more in our business banking and commercial banking customers and continue to deepen relationships with them. The other aspect is to make sure we stay within our risk framework. As you can see on Slide 2, credit continues to perform well with a 43 basis point net charge-off ratio this quarter. Since coming out of the crisis and stabilizing, we’ve now seen consistency over the last few years. In fact, the charge-off ratio has been below 50 basis points for 14 of the last 17 quarters. In global markets, we continue to see a strong return on our lower value at risk metric than many of our peers all while continuing to generate growth and improve profitability. We have earned a 15% return on capital in the global markets business year-to-date from Tom and the team. The other part of being sustainable is to invest while remaining efficient. We have to make investments in the communities we serve, investments in our talent and our company, and investments in our capabilities. By doing this, we believe we had a leading capability that will sustain us well into the future. How do we afford all that? We afford it through operational excellence. We’ve been able to continue to invest and even have our costs continue to come down. Investments in our teammates have resulted in a strong, stable talent pool of tremendously effective teammates and attrition levels are at all-time historic lows. We continue to receive third party accolades as one of the best companies for people to work. If you move to Slide 3, when you put all that together, what happens? You get operating leverage. This slide shows you the 14th quarter in a row where we’ve had positive operating leverage in our company. On a linked quarter basis, every business segment drove expenses lower from first quarter to second quarter, even as they continued to invest. When people ask for examples of how all this works, how can you invest in developing capabilities while continuing to take down costs and continuing to have higher customer satisfaction, I think the easier way for people to visualize that is in our consumer digital banking capabilities. Many of you use them and all of you should. By investing in client capabilities, we make our clients’ lives easier, more efficient for them, more effective for them, and their satisfaction goes up. Our costs then in turn go down because our processes become more automated. So how does that play out? Let’s look at Slides 4 and 5. Here we display the results, and typically Paul will cover these details, but I think it’s important to understand how responsible growth in driving sustainable operating leverage works. As you can see on this slide, you can see some of the results of the investments we’ve been making across decades to drive the business. The important thing is the size of our consumer base allows those investments to be leveraged. As you can see in the upper left-hand corner, we crossed over 25 million active mobile users this quarter. Another 10 million use other digital channels, so that brings us to 35 million customers using digital devices this quarter on an active basis, and it continues to grow as you can see due to the innovations we had. Those mobile users, as you can see below, logged into their mobile apps nearly 1.4 billion times this quarter. What are they doing with us? You can see that in some of the other boxes. While they do transactions, they also use them for communication. They’re using their digital services to set appointments in our financial services for their convenience, rather than just drop in. This assures we have the right teammates to serve the customers well. We had a half million digital appointments this quarter, but there’s still a lot of room to grow when you think of the 50 million customers who walk into our great stores every day, so it’s critical to have both digital and physical capabilities. As you can see in the roll-out of Erica, our digital assistant, you can do some tasks hands-free or text, and that increases your flexibility. You can see Erica has grown nicely to over 2 million users from only starting a few months ago. Customers are doing more of their regular deposit transactions on their digital devices. This quarter, we saw more deposit transactions by a person taking a picture of the deposit and sending it over mobile phone than we did by a person handing their check to the teller. In fact, 76% of all our deposit transactions are now through ATMs and mobile deposit. This allows for more meaningful relationship management activities to take place in our centers as we invest more and add more teammates to do that. Customers just aren’t transacting and researching with these capabilities; they’re using them for sales. Digital sales now make up 24% of all our sales in our consumer business. This compares favorably with all sectors, including general retail regarding digital sales. As we move to Slide 5, you can also see that the adoption rate is moving faster for these newer products. New capabilities are taken up much faster by the customer base who is completely digitally enabled. On payments, you can see the early adoption of Zelle has grown. In the recent quarter, we processed 35 million Zelle transactions or more than $10 billion in principal amount - that’s twice the pace of a year ago. We believe we account for about 25% of Zelle, and this activity will continue to grow as the industry continues to drive this as our standard for P2P payments. Overall, consumer digital payments have now overtaken non-digital payments, more than $368 billion in digital payments at the bottom of Slide 5 you can see. Over 52% of total payments have come in this quarter. This is growing 12% on average for the past four years. As you can see on sales: 24% of sales are executed digitally, and we continue to expand that through other products and services. Digital auto was launched a year ago, and now more than half our retail auto volume. Digital mortgage, which is a true end-to-end digital experience just brought out recently, you can see is growing fast; and on investments in the lower right-hand side, you can see the Merrill Edge platform growing assets 20% in the past year to $191 billion and 2.5 million accounts. We have parlayed that and our capabilities for our automated Merrill Edge guided investment platform, which you can see the statistics. These examples are just a set of examples about how the sustained investment coupled with the change in customer behavior coupled with process improvement and operational excellence allows us to drive positive operating leverage while driving up customer satisfaction. There are many other examples across our company, including Cash Pro in our commercial set of businesses, which has 475,000 commercial users. We’ll continue to make these investments and continue to drive the operating leverage of the company, and that will provide good utility for you, our shareholders. Now let me turn it over to Paul to handle the financial results. Paul?

