Bank Of America Corp (BAC) — Q1 2019 Earnings Call Transcript

Good morning. Thanks for joining this morning's call to review our 1Q 2019 results. By now I trust that everyone has had a chance to review the earnings release documents which are available on the Investor Relations section of bankofamerica.com website. Before I turn the call over to the CEO, Brian Moynihan, let me remind you that we may make forward-looking statements during the call. After Brian's comments, our CFO, Paul Donofrio, will review the details of the 1Q results. After that, we'll open it up for all of your questions. For further information on forward-looking comments, please refer to either our earnings release documents, our website, or our SEC filings. With that, take it away, Brian.

Thank you, Lee, and good morning, everyone. Thank you for joining us this morning to review our first quarter of 2019 results. In the first quarter, we’ve reported $7.3 billion of net income after-tax, the best quarter in the company's history. So let's begin on slide two. This slide shows the building blocks in achieving another record quarter. It also shows our commitment to responsible growth and how it drives our shareholder model. We reported diluted EPS of $0.70, which grew 13% from the first quarter of 2018. This reflects a nice mix of both operating improvements and capital returns. Pre-tax income of $8.8 billion grew 4%, and you could see that in the upper right. We generated operating leverage of more than 400 basis points, which you can see in the lower right. Asset quality remains strong as net charge-offs remained around $1 billion, the same level it has been for several quarters. Provision expenses were up year-over-year to match those net charge-offs more closely, with a small reserve build this quarter against the net reserve release last year. Through disciplined capital deployment after meeting all requirements to make loans to our customers and support their businesses, we continue to drive our share count lower. You can see that in the lower left. We are well underway with our goal to offset the dilution in shares caused by the increased capital build after the crisis. Through share buybacks, our diluted shares are down 7% compared to the first quarter of 2018 and down 1.5 billion shares in the past four years. Turning to slide three, part of responsible growth is to produce sustainable results and drive operational excellence, and we did it again this quarter. As you can see on slide three, we extended our positive operating leverage streak to 17 consecutive quarters. Over the last four years, we've had a variety of market conditions, interest rate environments, and shifts in perceptions of both the U.S. and global economy. All of these factors impact our business in a given quarter. However, what remains constant is our ability to drive operating leverage. We achieved it in various ways each quarter, but consistently nonetheless. When you think of our company, consider the three broad and diverse buckets of revenue, two of which have annuity-like characteristics, and one is more susceptible to market conditions. The first bucket is spread revenue derived from loans and deposits, while the second bucket includes recurring fees, such as cash management fees in our commercial business or consumer account fees. The third bucket of revenue, which is more market-related, consists of sales and trading revenue, investment banking fees, and asset management brokerage revenue, which depend on market levels and activity. Compared to last year, our market-related revenue was down 12%. However, the other two, non-market-related revenue sources were up 7%, which reflects the diversity within our company, leading to flat revenue growth overall. Our unwavering focus on expense management resulted in a year-over-year expense decline of 4%, contributing to the 400 basis points of operating leverage. As we turn our attention to how we're managing the company, while controlling expenses, we also continue to invest in the future. Our expenses decreased from $57 billion to over $53 billion over the past four years. Alongside this, we've driven operational leverage quarterly and continue to deepen investments in our franchise. We're achieving positive results as we enhance relationship management capacity, amplify marketing efforts, and broaden market penetration across the U.S. We remain committed to investing in our people with leading benefit plans in health and retirement, as well as premier training programs for reskilling our employees. Additionally, we've announced an increase in our minimum wage from $15 an hour to $20 an hour over the next 26 months. We need to attract and retain the best talent to ensure our company thrives and serves our clients effectively. This quarter, we hired 500 new sales professionals, including consumer