Bank Of America Corp (BAC) — Q2 2019 Earnings Call Transcript

Good morning. Thanks for joining this morning's call for a discussion of our second quarter results. I trust everybody has had a chance to review the earnings release documents that were available on the Investor Relations section of the bankofamerica.com website. Before I turn the call over to our CEO, Brian Moynihan, let me remind you that we may make forward-looking statements during this call. After Brian's comments, our CFO, Paul Donofrio, will review the details of our second quarter results. We'll then open up for questions. For further information on any forward-looking statements, please refer to either our earnings release documents, our website, or our SEC filings. With that, I'll turn it over to you, Brian.

Yes, thanks Lee, and good morning everyone, and thank you for joining us to review our second quarter results. Many of you have discussed, written about, and engaged in debate about the perceived change in the forward environment that we all saw this quarter. However, we saw in our client base during the second quarter 2019 solid consumer activity pointing to a continued growing economy in the United States this year, albeit at a slower pace. In that environment, our company reported the best earnings quarter in the company’s history. That was made possible through the hard work of my 209,000 teammates who are driving responsible growth. We reported $7.3 billion in after-tax net income and $0.74 per share. Both these items increased on a linked quarter and a year-over-year basis. Revenue on an FTE basis was $23.2 billion and grew 2%. We increased our return on assets to 123 basis points. Our return on tangible common equity was 16.2%. And in the end, responsible growth continued to prove strong earnings, returns, and shareholder value. As we look at Slide 3, we start to highlight how we achieve these results. Revenue grew 2% and expenses were basically flat year-over-year. We generated operating leverage of more than 200 basis points; our credit costs remained low and stable, which resulted in year-over-year net income growing 8%, and during the past year, we bought back 7% of our shares. This reflects the model of combining solid operations with strong capital returns and thereby driving strong core EPS growth. This quarter, diluted EPS grew 17% from the second quarter of 2018. All the while, our capital and liquidity positions remained very strong and continue to strengthen. Book value per share grew 10%. We also had important client growth and market share gains in our businesses. Client activity showed $75 billion of deposit growth, a growth rate of 6% year-over-year. We also had $37 billion of that deposit growth coming from consumers. At the same time, we saw strong investment flows from those customers. Loans in our businesses grew $34 billion or 4%. Importantly, we saw progress in other focus areas as well. A year ago, I told you we’d continue to drive to regain our position in investment banking. As a nice start, we saw market shares across many of the products in investment banking in the first half of this year. One example is IPOs where we're number one in volume for U.S. IPOs in the first half. Our team has done a good job and is off to a good start driving this business. All in all, we're pleased with the results this quarter. We grew. We did it the right way. We stayed within our risk parameters, and we continue to invest heavily in our franchise — franchise adding salespeople, more technology, increasing our marketing spend, and improving and expanding our physical plant in all dimensions. This results also led to the highest first half earnings in the company's history. So as we look at Slide four, we show you the last five years of results of the first half. For the first half of 2019, we generated nearly $15 billion in after-tax earnings. Compared to the first half of 2018, EPS was up 16%, and you can see that growth has continued for the last five years. In those years, we have driven operating leverage. You can see that in the lower right. This year we saw that operating leverage continue in the first half. This led to a 57% efficiency ratio. We use the excess capital beyond the need for growth and investments in our company to buy back shares, a trend which has accelerated, and you can see on the lower left here. Our primary goal of driving responsible growth has been to produce sustainable results even if the environment changes. This requires us to drive operational excellence in all we do so that we can drive operating leverage. And we did it again this quarter. As you move to Slide 5, you can see we've extended our positive operating leverage streak to 18 consecutive quarters. In those 18 quarters, you've seen many different market environments; changes in interest rates, economic growth has sped up or slowed down, but we still manage to drive operating leverage for four and a half years successively. Generating operating leverage doesn't get any easier after four-plus years. However, with that strong expense discipline, we remain focused on it. Now one of the things that you don't see here, and you see in our results is the improvement we're starting to see in some of the categories especially consumer fees as you go through the quarters the last four quarters. Over the last decade, we faced service charge headwinds from reductions in accounts, and in other fees related accounts for many years. This was based on our consumer strategy to strive to have the best-in-class franchise, with lower fees due to changes in overdraft policies, but also, most importantly, the drive we've had towards being the core relationship bank for the American consumer. Now in the recent past, we've offset those fee reductions by increasing the growth in the actual accounts, the number of accounts we have that are primary household relationships. The past few years, we have much higher retention than we've ever had and we're improving client satisfaction to levels that haven't been seen before. But most importantly, that focus and relationship depth has resulted in 92% of our households with primary