Thanks, Brian. I will start on Slide 6. Bank of America reported net income of $6.8 billion or $0.63 per diluted share. Net income was up 33% from 2Q17, and EPS grew 43%. Once again, our earnings growth was driven by strong operating leverage and continued strong asset quality in addition to the benefits of tax reform. Before I review comparative period performance, let me remind you of a few select items which I think are helpful in understanding our operating performance. In 2Q17, we had a net after-tax gain from the sale of our U.K. card consumer business of roughly $100 million, which included a revenue benefit of nearly $800 million in other income mostly offset by a tax cost of nearly $700 million, so revenue was $22.6 billion on a reported basis, down 1% versus 2Q17; however, excluding the impact of the U.K. card gain, revenue was up 3% year-over-year driven by NII improvement and better sales and trading results. Another notable item in 2Q17 was in expenses. We had a $300 million impairment charge associated with the sales in data centers, so an expense of $13.3 billion on a reported basis was down 5% from 2Q17, but excluding that charge, expenses declined 3% or nearly $400 million. After excluding both of the 2Q17 revenue and expense items, operating leverage was 6% and pre-tax income improved 11%, as Brian noted. I would also note two items in our 2Q18 results which had a combined negative pre-tax impact of roughly $160 million in other income; however, these items are not part of the select items adjusted for on this page and in our release. The first item was a charge of $729 million from the redemption of some trust-preferred securities. The second item was a gain of $572 million from the sale of some non-core mortgage loans. Net DBA negatively impacted the quarter by $179 million. Provision expense was $827 million, $101 million higher than 2Q17 driven primarily by the seasoning of our credit card portfolio, loan growth, and a modestly lower reserve release. Brian already covered the significant improvement in returns seen on this slide. The effective tax rate for the quarter was a little more than 20%, which includes the ongoing benefit from the Tax Act. We would expect the tax rate to be roughly 21% in the second half of 2018, absent unusual items. Turning to the balance sheet on Slide 7, overall, compared to the end of Q1, end of period assets of $2.3 trillion decreased $37 billion, driven by lower global markets assets as well as lower deposit levels, primarily due to seasonal customer tax payments. Liquidity remains strong with average global liquidity sources of $512 billion and a liquidity coverage ratio of 122%. Total shareholders equity decreased $2 billion from Q1. Preferred equity was down $1.5 billion in the quarter. If you look at the first half of the year, we issued $3.5 billion of lower yielding preferred stock ahead of redemptions of $2.8 billion of higher yielding preferred stock, and note we have called another $900 million that will settle in the third quarter. Given a billion dollar decline in the value of AFS securities, which impacts OCI, common equity decreased by half a billion dollars as we returned 90% of net income earned in the quarter to our shareholders via dividends and repurchases. In Q2, we repurchased 166 million shares for $5 billion and paid $1.2 billion in common dividends. Turning to regulatory metrics, this is the first quarter in which our RWA under standardized exceeds RWA under advanced. Standardized RWA increased $8 billion from Q1 due to lower trading exposure on global markets and continued runoff of legacy mortgages. CET1 capital was flat from Q1 as net income and lower DTA disallowance was offset by share repurchases, dividends and OCI. Our CET1 standardized ratio improved to 11.4% and remained well above our 9.5% requirement. The supplementary leverage ratio remains well above U.S. regulatory minimums. Turning to Slide 8, on an average basis, total loans increased to $935 billion. Note that the 2Q17 sale of U.K. card impacted the year-over-year comparisons by nearly $6.5 billion. Adjusting for the U.K. card balances, which we recorded in all other, average loans were up $26.6 billion or 3% year-over-year. Total loan growth continued to be impacted by the runoff of non-core consumer real estate loans. On the other hand, loans in our business segments were up $45 billion or 5% year-over-year. Our consumer loans grew 6% year-over-year as clients grew card balances 5% and mortgage originations across both consumer banking and wealth management were equally strong. While we are seeing good growth in originations of home equity loans, they continue to be outpaced by pay-downs of older loans. Commercial loans grew 5% year-over-year. Consumer optimism carried over into small business as we originated $2.3 billion in loans and grew balances 6%. Strong year-over-year growth in structured lending with wealth management clients also contributed to commercial loan growth. Competition for commercial loans remains intense. We are seeing aggressive terms and structure; however, we remained disciplined. From a consistency standpoint, as you can see on the bottom right chart, loan growth in our business segment has been mid-single-digit consistently for several years now. This chart compares year-over-year growth over the past five quarters. Our growth has been led by consumer, which is consistent with what we’re seeing in the economy. The recent moderation in the consumer growth rate is driven mostly by auto loans, given our decision to focus on organic growth and rely less on third-party flow. On the other hand, growth in consumer credit card has ticked up recently, and also note the modest increase in the growth rate in commercial. This has been driven by improvements in both small business and structured lending. Before turning the page, I just want to mention deposits as we think about funding this growth. Average deposits grew $44 billion or 3.5% year-over-year. Consumer banking once again led with growth of $35 billion or 5%. Deposits in wealth management declined in Q1, reflecting seasonal income tax payments and shifts to investments. Global banking deposits were strong, growing 8% and included movement from non-interest bearing to interest-bearing. Turning to asset quality on Slide 9, total net charge-offs were $996 million or 43 basis points of average loans, and increased as expected. We saw seasonally higher losses in credit cards. Note that we are now more than 180 days past the storms which impacted many U.S. areas. The small storm-related card losses which came