relationship bankers, wealth advisors, commercial bankers, and investment bankers. Our technology spending has been around $3 billion annually for several years, and due to savings from tax reform, it is expected to be 10% higher in 2019. We're enhancing both our physical network for delivering products and services to clients and the operational facilities in communities and countries worldwide. Overall, Bank of America invests around $2 billion annually in capital expenditures to improve our financial centers, ATMs, and other infrastructures. We've executed well on the broad-based buildout we started several years ago, and the costs to complete this work are already included in our expense forecasts and current run rates. In doing so, we drive operating leverage, invest in our future, and observe the returns on these investments. One of the key ways we measure returns on investments is through digital capabilities. Each quarter, we present the charts on slide five illustrating our digital customer statistics. As I have shared with many of you, we sometimes overlook the obvious driving this trend: the evolving preferences of our customers. We will continue to assist our customers via all available channels. Customers can have their cake and eat it too—they can choose between digital and physical services, 24/7 cash access and electronic payments, checks, wires, ACH, and meeting loan officers online or in person for mortgage applications. Currently, we have 37 million digital users, with 27 million utilizing mobile services; 27% of our sales are transacted digitally, and 77% of our deposit transactions are now completed through digital means. This allows our financial center employees to devote more time to significant client interactions. We welcome 800,000 customers daily into our financial centers, which remain an essential aspect of our offerings. We continue to modernize our financial centers, and while consumer payment growth has slowed from an 8% to 9% rate a year ago to 3% in the first quarter of 2019 compared to a strong quarter in 2018, this still accounts for over $700 billion in payments this quarter. As part of these payments, Zelle usage has increased to over 5 million active users, and we processed $16 billion in payments for them this quarter. On slide six, let's discuss client activity further. Our average total deposits increased by $63 billion year-over-year—marking our 14th consecutive quarter of organic deposit growth of over $40 billion. Global banking deposits grew by 8%, as did wealth management. Consumer banking deposits rose by 3%, with consumer core checking specifically growing by 7% from the prior year. This indicates that more households are choosing us as their primary bank. Our growth rates have consistently outpaced industry averages, showing that customers value our service offerings and growing loyalty. Furthermore, wealth management experienced substantial deposit growth from new relationships. Our Global Banking team continues to capitalize on strong demand by deploying bankers and treasury officers across our franchise. Additionally, within Global Banking, you may notice that commercial customers are moving balances from non-interest-bearing to interest-bearing accounts due to increased treasury credit rates which we provide for those balances. Ultimately, this process stabilizes when the rate curve stabilizes as it has. Moving on to slide seven, let's delve into average loans. The promising news is the growth from the impacted late fourth quarter we previously discussed was complemented by additional growth during the first quarter. We observed strong rebounds in our middle market base, where line usage increased significantly. This indicates that middle market companies are ramping up loan activity to finance raw material purchases, payrolls, and various investments. Overall, on a corporate level, our loan portfolio grew by 1%. When examining our business segments, core loans increased by $33 billion, or 4%, on a year-over-year basis, which aligns with our responsible growth model. The lower left chart demonstrates that core business growth has been consistent over the past five years, which is congruent with our responsible growth practices. In fact, our ending balances in commercial banking have shown the highest linked quarter growth rate in the past six years. As we look at slide eight, here are the key highlights for the quarter. I have covered many core points, but I want to emphasize our returns. Despite a modest increase in the average balance sheet, our return on assets was 126 basis points, improving both year-over-year and sequentially. Our return on tangible common equity was 16%, while our efficiency ratio continued to decline to 57% from 59.5% last year. I will now hand it over to Paul to dive deeper into the details of our first quarter results. Paul?