accounts maintaining an average balance of over $7,000. In card income, we've seen consumer debit and credit card spending at a 5% plus level year-over-year. This seems consistent with 2% plus growth in the U.S. GDP environment. We're still fighting the headwinds of the reward impacts that happen in that business, and you see that in us and our competitors, but at the end of the day, we are providing great value for consumers. When you look at the total relationship and those consumers, it's advantageous for our shareholders. In the next couple of slides, we're going to do something we’ve done in each of the earnings reports for some time, but we're going to add a piece to it. We've always talked to you about our consumer business — banking digital usage which you can see on Slide 6. But importantly on Slide 7, we'll talk about how that impact is now being driven across our corporate and global transaction services business. So first let's start on Slide 6 with our consumers. Each quarter, we've shown you these charts. In the second quarter, in its broadest context, we had 2.4 billion interactions in the second quarter alone with our consumers across all our channels. To show you how dominated it is by digital, 2.3 billion of those interactions were digitally or automated based. This explains why we have to be and are excellent with both high touch and high tech. If you looked at our digital-only clients, meaning customers who have not used a financial center in the past year, we have 30 million consumer customers across our platform who are primarily digital, and they hold over $400 billion in balances with us today. Their entire relationship is managed digitally, and the balance and activity continue to grow strongly. But that’s not our business. Our customers want both physical and digital access. This is why we continue to invest heavily, enhancing our number one ranked digital platform while at the same time enhancing our best-in-class financial centers. And again this quarter, you see the interaction of those two in the lower left-hand side of the slide with a record number of appointments that were set up. This quarter, we added another 17 financial centers to help drive growth in our consumer business. We then renovated 45 more, bringing the total number of centers renovated in the last few years to over 1,200, and we remain on track to hit the three-year targets we established 18 months ago of adding 500 new financial centers. We also established targets to renovate over 3,000 centers. Additionally, we are adding many more relationship managers in these new centers while refreshing many centers to bring them up to our modern high-touch environment. One of the things that we hear a lot about is the millennial customer and the Gen Z customer. Our digital capabilities are one of the things that attract millennials to our platform. Today, in our customer base, we estimate that we have 16 million millennial customers. Those are customers between the ages of 25 and 41. These millennials are very important for our growth, and they hold nearly $200 billion in deposit investments with us. It's a powerful platform for all segments of the U.S. consumer population. Turning to Slide 7, while many of us focus on the consumer digital trends, I think it's also important to recognize significant activity in the digital transformation in our commercial space. Over the past decade, we've been continuously investing in our global transaction services platform, and on Slide 7, we start to show the digital capabilities as part of that investment. We focus on making the business easier, faster, cheaper, and more secure for clients and make it more convenient to access and conduct business 24/7. We now have nearly 500,000 cash PRO Online users with double-digit growth in mobile usage attached to that. Mobile payment approvals by these users were 123 billion in the past year, doubling year-over-year and it’s growing quickly. One of the latest enhancements we have is to have mobile tokens delivered through an Apple Watch to help corporate treasurers process payments. At the end of the day, the people who work with our companies want the same convenience that our consumers want to be able to deliver the services. Let me address a few questions that may be on your mind. Number one, many of you asked about the expected forward yield curve, i.e., the reduction in interest rates. I asked Paul to lay out our thoughts on that, and he'll do that shortly. The second question is whether strong asset quality can continue to last. Assuming the economic conditions continue to move along, we think the net charge-offs should remain low for some time. We’ve told you that for many quarters in a row. This is not due to anything we're doing in the second quarter of 2019; it's about the work we've done over the last decade to continue to maintain our risk profile consistently and to strive toward it. We see no immediate credit concerns as evidenced by the volume of additions in non-performing loans or delinquencies or any of the statistics related to credit that you can see in the documents. The third question is whether, given an environment where we may see a slowdown in the economy, we have further expense levers to pull? One of the questions we get is whether we can manage expenses effectively, and we believe it’s important to continue to invest in the future of our franchise. Paul will discuss near-term expense guidance later. But importantly, the reason why we invest is to produce these investments, presumably meaning meaningful results. Our 2019 expenses are projected to be lower than 2018, and that brings us to every year in the last decade where we had declining expenses except for one. We as managers want to agree with you that if there are severe economic issues ahead, we have the flexibility to reshape our expense base, obviously starting with revenue-related costs, which would adjust quickly and automatically, and then changing our investment strategies. These areas we focus on are top of mind just as they are on yours. So with that, let me turn it over to Paul for a few more details on the quarter. Paul?