through in this quarter were previously reserved for. Provision expense of $827 million in Q2 included a $169 million net reserve release. This reflects continued improvement in our consumer real estate and energy portfolios. The increase in net charge-offs versus 2Q17 was due primarily to credit card seasoning, loan growth and the storm-related losses. Compared to 1Q18, the increase was driven by commercial bouncing around the bottom. Our reserve coverage remains strong with an allowance to loan ratio of 1.08% and a coverage level 2.6 times our annual net charge-offs for the quarter. On Slide 10, we break out credit quality metrics for both our consumer and commercial portfolios. With respect to consumer, net charge-offs of $830 million were flat compared to 1Q18 and up $79 million from 2Q17. As mentioned, the driver of the year-over-year increase was credit card seasoning which increased to 3.17% due to seasoning and growth, as well as storm-related losses. Excluding the storm-related losses, the credit card loss rate increased 22 basis points from 2Q17. Consumer NPLs of $4.6 billion declined 5% from Q1 and 47% of our consumer NPLs remain current on their payments. The commercial loss rate, excluding small business, remains strong at 9 basis points. While up from a low level in 1Q18, commercial losses continued to remain low. Other commercial asset quality metrics continued to improve as reservable critical exposure was down $1 billion from Q1 and NPLs declined 5%. Turning to Slide 11, net interest income on a GAAP non-FTE basis was $11.65 billion, $11 billion on an FTE basis. Compared to 2Q17, GAAP NII is up $654 million or 6%, reflecting the benefits of higher interest rates as well as loan and deposit growth. This growth is even more impressive given 2Q17 included $140 million of NII from the U.K. card business which we sold in June of last year. Note we have presented the interest yield excluding the impact of net interest income and related assets associated with our global markets segment. These assets, resulting from client financing and trading activity, generally are shorter term and have a lower net interest yield than core banking assets. The net interest yield excluding global markets increased 12 basis points year-over-year to 2.95% driven by broad improvement in asset yields relative to funding costs. Moving back to total NII, Q2 GAAP NII increased modestly versus Q1 as the benefits of higher interest rates and one extra day was offset by seasonal client activity in global markets and seasonal pay downs of credit card loans. An increase in three-month LIBOR rates from 1Q18, which impacts the cost of our long-term debt, also negatively impacted the comparison. With respect to deposit pricing, rate paid on total interest-bearing deposits rose 7 basis points from Q1 and is up 32 basis points versus 4Q15, which was the beginning of this Fed rate hike cycle. That compares to an average Fed funds rate which is up 27 basis points and 151 basis points respectively from 1Q18 and 4Q15, so to date in this cycle we have passed through on interest-bearing deposits roughly 21% of the increase in Fed funds. Turning to asset sensitivity, as of 6/30, an instantaneous 100 basis point parallel increase in rates is estimated to increase NII by $2.8 billion over the subsequent 12 months. This is modestly lower than our sensitivity on 3/31 driven by cash deployed to securities, which increases future NII. Note that the short end represents about 70% of this sensitivity. Turning to Slide 12, we had another solid quarter of expense management, extending our record of year-over-year quarterly decreases in expense to 14 out of the last 15 quarters. Non-interest expense of $3.3 billion was down $698 million or 5% year-over-year. As I mentioned earlier, 2Q17 included roughly $300 million in impairment associated with data centers that we sold, so excluding that charge, expense still declined nearly $400 million or 3% with broad improvements across most categories. I would emphasize that we achieved this reduction while continuing to invest in new technology, new financial centers, and sales staff. With respect to sales professionals, we continue to add relationship bankers in consumer, business banking and commercial, as well as financial advisors in wealth management. Notably, despite adding sales professionals, our headcount is down roughly 3,000 from last year as we reduce non-client facing roles by streamlining how we work and deliver for customers. During the quarter, we also onboarded more than 2,500 summer interns. These interns were selected from nearly 50,000 applicants. This year’s class is our most diverse group ever; for example, women make up 45% of these interns and 55% are ethnically or racially diverse. Turning to the business segments and starting with consumer banking on Slide 13, another great quarter for this business as client balances grew, revenues increased and expenses were down. Key metrics suggest a healthy consumer and a strong U.S. economic growth. Jobs and wages are improving, tax reform put more money in consumers’ pockets, and equity markets are healthy and creating wealth. These types of improvements are fueling higher spending and more borrowing, and we believe we are gaining share and deepening relationships in this growing economy. Earnings in consumer banking increased to $2.9 billion, returning 31% on allocated capital. This is the 12th consecutive quarter that earnings in consumer banking have increased year-over-year. Consumer banking created over 850 basis points of operating leverage this quarter as revenue grew 8% while expenses were down. The efficiency ratio has improved more than 400 basis points in the past 12 months and is now below 48%. Year-over-year, average loans grew 7%, average deposits grew 5%, and Merrill Edge brokerage assets grew 20%. As rates rose and given our solid growth in client balances, the value of our deposits drove an 8% improvement in revenue year-over-year. Cost of deposits, which reflects non-interest expense as a percent of average deposits, improved to 155 basis points. Rate paid remained at 5 basis points. Net charge-offs increased $105 million from 2Q17 as our credit card portfolio grows and continues to season. Net charge-off ratio remained low at 128 basis points, up only 7 basis points from 2Q17. Provision expense increased $110 million from 2Q17, in line with the increase in net charge-offs. Turning to Slide 14 and key trends, looking first at revenue, we believe relationship deepening is driving improvement in revenue, predominantly NII. This quarter, our