Good morning, everyone. I'm starting on slide 10 since Brian already covered the P&L. Overall, compared to the end of Q4, the balance sheet grew by $23 billion, driven by the equity financing business. Liquidity remained strong with average global liquidity sources of $546 billion, and all liquidity metrics were well above requirements. Long-term debt increased by $4 billion, and common shareholders’ equity rose by $1.7 billion from Q4, primarily driven by the value of our AFS debt securities benefitting from the decline in loan and interest rates, thus boosting AOCI. Partially offsetting the increase was the return of more capital than we earned this quarter, which totaled $7.7 billion or 112% of the net income available to the common through a combination of dividends and share repurchases. Turning to regulatory metrics, total loss-absorbing capacity rules became effective in January, and at the end of March, our TLAC ratio comfortably exceeded our minimum requirements. Our CET1 standardized ratio was flat at 11.6% from Q4 and remained well above our 9.5% regulatory requirement. The ratio remained flat because the increase in AOCI mentioned earlier was offset by higher RWA, primarily in global markets. Now, addressing slide 11, I would like to spend some time discussing NII given the changes in the rate environment. Net interest income on a GAAP, non-FTE basis was $12.4 billion; $12.5 billion on an FTE basis, reflecting a year-over-year increase of $606 million or 5% compared to Q1 2018. The improvement was driven by the value of our deposits as interest rates rose, along with loan and deposit growth, partially offset by reduced loan spreads. However, on a linked-quarter basis, GAAP NII was down by $128 million. In Q1, we benefited from yields rising on our floating rate assets as short-term rates increased. We were disciplined with respect to deposit pricing and saw growth in both loans and deposits, particularly from commercial loans. Nevertheless, higher short-term rates also raised our long-term debt costs and other global market funding costs. Additionally, lower mortgage rates mitigated the benefits from increased short-term rates, resulting in a net benefit for the quarter. However, this net benefit only partially countered the seasonal impact in Q1 from having two fewer days of interest, costing us approximately $180 million. Our net interest yield of 2.51% improved by 9 basis points year-over-year, although it dipped by 1 basis point on a linked-quarter basis. Deposit rates within our Wealth Management and Global Banking sectors increased; however, there was little movement in our consumer business. Overall, the average rate paid on interest-bearing deposits rose to 76 basis points up 9 basis points from Q4 and 40 basis points compared to Q2 2018, alongside an average increase in Fed funds of 97 basis points year-over-year. Moving on to the asset sensitivity of our banking book, the drop in long-end rates increased our asset sensitivity compared to year-end. We're now modeling slightly lower deposit pass-through rates based on our experiences in this interest rate cycle. Given the recent rate movements, I want to share insights on NII for the upcoming year. For the full year, NII increased by 6% in 2018, amidst rising interest rates and an economy growing around 3%. However, the economy is projected to grow more moderately in 2019, with lowered rate expectations. Furthermore, we face some seasonal headwinds in Q2. Nonetheless, through loan and deposit growth and two additional days of interest in the next couple of quarters, we anticipate NII growth will be consistent with or slightly outpace overall economic growth. More specifically, Q2 generally sees increased funding for client activity in global markets tied to the European dividend season, which can boost trading revenue but reduce NII. We often see less benefit from loan growth driven by paydowns on credit card balances at year-end. Additionally, falling long-end rates may drive higher prepayment for mortgage-backed securities, which will lead to bond premium write-offs. These headwinds will be partially mitigated by one additional day of interest accruals. Looking to the latter half of the year, we should see NII benefit from loan and deposit growth, along with an extra day of interest in Q3. Ultimately, we estimate NII growth for 2019 around half the growth rate from 2018. This perspective relies on today's forward curve and loan and deposit growth consonant with the current economic climate. Now, moving to slide 12, we’ve made notable improvements in efficiency, with expenses totaling $13.2 billion, a decrease of $618 million or 4% compared to Q1 2018. This decline reflects the efficiencies from a full year's work aimed at simplifying processes across the enterprise and lowering FDIC insurance costs. Additionally, we reduced the number of management layers over the past year, minimizing bureaucracy and complexity. Regarding headcount, many managers have been replaced with sales professionals. We've also ended various intangible amortization in