Good morning, everyone. I'm going to start on Slide eight since Brian already covered the P&L. Overall, compared to the end of Q1, the balance sheet grew $19 billion driven by loan growth, which ended the quarter more than $20 billion higher in our business segments. Liquidity strengthened in the quarter, average global liquidity sources of $552 billion remained well above requirements. Shareholders' equity increased by $4.4 billion as we issued $2.4 billion in preferred stock ahead of planned calls announced in July, and common equity increased by $2 billion versus Q1. The $2 billion increase in common equity reflects an increase in AOCI as the value of our AFS debt securities rose given the decline in loan and interest rates. In total, we returned $7.9 billion in Q2 through common dividends and share repurchases, 112% of net income available to common. As a reminder, we recently announced plans for a 20% increase in our quarterly dividend, as well as an increase in our share repurchases to more than $30 billion over the next four quarters. With respect to regulatory metrics, our key capital ratios remain comfortably above our minimum requirements. Our CET1 standardized ratio increased to 11.7%, remaining well above our minimum requirement of 9.5%. Higher capital levels drove the increased AOCI, improved the CET1 ratio while higher loan balances and commitments mitigated some of that improvement. Moving to client activity and starting with average deposits on Slide nine, average deposits grew nearly $75 billion or 6% year-over-year. This was the 15th consecutive quarter in which we grew deposits by more than $40 billion. Global Banking alone brought in more than $39 billion. Global Banking continued to benefit from strong customer demand, reflecting the additional bankers we have deployed over the last few years in the middle market franchise. We also continue to see a shift from non-interest-bearing to interest-bearing deposits in global banking. Deposits with consumers grew $37 billion or 4%. Within that, Global Wealth Management was up $18 billion year-over-year reflecting client growth with a preference to hold cash amid market uncertainty, as well as inflows of about $8 billion from the conversion of some money market funds to deposits near the end of 2018. Consumer banking deposits grew by $19 billion or 3% year-over-year. More importantly, checking balances grew, while more expensive account balances declined modestly. In fact, checking balances grew $22 billion or 6% year-over-year to $374 billion, while rates paid remained low at 9 basis points, up only 5 basis points year-over-year. Turning to average loans on Slide 10, overall our loans grew a little less than 2% year-over-year. Our all other portfolio is down to $45 billion and has been running off at a pace of approximately $2 billion per quarter excluding loan sales. Looking at loans across our business segments, core loans grew $34 billion or 4% year-over-year. Consumer, Wealth Management, and Global Banking segments each grew at a healthy year-over-year pace. As you can see in the bottom right chart, we continued to demonstrate a fairly consistent pattern of responsible loan growth. Growth of loans to consumers was led by an increase in mortgages, as lower interest rates stimulated more originations and allowed many of our customers to lower the cost of owning their existing home or buying a new one. Within global banking, we saw increased activity for middle-market clients, complementing the continued activity from large global corporate borrowers. Turning to slide 11. I'll not only review the drivers of our net interest income this quarter, but also share a few perspectives on the future given the expectation of lower rates embedded in the forward interest rate curves. Net interest income on a GAAP basis — on a GAAP non-FTE basis was $12.2 billion, $12.3 billion on an FTE basis. Compared to Q2, 2018 GAAP NII was up $361 million or 3%. The improvement was driven by the value of our deposits as interest rates rose in 2018 as well as loan and deposit growth. On a linked quarter basis, GAAP NII was down $186 million. In Q2, we benefited from an initial day of interest, as well as loan deposit growth, which was more than offset by three factors. First, lower long-term rates resulted in higher prepayments of mortgage-backed securities, which caused higher write-offs of bond premiums. Second, Q2 included higher funding costs from growth in non-earning trading assets and other global market assets. And then lastly, lower short-term rates reduced yields on floating-rate assets such as commercial loans. As a result of these impacts, net interest yield of 2.44% declined seven basis points linked quarter but was up three basis points year-over-year. With respect to deposit rates, we remain disciplined and saw minimal movement in total