revenue growth of 8% year-over-year included 11% growth in NII as well as higher revenue in card income and service charges. Spending levels on debt and credit cards were up 8% year-over-year, driving the increase in card income. Service charges grew modestly. Customer satisfaction in consumer banking reached a new high with roughly 81% of our clients rating us 9 or 10 on a 10-point scale. Focusing on client balances on the bottom of the page, we continued to grow deposits, loans, and brokerage assets. With respect to loans, in addition to growth in residential mortgage, card balances grew 5% year-over-year and Merrill Edge assets grew 20%. Edge offers customers a lot of value and is a great way for us to deepen relationships. Whether it is access to one of our 4,000 licensed advisors and a world-leading research platform or how integrated Edge is with other banking needs, we think customers are noticing and giving us more of their investment dollars. Expenses were down slightly compared to 2Q17 as productivity improvements more than offset the continued investment in financial center renovations and technology initiatives. We continue to modernize financial centers and add new ones. This quarter, we opened 13 new financial centers and renovated another 65. Turning to global wealth and investment management on Slide 15, GUM produced another quarter of solid results, nearing the record $1 billion of net income earned in Q1 and producing the second highest pre-tax margin ever at 28%. Strong client activity and a healthy equity market coupled with solid expense management all benefited results. Growth in households and deepening of relationships is helping offset industry dynamics driven by consumer behaviors. Strong AUM flows and market appreciation increased AUM balances, driving a 10% increase in asset management fees. This was offset by lower brokerage revenue and modestly lower NII. The NII reduction from 2Q17 reflects lower deposit levels as well as higher rates paid on deposits. Additionally, brokerage revenue decreased as volumes declined and mix shifted toward fee-based products. As a result of this shift, the percentage of GUM revenue derived from annuitized revenue streams has increased over the last year to more than 85%. The business managed costs well, creating operating leverage. Moving to Slide 16, we continue to see strong overall client engagement in Merrill Lynch and U.S. Trust. Our local market strategy led by 93 market presidents is helping to better integrate our lines of business and deepen relationships, especially in wealth management. Merrill Lynch advisors reacted constructively to our 2018 compensation program, which incentivizes household and other types of responsible organic growth. Merrill Lynch’s organic household acquisition has not been this high for at least five years. Competitive advisor attrition remains near historic lows. Year-over-year, client balances rose to record levels of nearly $2.8 trillion, driven by higher market values, solid AUM flows, and continued low growth. AUM balances, which have climbed to over $1.1 trillion, are up $110 billion versus 2Q17 with flows contributing $74 billion of that increase. Average loans of $161 billion grew 7% year-over-year with continued strength in consumer real estate and structured lending. Turning to Slide 17, global banking earned just over $2 billion, growing 16% from 2Q17 and generating a 20% return on allocated capital. Revenue was down 2% from 2Q17 as an increase in NII from traditional corporate banking activities and higher rates was more than offset by lower investment banking fees and the impact of tax reform with respect to tax advantaged investments. Absent the impact of tax reform, the business would have created modest revenue growth and operating leverage. IB fees of $1.4 billion for the overall firm declined 7% year-over-year driven by lower advisory fees from a record quarter a year ago. Expenses were relatively flat versus 2Q17 despite our continued investment in additional client-facing professionals to enhance local market coverage. Global banking average loans grew 3% and deposits 8% year-over-year. Looking at trends on Slide 18 and comparing to Q2 last year, with respect to average loans, 3% growth was led by corporate banking lending in international regions. Core loan portfolio spreads were down 5 basis points year-over-year and 1 basis point versus Q1. Loan growth was solid and reflects the current economic environment but remains very competitive. Average deposits rose $23 billion or 8% compared to 2Q17 as we maintain a targeted pricing approach to acquire and retain high quality deposits. Switching to global markets on Slides 19 and 20, I will talk about results excluding DBA. Global markets generated revenue of $4.4 billion and earned $1.3 billion, producing a return on allocated capital of 14%. Earnings were up 35% as revenue growth outpaced expense increases from higher revenue-led costs and continued technology investments. Sales and trading grew 7% versus 2Q17 to $3.6 billion. Our equity business led the improvement with revenue of $1.3 billion, up 17% year-over-year. The equities business benefited from increases in client financing activity, reflecting investments made in the business over the past 18 months. Equity derivatives also benefited from increased client activity driven by volatility in financial markets. Fixed sales and trading of $2.3 billion increased 2%. In general, improved performance across macro-related products was partially offset by weakness in credit products. On Slide 21, we show all other, which reported a net loss of $247 million. This is an improvement from 2Q17 of $98 million. All of the selected items reviewed at the start of this presentation, except DBA and global markets, were recorded in all other and therefore impacted both revenue and expense comparisons. If you remember the two items in 2Q18, the TRUPS and the gain from the sale of non-core mortgages netted to a negative $160 million, while the sale of U.K. card increased revenue in 2Q17 by nearly $800 million. This nearly $1 billion year-over-year swing drove the $1.2 billion change in revenue. Non-interest expense improved $760 million year-over-year and includes the 2Q18 data center impairment charge as well as broad improvements across other expenses. Remember, when comparing income tax expense between periods, the tax expense in 2Q17 included the nearly $700 million tax impact of the U.K. card sale, which offset the revenue benefit. Let me turn it back to Brian for a couple of closing comments before we open it up for Q&A.