our Merrill business related to the merger a decade ago. In comparison to Q4 2018, expenses were up $149 million due to seasonally elevated payroll tax expenses, giving rise to an increase partially offset by the timing of tech initiatives and marketing plans. Notably, Q4 was elevated due to discrepancies between accounting for some deferred benefit programs and the associated hedging accounting, skewing towards declines in Q4 and rebounds in Q1. Our efficiency ratio improved to 57%. Additionally, I would mention that we filed an 8-K earlier this year, reclassifying some expenses to revenue resulting in a reduction of around $200 million from the total 2018 expenses. Regarding 2019 and 2020 expense levels, as we know, we’ve raised planned initiative spending for 2019 supporting both physical and digital expansions, and announced further investments in our workforce including the minimum wage increase. Despite these spending increases, we believe we can meet our target of maintaining expenses in line with our reclassified 2018 figures. However, be aware that the quarterly progression of expenses in 2019 may appear somewhat different compared to previous years, likely influenced by the timing of technology and marketing expenditures. Concerning asset quality on slide 13, asset quality continues to be strong, thanks to our long-term commitment to responsible growth and a robust U.S. economy. Net charge-offs totaled $991 million, which was $80 million higher than Q1 2018 and $67 million higher than Q4. Compared to Q4, we observed typical seasonality in our credit card portfolio, while year-over-year, we continued to see gradual seasoning within that portfolio. In Q1, there was one charge-off related to a single utility client, which inflated losses by $84 million and affected comparisons to both periods. The net charge-off ratio stood at 43 basis points. The loss ratio has been below 50 basis points in all but three of the past five years. Provision expense was slightly above $1 billion, matching losses for this quarter, which included a modest $22 million net reserve build. Looking ahead, we expect net charge-offs to be close to this quarter’s $1 billion level for the remaining quarters of 2019, assuming that current economic conditions hold steady. On slide 14, we have broken down credit quality metrics for both our consumer and commercial portfolios. As noted, both consumer delinquencies and non-performing loans have trended downward, which we view as a positive indicator for future asset quality. In the commercial segment, we did register a slight uptick in non-performing loans and reservable criticized exposure; however, as a percentage of loans, both metrics remain near historic lows. Shifting focus to business segments, let's start with consumer banking on slide 15. Earnings in this segment grew 25% year-over-year to $3.2 billion. Q1 reflects ongoing robust momentum from 2018, as deposits increased by $23 billion or 3%, revenue rose by 7%, and expenditures were lowered by 4%, generating operating leverage of 11%. Despite the expanded physical footprint, the overall cost of running the deposit franchise decreased by 6 basis points year-over-year to 1.64%, with the efficiency ratio declining to 45%. Credit costs remain manageable, with a net charge-off ratio rising only one basis point year-over-year to 128 basis points. We also continued to boost our account numbers while maintaining a primary account status above 90%. More clients are joining our preferred rewards program, leveraging digital channels for services and sales, and benefiting from our expanded and improved physical delivery network. Consumer spending growth has naturally eased to 3% following two years of above-average growth, especially in light of a moderately slowing economy. It's also worth mentioning that the growth observed in Q1 2018 was bolstered by consumer confidence following tax reforms in late 2017. Solid performance in consumer lending has persisted, showing a year-over-year growth of 5%. The recent decline in mortgage rates has enhanced momentum in the mortgage market, with both refinancing and purchase originations climbing by 22% from Q4. In our support for small business owners, we've invested in expanding our capabilities, such as streamlining underwriting processes, enriching credit card features, and adding specialists. Outstanding loans to small businesses are nearing the $20 billion mark, reflecting a 6% year-over-year increase. Healthy consumer activity is also clear in the growth of our investment assets, with a $29 billion rise recorded in investment assets for the Consumer segment compared to Q1 2018, fueled by solid inflows and the Q1 2019 market recovery, indicating sustained customer engagement across all major product categories. Turning to slide 16, we see real improvement in consumer banking NII, which drove our 7% growth overall. As we capitalize on the value of deposits through our focus on deepening relationships, card income has decreased by 3% year-over-year due to higher rewards costs. These increased rewards