deposit prepaids at 57 basis points, which increased just three basis points from Q1. With LIBOR rates lower than Q1, and the forward curve predicting further declines, we would expect client deposit rates to begin to move lower over the third quarter. Turning to asset sensitivity of our banking book, we remain asset sensitive given the nature and size of our deposit base and the type of loans our customers have sought from us. Our asset sensitivity in a rising rate scenario increased compared to Q2. This was driven by the decline in mortgage rates, which increases the likelihood of mortgage refinancing in the baseline. The lower current forward curve also caused increased asset sensitivity in a falling rate scenario. In the second half of the year, we expect NII to benefit from growth in loans and deposits, as well as an additional day of interest in Q3. However, lower rates are expected to have three primary negative effects. First, yields on floating-rate assets should continue to decline from short-term rate reductions. Second, lower long-term rates may continue to stimulate mortgage refinancings, causing increased write-off of bond premiums. And third, reinvestment rates on securities and mortgages will dilute current portfolio yields. However, lower labor rates should reduce the cost of long-term debt and other funding, partially offsetting these headwinds. Last quarter on our earnings call, we reviewed our expectations that net interest income could grow roughly 3% for the full year of 2019 over 2018. That was based on a relatively flat forward curve at the time of our earnings call. Since that earnings call on a spot basis, the 10-year rate has fallen more than 40 basis points and short-term LIBOR rates are lower by 10 basis points or so. From here, if we were to assume stable rates, we think our NII for 2019 would now be up approximately 2% compared to 2018. Additionally, the forward curve anticipates two Fed funds rate cuts in 2019 and another in 2020. If rates follow the forward curve, and the Fed funds rate were indeed to be cut twice this year starting this month, we think it would likely shave another 1% off NII growth for 2019. Turning to expenses on slide 12, we have now been pacing at our targeted level of non-interest expense for several quarters, and our efficiency ratio has improved 100 basis points year-over-year to 57%. At $13.3 billion, we were basically flat compared to Q2, 2018 with expenses up less than $50 million. While holding expenses roughly flat, we increased investment in our people, our brand, in technology, and in office space. We are adding and renovating financial centers, which serve not only consumer clients, but also commercial and wealth management clients. Investment in people included adding more sales professionals, increased merit and benefits, as well as shared success bonuses which we have awarded for two consecutive years now. Also in the expense space is the increase in early Q2 of our minimum wage to $17 an hour. And as you know, we announced our intention to continue to raise our hourly minimum wage until it reaches $20 in 2021. Compared to Q1, expenses are also up modestly as Q2’s decline from the seasonally elevated Q1 payroll tax expense was more than offset by the increase in investment in initiatives and marketing in Q2. In the second half of 2019, we expect our expenses to roughly equal our first half expense of $26.5 billion. We expect increased technology investment in the second half, plus the cost of adding new client-facing professionals to be roughly offset by the seasonally lower incentive costs. We previously projected that we could hold 2019 flat with our 2018 expense of $53.2 billion inclusive of these planned investments. However, as you heard Brian say, we now estimate expense in 2019 will be modestly lower than that. Turning to asset quality on slide 13, asset quality continued to perform well driven by our disciplined approach to underwriting and a solid U.S. economy. As you know, the industry received annual stress test results this quarter, and once again our loss rates in stress scenarios were lower than those of our major peers. Total net charge-offs in Q2 were $887 million, a little more than $100 million lower than Q1 and the year-ago quarter. The decline was driven by the sale of $700 million of home equity loans, which resulted in $180 million of recoveries from previously charged-off loans. Absent this recovery, net charge-offs were just over $1 billion or 43 basis points of average loans, consistent with the net loss of rate ratio in Q1 and the prior year quarter. Outside of the normal expected Q2 seasonality in our credit card portfolio, we experienced a modest increase in commercial driven by a couple of single-name losses. Provision expense of $857 million included a modest $30 million net reserve release. Our guidance