Thanks, Paul. Just a couple thoughts to close and then we’ll take your questions. We continue to operate in a strong business environment led by consumer health, corporate profits, and a view of growth in the future. We’ve performed well in this environment and feel we are getting our fair share of the business. We continue to drive strong operating leverage for the 14th quarter in a row and we grew, but we did it in a responsible manner, keeping our risk in check. Customer balances and earnings, they all grew as we cited earlier. We report earnings which have been stronger and more consistent for many years now, and with that consistency and stability, we continue to produce that operating leverage, which plays to your benefit as shareholders. With that, let me turn it over for questions and answers.

Hey guys. Wanted to ask about expenses, which came in a little better than expected this quarter. Brian, how should we think about the $500 million technology investment that you mentioned in the press release over the next few quarters, and what’s it mean for the target of approximately $53 billion in expenses this year and also your ability to keep expenses flattish into ’19 and ’20, which you’ve previously talked about?

Thanks, John. We, along with a lot of other companies, announced $1,000 bonuses, we announced a share for success plan, and then on top of that we’ve stepped up investment in opportunities that we have. It’s basically $75 million a quarter from now until the end of next year. We expect to manage a lot of that through self-funding, for lack of a better term, by continuing to improve our expenses what we’ve seen, so you should think in the $53 billion, low $53 billion range this quarter and keeping it relatively flat, and we’re going to work this self-funded. But in any event, it will be $75 million a quarter in expenses, but when you add it all up, it’s a major step in investing in our company due to the benefits from tax reform.

Got it, and then beyond this year, kind of staying, like you said, flattish in that same ballpark is the goal for next year and possibly beyond as well?

Yes, the idea is for ’19 and ’20, we’ve told you on many occasions that we expect to maintain flattish over the next couple of years beyond ’18.