are influenced by multiple factors, including more customers enrolling in preferred rewards, deepened relationships yielding greater rewards for clients, and new features enhancing customers' ability to earn and track their rewards. While these adjustments raise rewards expenses, they also contribute to relationship deepening across multiple products, positively impacting retention and profitability. Service charges dipped 2% year-over-year as we continue to adjust policies to reduce various overdraft fees. Lower ATM volume has also impacted service charges. Moving on to Global Wealth and Investment Management on slide 17, the GWIM results were impressive, particularly considering the revenue hit from the market's decline at the end of December. Compared to 2018, this business has gained momentum, reflected by the acquisition of new households, which not only contributed solid AUM flows but drove another successful quarter of brokerage flows. Net income exceeded $1 billion, increasing by 14% from Q1 2018. Pre-tax margins are robust at 29%. The business achieved 360 basis points of year-over-year operating leverage as expenses declined by 4%, while revenue fell only modestly. Within revenue, positive contributions from banking activities and AUM flows weren't enough to offset declines in transactional revenue and pricing pressures from the market's fluctuations. The 4% expense decrease was attributable to lower FDIC insurance costs, reduced revenue-related incentives, and merger-related intangibles, which are now fully amortized. Shifting to the combined performance of Global Banking and Global Markets on slide 19, together, these segments generated $9.3 billion in revenue and earned $3.1 billion in Q1, equivalent to a 16% return on their combined allocated capital. Individually, starting with Global Banking, this segment earned $2 billion, yielding a 20% return on allocated capital. Earnings increased by 2% from Q1 2018, propelled by operational leverage. Revenue was up by 3% year-over-year, driven by loan and deposit growth and higher interest rates, alongside increased leasing revenue. These rises effectively countered the declines in investment banking revenues and loan spread compression. The business generated over 400 basis points of operational leverage, with revenue growth negating a 1% decline in expenses, where lower deposit insurance costs exceeded the continued investments in technology and human resources. Examining trends on slide 20, relative to Q1 last year, the investment banking fees declined by 7% year-over-year. The overall industry's global fee pool is estimated to have decreased by 14%. We enjoyed a good performance in advisory fees, rising by 16%, but this was more than offset by reductions in both debt and equity underwriting fees. Despite a rebound in leverage finance within debt underwriting, primary additions remain muted. Comparatively, in equity capital markets, we also witnessed year-over-year fee declines. As we turn to global markets on slide 21, excluding DVA, global markets generated $1.1 billion in earnings and a 13% return on capital. Q1 experienced a seasonal bounce back from Q4, yet was down compared to the record-setting first quarter of the previous year. Q1 2018 witnessed exceptional equities business driven by heightened client activity and market volatility. In Q1, 2018, a significant client-driven derivative transaction contributed to exceptional revenues. Overall revenue declined by 10%, while expenses decreased by 6%. Sales and trading revenues fell 13% year-over-year to $3.6 billion, with FICC revenues down by 8% and equities declining by 22%. The equities decline was moderated by the absence of the significant client transaction from a year prior. Low market volatility this year resulted in reduced client activity and poorer performances in equity derivatives. The downturn in FICC revenues stemmed from lower client activity and less favorable market conditions across both macroeconomic and credit products. Throughout the quarter, investors displayed caution in light of geopolitical concerns, resulting in lower trading volumes for both primary and secondary markets. Notably, there were no days with trading losses during the quarter. On slide 22, we illustrate that our sales and trading revenue continues to skew towards domestic activity, where fee pools remain concentrated. Within FICC, we are more aligned with credit products compared to macro. Moving to slide 23, we covered our other segment, which reported a net loss of $48 million, remaining relatively unchanged from the year prior. Given recent adjustments to our financial statements that refined certain allocation methodologies, we believe the ongoing profitability or loss in this unit should not significantly differ in Q1 absent unusual occurrences. This quarter, we encountered a typical seasonal tax benefit of about $200 million from stock-based compensation, which adjusted the quarterly tax rate from our expected full-year rate of 19% to a reported rate of 17%. Now, with that, let's open up for questions.