Okay. Paul, wanted to ask about the card losses. What kind of pace of seasoning do you see in the credit card book over the next couple of quarters as that continues to grow?

Pace of seasoning? Look - I guess a couple of thoughts. One, I think you have to remember that 2Q is sort of the highest quarter seasonally for card losses, right? We’re sort of at 3.17, and if you back out the hurricane, we’re at kind of 3.09. So yes, I would expect that kind of a range as you look out the next couple of quarters, and that would reflect seasoning and loan growth in the card portfolio in that number.

Okay, that’s helpful. Then just more broadly, credit at the top of the house in terms of the run rate around charge-offs and provisions, you also expect stability in the near term?

Yes. In the third quarter, we anticipate that credit will continue to perform well. We expect provisions to be roughly aligned with net charge-offs, while reserve releases will moderate over time as we continue to build allowances to support loan growth, particularly in card products. As we mentioned, our card portfolio is maturing, which may lead to an upward trend in net charge-offs; however, keep in mind that the second quarter typically sees the highest card losses. Also, it's important to note that net charge-offs can be somewhat variable in the commercial sector, especially since we are currently at the lowest point. Nonetheless, when we examine all the metrics—non-performing loans, delinquencies over 30 days, and reservable criticized loans—they are all improving, and these indicators suggest a very robust environment and a strong portfolio.

Okay, that’s helpful. Thank you.

Hi, thanks very much. I want to ask an NII question, and I saw the comments on ex-global markets, the net interest yield being up 12 basis points, deposit betas are good, so the core business that we all focus on is good. I do want to talk about the actual pick-up in wholesale funding costs, because the yield up 49 basis points on Fed funds purchased is big. I know it’s a steepening of the short end, but the question I have is, is that something that we should expect to be with us throughout this rate hike cycle if the short end of the curve keeps steepening? Is it something that you’re able to hedge, because it does make a pretty big difference in NII.

Are you talking about the increase in the cost of our long-term debt quarter over quarter?

Just think of it; it’s a matched book, so it moves together quite quickly because it’s all short term on the liability side, and while they have long assets, they adjust as the curve shifts. However, there are certain factors in the second quarter, like dividend transactions, that typically influence this, so I would keep an eye on it for next quarter. You may notice it stabilizing more like it usually does.

Okay, that’s good, because the flattening out on total net interest income is really that, as opposed to the core business, that’s why it’s more important than usual now?

Yes.

Okay, and then just one question on advisory. Year-to-date, you guys have lagged peers some. I don’t know if you feel that’s a couple of big deals or a sector or two that you want to deepen coverage in. I’m just curious to get your thoughts on advisory.

Oh, the M&A advisory fees? I think it is. It is, just sometimes you get the right side of a deal, sometimes you get the wrong side of a deal, sometimes you’re not in a deal. But even though we performed solidly in line with the fee pools and stuff year-over-year, we know we can do a better job there and the team is working on it. We had a record quarter in the second quarter last year, and so the $1.4 billion level is more in line with quarters across time, second quarters. But the team knows they can do a better job and are after it.

All right, thank you.

Hey, good morning. Maybe just talk a little bit about loan growth, what you’re seeing. Obviously the environment has been showing signs of life. Are you seeing that as well, and how do you think about that going forward in terms of your outlook for loan growth?

First off, I guess our perspective is customers are optimistic given tax reform, the economy is strong, and confidence feels high, so customers are going to react differently to those factors near term - some may pay down debt from tax savings or repatriation, but some are going to invest and borrow. In large corporates, growth in any one quarter can bounce around a little depending on acquisition financing, so having said all that, our near-term expectation on loan growth remains unchanged. We still expect total loan growth to be low single digits at the top of the house, if you exclude the headwinds from the run-off of the non-core mortgage book and all other, growth within the business segments should be mid-single digits. I would also note in the slide deck, year-over-year growth has been relatively consistent now over the past couple of years. If you look at the different categories, you want a little bit more color, we anticipate modest growth in consumer loans. On car, we’ve seen mid-single digit year-over-year growth, which has modestly increased over the last couple of quarters. With respect to consumer real estate, originations are solid and balances are growing well, but there are headwinds continuing from the run-off from the non-core portfolio; and remember, we’re booking 90% of our mortgages now on the balance sheet. I mentioned in the remarks that we expect auto growth to be flat to down as we focus on organic growth and rely less on third-party, and note that in all of these categories, we’re very focused and remain focused on prime and super-prime.

So you’re not seeing any real acceleration yet?

I wouldn’t say we’ve seen acceleration. I think it’s been consistent growth. You know, we have a pretty diverse set of clients that we service. In any one quarter, one may accelerate more than the other. If you look at this quarter, we saw really good growth in small business, we saw good growth in structured lending and GUM, so in any quarter we might see growth, but it always seems to average out at that sort of mid-single digit level.

As we consider the context of slowing deposit growth, I'm unsure if TRUPS has a significant impact. How do you view the rates on that and our expectations for NII growth going forward, given the current yield curve?

Yes, well we will clearly benefit from the June rate hike, Q3 is going to have an extra day, and we’re also going to benefit from expected loan and deposit growth, but these benefits are going to be offset by rate increases on deposits. As you know, we’ve been increasing rates in GUM and global banking. The issue is we just don’t know when we will increase in consumer. It’s going to depend on the competitive environment, so it’s probably a little misleading for me to give you all some sort of numerical guidance as we just don’t know the timing of any increase in consumer. Having said that, year-over-year we’re up a billion dollars in the first half.

Okay, fair enough. Thanks.

Hi, good morning.

Morning, Betsy.

A couple of questions. One is on deposit betas and getting a little bit more color there. I know you mentioned in the prepared remarks the overall deposit beta. Can you give us a sense as to where you think you are in the commercial, the wealth, the consumer buckets? I’m just trying to get an understanding of which buckets are higher than others, and do you see an acceleration in any of these specific buckets from here?

I think, Betsy, the customer base has performed very differently depending on what the cash is used for. If it’s transactional cash, whether it’s a consumer or whether it’s a wealth customer or a company, they’re using that money and it’s in the flow, and therefore the rate side of it is not as important as you’re paying for service on the commercial side, or the consumer side just the cash flow getting out of the household. If you look at it on the investment side, obviously all segments when they have the access cash that they don’t need to conduct their daily business moves, and so if you look at our pricing strategies across businesses that Paul talked about earlier, you see them differentiated not only by business but also by market and sub-markets within business, and so if you look at the powerful engine and the trillion-plus of deposits, $1.3 trillion, consumer is nearly $680 billion of it, and of that $300 billion-plus is checking, which moves very slowly because it’s transactional. The good news in consumer is we’ve grown the number of checking accounts for the first time in the last six or eight quarters consistently due to all the repositioning we’re doing with accounts, and the average balance has gone up and is all checking. So that is very beneficial for us going forward. So without getting into all the numbers, and Paul can hit that, you just have to think philosophically, half that balance in consumer or checking are not going to move much, and the rest of it is money market and will move as the market moves and competition moves. We’ve been able to maintain discipline on that side and generate another $30 billion-odd of year-over-year deposit growth, which is pretty good, and that’s all core market share gains because we’re not doing CDs and other stuff. Then on the institutional corporate side, we’ve moved it, and Paul gave you some of the statistics. For commercial sides, obviously the highest end moves fastest, and yet we’ve been able to maintain growth in balances while still maintaining discipline on pricing.

Okay, and you spoke to the non-consumer side growing nicely. What about on the commercial side, are you seeing a shift from NIB to fees, or are you holding your NIB in the commercial group?

Well, most of the deposit growth in global banking has been in interest-bearing deposits, so we are definitely seeing a shift there from non-interest bearing to interest bearing.

But it’s very different by business, so in the business banking segment, it’s five to one non-interest bearing to interest bearing, and then when you get to corporate, it’s more interest bearing than non-interest bearing. So again, it differs by the type of customer it is too.

Yes, okay, but I guess part of the point you’re making is that that’s in the run rate already?

Yes, the key point is that you can observe the impact of the tightening measures since 2015 on the global situation. The tightening moves have influenced deposit rates, which will continue to adjust. If you consider the overall asset sensitivity, it shows just under $3 billion for a 100 basis point increase, with 70% being in the short term. This reflects all the aspects we are discussing and incorporates the forward curve assumptions.

The checking accounts that you’re growing on the consumer side, do you see that more in your branch expansion areas or is that more in your, for lack of a better word, legacy footprint?

It has to be in the legacy, because the expansion footprint is so small. When you think about it, it’s digital sales, it’s in the legacy footprint, it’s deeper relationship management. But we’ve grown those checking account numbers at the same time the primary percentages kept moving up. We’re now at 91% of the primary checking account in the household and the average balance has grown also, so think about that dynamic - a higher average balance, primary households going up, and growing the number, and it has to be in the core franchise. There’s not enough new branches out there to make a difference when you have the size of franchise we do.

Got it. Then just lastly, can you remind on the pace of the branch expansion over the next year or two? I know it’s a four-year forward that you announced, but just trying to understand the rate of change here over the next year or two.