Hi, good morning. Paul, I was hoping that you could clarify the outlook for net interest income. It sounds like you expect NII to be down sequentially in Q2 due to several pressure points you've mentioned. And then to see growth in the latter half as loan and deposit growth and day count become more favorable?

Yes, that's right. As we indicated in the prepared remarks, we face some near-term headwinds, some seasonal, while other factors relate to stabilization of long-end rates. However, we expect that in the second half of the year, we will benefit from ongoing loan and deposit growth, plus an extra day of interest in Q3. Ultimately, we project that NII for the full year 2019 will increase by roughly 2% year-over-year. By the way, I also want to clarify when I mentioned the net charge-off involving that single credit, I mistakenly transposed the figures; I said 84 million, but it should have been 48 million.

Okay. So regarding your outlook for 3% NII growth in 2019, does that assume no rate hikes, with a relatively flat curve?

Yes, that assumes the curve as we sit here today, which is flat.

Okay, no hikes. In terms of rate sensitivity, you've mentioned an increase. How do you approach managing rate sensitivity at this point in the cycle? Are there actions to potentially shield NII in a flattening curve environment or in a rate cut scenario?

While we're not a hedge fund but a bank guided by customer needs, our asset sensitivity is influenced by loan and deposit activities. We have limits for asset sensitivity adjustments on both sides. Adjusting sensitivity does involve forecasting interest rate changes, and there may come a time in the future where we'd consider modifying it, yet presently we feel comfortable with our standings.

Got it. Thank you.

Thanks. I appreciate it. While this is related to the NII context you just provided, could you explain the ongoing shift from non-interest-bearing to interest-bearing deposits? How real-time is this? If we see no hikes in the coming quarters, will the shift stop promptly?

What I meant to convey was that we need to evaluate the factors influencing our consumer deposit franchise. On that side, consumer deposits rose by $26 billion, and checking accounts grew by $24 billion, which drives our client base. For non-interest-bearing balances in commercial clients, the way cash management services are priced means that when rates increase, clients require fewer balances to cover fees as credit rates improve. When rates plateaux— as we've observed recently — we expect stabilization to continue.

That makes sense. Maybe this ties into a follow-up question, but you've noted decreases in service charges, especially around deposit-related fees, down by 4% or 5% year-on-year. Is this a response to customer behaviors, or has Bank of America implemented new fee structures?

We continue to evaluate and modify our overdraft policies, which affects downward trends, but the primary driver stems from our retention of primary households. Clients exceeding limits for free checking, where maintaining $1,500 in average balances enables fee waivers, ultimately contributes to profitability.

Understood. Thank you.

Hi, good morning. I want to ask about the context of operating leverage. A core aspect of the investment case has been your sustained positive operating leverage capability—something showcased quite effectively on slide three. Given the present outlook for loan and deposit growth, paired with expectations for expenses to rise year-on-year through 2019, are you still confident in efforts to maintain that momentum and positive operating leverage without higher rates?

Certainly. We provided guidance on expenses and indicated our expectation for 2019 and 2020 is to have expenses approximate 2018 on an adjusted basis. Hence, we shall continue to generate operating leverage if we simultaneously grow loans, deposits, and revenue.

Understood. Just one final follow-up regarding TLAC. Paul, noting your incremental color this quarter—again, asked this on the last call—could you provide more detail regarding your comfort with TLAC ratios, especially considering the interest expenses associated with long-term debts? Are there moves to optimize your TLAC ratios to alleviate that interest burden given the current operating environment?

We certainly have interest in optimizing our positions. We’ll share extensive details of TLAC ratios in our Q filings. To note, we received approval for an additional $2.5 billion in buybacks earlier this February and set up new banking and broker-dealer entities due to requirements for Brexit and resolution planning. So our funding needs are higher currently, which is a longer-term optimization goal for the future into the coming period.

Thank you.

Thank you. Good morning. Paul, you stated that the equity business included a notably large derivative client transaction. Could you provide more context for that?

I'm hesitant to share specifics related to individual clients. However, to clarify, if you remove the impact of that transaction, equities would potentially be down about 12% instead of the 22% noted, which indicates significance.

Okay. Regarding your effort to control expenses effectively, could you provide perspective on where you foresee the efficiency ratio stabilizing, allowing consistent operations?

The efficiency ratio is constantly improving, where it stops remains to be seen. We continuously work to drive it lower without setting a defined goal that may impede ongoing growth. We aim to maintain flat expenses in a rising NII context, which will reflect positively.

Thank you.

Hi, good morning. On the expense front, I noted that we saw exceptionally low expense ratios this quarter. Based on your perspective, do you view this as a one-off situation given capital markets revenues were lower, or do you project it is achievable for Q1 2020?

Reflecting on our guidance from 2019 and 2020, we foresee that with continued investments in technology, healthcare, labor, and the expansion of our financial centers, we maintain our expense levels similar to those of 2018. Something to note is that Q1 expenses increased by approximately $150 million compared to Q4. Additionally, Q1 typically incurs seasonal payroll taxes within the same framework, partially offset by timing concerning tech initiatives and marketing expenses.

That makes sense. Can you further elaborate on your outlook for loan growth, including any distinctions among categories?

For our corporation and the U.S. economy, particularly, we noted strong performance in our middle market and small businesses. This is promising because our core clients, which include thousands of middle market clients and millions of small businesses, are increasingly leveraging their lines as evident in the uptick in line usage. Overall, loan growth is reflective of well-managed portfolios, and we see increasing origination—all positive signs for the future.

Thank you.

Good morning, team. Regarding interest rate sensitivity, you've provided a breakdown of that $3.7 billion sensitivity between short and long-end. Would you mind reiterating the current breakdown?

Yes, it currently stands at 75% on the short end and 25% on the long end.

Thank you. I understand you've faced some pressure with increasing short-end rates impacting sales and trading NII. Does your 3% growth outlook presume some relief as rates stabilize?

Indeed, as rates stabilize, we don't anticipate much change in NII in that sector.

Appreciate it. On card income, it has seen a 2% year-over-year decline, and volumes only grew about 2%. Could you provide additional context into that?

Certainly, it is worth noting that we are engaged in managing the business with an eye on deepening relationships rather than individual product focus. Consumer revenue grew by 7% year-over-year, securely bolstering consumer profit by 25%. While purchase volume growth slowed, we still noted a continued presence from higher rewards costs impacting revenue. Moreover, our new cards enrollment remains steady.

That's helpful. Lastly, regarding CECL, could you update us on where you are in the process and anticipate when you'll report day-one impacts?

We’ve made significant progress, conducting a parallel run in Q1, which is under evaluation. From preliminary insights, we expect CECL reserves will increase. However, it's important to stress that further work is ongoing. We estimate that the increase in reserves could be up to 20%. Of course, any adjustments will depend upon our portfolio composition and economic forecasts at that point, which will be year-end. The primary drivers include credit card performance as well as commercial real estate concerns.

Thanks for the clarity.

Good morning. Do you have any insights into the NIM outlook going forward? While I recognize volatility is possible quarter-to-quarter, what do you foresee the underlying direction of NIM will be? Can you maintain stability or might we face slight declines?

Long-term, the trajectory of NIM will indeed hinge on the forward curve, and for Q2, I'd expect a slight decline in NIM due to the factors outlined in the prepared remarks. However, it has improved year-over-year. Focusing on the banking book, you can observe that it's currently at 3.03%, which is a 10 basis point improvement year-over-year.

If we consider the current forward curve, does that indicate underlying pressure beyond Q2 as well?

No, I believe it would remain stable over the course of the year.

So to clarify, decreasing slightly in Q2, then rebounding to Q1 levels in the latter half of the year?

Precisely.

On a broader scale, given our discussion around flattening revenues and expectations for the softer future, how are you positioned to tackle challenges in revenue generation, especially with expenses lined up?

In an economy growing at around 2%, we can reflect on the last decade's performance at similar levels. Over that timeframe, our loan growth sustained mid-single digits while deposits grew at an even faster rate. This creates favorable funding costs and well-priced loans for our clients within both consumer and commercial segments. Thus, the efforts to generate net interest income stem from ongoing hard work and focus on service. Our operating leverage remains positive, allowing us to meet expenses. Meanwhile, we are enhancing our client growth in diversified products to yield profits.

Understood. Thank you for that clarification.

Good morning. Brian, regarding your initiative to elevate minimum wage from $15 to $20 over the next 20 months, I understand the need to attract top talent in light of low unemployment rates. However, could you share the productivity improvements you're witnessing within your workforce, and if this salary increase will be compensated by greater productivity?