About 500 over the next four years has been; and so you saw some of that dynamic this quarter. It picks up because literally just getting locations set and getting a build out, so you’ll see it pick up over the next several quarters, but it takes about four years to get to them all. Thirteen this quarter, to give you a sense, so it will pick up as we move forward.

Got it, okay. Thanks, Brian.

Good morning, Brian. Good morning, Paul.

Missed you the first time, Gerard.

I apologize for the telephone issue. Brian, could you provide insight into your returns on elevated capital by business line? Averaging them out results in over 22%. However, your reported return on equity is only slightly above 10%. It seems the capital allocated to your business lines is less than the total consolidated capital you have, so when I consider your tangible common equity, which is nearly $200 billion, and the allocated capital of about $128 billion, have you engaged in discussions with regulators? I understand it’s constrained by CCAR and operating risk as well. Have you talked to them about the actual capital needs for banks like yours under the new administration compared to the previous one?

Well, one important thing to keep in mind is that goodwill does not amortize, so that $70 billion will remain unchanged. We’re seeing a decrease of about $100 million per quarter from it; it used to be slightly higher. Our tangible common equity is in the mid-7s, which is significant compared to the mid-2000s when it was below 4, even dipping to around 3. This reflects our strong tangible common equity position. In response to Marty’s question, this means we, along with our peers, will be strong pillars in the market. We have serious discussions about how to ensure enterprises are efficiently capitalized for safety and soundness. Currently, our common equity Tier 1 ratio is above 11, which is more than our standard of 9.5. The challenge we face is managing this capital buffer alongside stress testing and capital requirements. It is crucial to have ongoing discussions with industry peers and regulators to find a balanced approach, as under-utilized capital is not ideal. We need to release capital back into the system to support others, which benefits the industry and acknowledges that consistently achieving 5% loan growth is a sustainable way to operate. To make all this work, we must allow capital that isn't necessary for growth to flow out of the industry. Additionally, regarding Marty’s question, we are significantly influencing the real economy. We have been doing this effectively for many years. Looking at our commercial loan growth, it’s been in the mid-single digits, and our small business loan growth this quarter has been very robust and consistently strong, thanks to our team’s efforts. However, we still have more capital than we need, and we must maintain a balance. Now that we’ve established long-term capital standards and everyone has met these requirements, we need to navigate through the final regulatory rules and manage outcomes effectively. Our industry is considerably stronger than others globally, which is promising for our country as we move forward into the next economic cycle.

Following up, Brian, on the capital, clearly you had a good ask on the CCAR returns. Can you remind us where you think long-term the dividend payout ratio can get to when you sit down with the board? Could it get to a 40% level?

Well, we have said 30%, and largely it’s trying to figure out how all the rules and regulations work, and also where you’ll never have to cut the dividend in times of stress and things like that. Let us get it up there and we’ll figure out where it goes from there.

Okay. Lastly, obviously you talked about the value of total relationships on your consumer side. You also talked about you’re adding more customers with credit cards, households, brokerage house clients. Can you parse for us how much do you think you’re taking away from other competitors just versus new people coming into the financial system? Do you have any idea what that is?

You can assess our growth through population trends and changing demographics, particularly in the consumer banking sector. However, given our size, we need to focus on delivering exceptional service to drive growth. This growth should naturally outpace economic and population growth, indicating that we are gaining market share. On the commercial side, we are also acquiring new clients by expanding our relationship management team and strengthening our connections with existing clients. This process takes time as we transition relationships between companies. The unique combination of our local operations and global platform, including our research capabilities and cash management services, gives us a competitive edge that few can match. In the middle market investment banking sector, we've introduced services in 50 markets and, despite fluctuations in overall investment banking fees, our revenue from middle market clients remains robust. We believe we have a competitive advantage and are committed to enhancing our efforts, which includes an additional $500 million investment as a result of tax reform benefits.

Great, thanks. I just had one quick one, and a lot of them have been asked already. Is there a way that you could size what the runoff portfolio did quarter on quarter, so we can kind of get back to what the core loans did sequentially?

I’m sorry, the run-off portfolio?

It’s been averaging about $3 billion to $4 billion per quarter, and you can see it in the deck, specifically on Page 8. We break it out for you right there – we have total loans, then the run-off portfolio, then the business segments, and we added this quarter so you could see the consistent year-over-year growth in loans we’ve been experiencing.

Okay, great. Thanks.

Thank you everyone for joining us. Another strong quarter - $6.8 billion in earnings. If you review Page 2 of the slide deck, you’ll see it - we grew loans on a core basis and grew deposits on a core basis. We grew revenue on a core basis at 3% and we brought expenses on a core basis down 3% for a 14th consecutive quarter of operating leverage. Returns are strong and we continue to drive it, and we look forward to seeing you next quarter. Thank you.