Over the years, we’ve increased wages from below $10 to above $15, all funded through productivity improvements. Enhanced customer behavior and our digital capabilities have transformed efficiencies. This means tasks performed in the past manually are now digitized, resulting in lower operational costs. We've successfully maintained or reduced overall costs, and this wage increase targets retaining the best talent to serve our customers effectively.

I have another query regarding the credit cycle. Marianne Lake mentioned there were approximately five significant loans that moved to non-accrual status at JPMorgan, marking the second consecutive quarter for such an event. She termed these loans as idiosyncratic, with no apparent industry trends. How has the credit cycle changed with the low rate environment, and what are the signs indicating a new credit cycle?

That's an excellent question, Nancy. Our adaptability lies within our geographic diversity, which dilutes the effect of regional economic downturns compared to past periods. The consumer vs. commercial credit mix has also significantly shifted; we are now balanced at 50/50, focusing on high-quality clients. With robust underwriting practices and adherence to credit standards, we've maintained a healthy credit quality picture. Our charge-off rates have remained low while effectively managing risk. Therefore, as long as economic conditions are stable, we foresee a favorable credit environment.

I want to emphasize our transformation over the past decade focusing on responsible growth, effectively striking a balance between consumer and commercial credit while adhering to prime lending practices. Our stress test results affirm that our loss rates are significantly lower than industry peers, demonstrating a solid financial foundation going forward.

Thanks for the insights.

Hi, I appreciate you taking my question. Your performance in GWIM was quite impressive. Given the numbers, the expense performance seems to support growth. Could you quantify the lower costs coming from FDIC and the intangibles in that segment?

The lower intangible costs run about $75 million per quarter, while FDIC averaged just over $100 million per quarter on a consolidated scale.

Is that across the entire company or specific to wealth management?

The $75 million pertains specifically to Merrill's intangibles, while the $150 million representation is across the full company.

Understood. Could you clarify your expectations for the 'other' segment? You've guided that Q1 should be a reliable reference, but I remember you discussed a temporary tax benefit of $200 million. Can you confirm whether that implies a run rate closer to a $50 million loss or to the $250 million?

I'm suggesting a modeling approach that factors in a loss of around $200 million per quarter nuanced by seasonal effects, so adjustments that reflect this within your estimates would be prudent.

Thank you for your clarity.

Thanks. A couple of inquiries. First, with card purchase volumes and rewards impacting your card income, what do you attribute the flat growth in card outstanding figures to? Has your tightening around the reward structure affected that?

Regarding card balances, we anticipate low-single digit growth to continue for the time being. Presently, our payment rates have slightly risen, thereby influencing growth.

So would you say this uptick is temporary, and if so, how do you see that moving forward?

The present trend favors positive behavior in our high-quality customer base, who are directing their extra deposits to clear away card balances.

Shifting towards investment banking, it appears your team has been hiring more bankers. That said, your IB fees recently dropped to number five while you once held the second spot. What's driving this shift, and how do you address it?

The positioning can fluctuate based on conditions in our sectors. Our investments in building relationships with clients—fostering both cash management as well as lending—remain robust. This ensures sustained engagement even in periods when investment banking engages fewer equities-heavy offerings.

Thank you.

Quick question regarding the commercial loan growth context. Can you highlight any specifics that indicate improvements in the commercial space, such as line utilization numbers or indications of increasing CapEx spending?

When you evaluate our performance over recent quarters, you've noted a combination of three primary factors—first in business banking, we've been managing credit risks and renewed stability in that portfolio. We've observed strong growth in our small business segment, but most notably, the addition of middle-market bankers whose focus on deeper client engagement fuels consistent growth. This sense of renewed momentum should amplify as we continue working with our existing clients and generating more transactions.

Thank you, Brian.

Thank you for joining us today. We appreciate your continued support as we navigate another quarter marked by record earnings and robust client engagement. We are encouraged by the solid U.S. economy, which enables us to strengthen those relationships. Strong asset quality persists, and we've successfully achieved a 16% return on tangible common equity along with 126 basis points return on assets, further demonstrating our commitment to delivering results. We look forward to connecting after the next quarter. Thank you.