on net charge-offs from many quarters now has been roughly $1 billion per quarter, and that remains unchanged. This guidance assumes current economic conditions continue. On slide 14, we breakout credit quality metrics for both the consumer and commercial portfolios. With respect to consumer metrics, delinquencies trended lower, which we believe is a good indicator of future losses. Additionally, non-performing loans continued to improve even after taking into consideration the loan sales this quarter. In commercial, we also saw a modest decline in non-performing loans while resolvable criticized ratios remained near historic lows. Turning to the business segments, and starting with consumer banking on Slide 15, consumer banking produced another strong quarter; earnings grew 13% year-over-year to $3.3 billion. Revenue grew 5% and we've created operating leverage of more than 400 basis points. The efficiency ratio also improved year-over-year to 45%. Even as we invest in new markets and renovate financial centers, the all-in 162 basis point cost of running the deposit franchise was relatively flat compared to Q2 2018 as the decline in the cost of deposits component offset the increase in rates paid. Client activity remained strong with loans and deposits showing solid growth. Mortgage originations clearly benefited from lower rates. Customer satisfaction improved, and asset quality remains strong as the net charge-off ratio was 124 basis points, decreasing 4 basis points year-over-year. I would note that much of the loan growth that we have added to our balance sheet is high-quality consumer real estate loans. We continued to add salespeople for consumer lending, investment advice, and small business lending. We also increased our spend on marketing via campaigns where our 91 local market teams across the country asked their customers what they would like the power to do. Turning to Slide 16, note that the 5% year-over-year improvement in revenue was driven by NII. While card income was down modestly year-over-year, card spending grew 5% more than the prior year, which on its own was a strong quarter given elevated spending driven by tax reform last year. Versus Q1, we saw improvement in card income driven by solid purchase volumes. We continue to expect higher rewards to dampen card income, but would also remind you that we use rewards to deepen relationships with a focus on total customer revenue, not just fees. Enrollment in preferred rewards increased to $5.7 million and now represents 65% of the eligible opportunity, and our retention rate of these customers is now 99%. Balances with these customers grew 11% versus Q2 2018. With respect to service charges, they were also down modestly year-over-year. Again this quarter, we faced headwinds from actions we took in previous quarters that reduced customer penalty fees. However, as with card versus Q1, we saw a modest improvement in service charges. Turning to Global Wealth & Investment Management on Slide 17, strong results were driven by new investment accounts and more traditional banking products, as well as the market's rebound in the quarter. Referrals from across the company also gained momentum. Net income, which approached a record level, was just over $1 billion and grew 11% from Q2, 2018. Pre-tax margin was a record 29%. The business created 240 basis points of operating leverage year-over-year as revenue increased more than 3%, and expenses grew 1%. Within revenue, positive impacts from banking activities and higher rates drove NII higher while fee improvements from AUM flows and market valuations more than offset general pricing pressures. With respect to expenses, higher revenue-related incentives and continued investment in new advisors, technology, and brand were modestly offset by lower intangible amortization and deposit insurance costs. Digital use by affluent clients continues to gain momentum, as mobile usage once again grew double digits year-over-year. For example, GWIM clients used E-signature twice as much as they did only a year ago. Moving to Slide 18, GWIM results reflect continued solid client engagement in both Merrill and the private bank. Strong household growth in both businesses contributed to the $2.9 trillion in client balances. AUM flows were $5 billion in Q2 or $24 billion over the past four quarters, contributing to record AUM balances, which rose 6% year-over-year to $1.2 trillion. On the banking side, deposits of $254 billion were up $18 billion or 7% year-over-year driven by client growth and the desire by some clients to hold more cash amid market uncertainty. Linked quarter deposit outflows reflected seasonal tax payments by our customers. Loans were 3% higher year-over-year reflecting strong mortgage growth given the decline in rates. We also saw good growth in customer lending. With respect to client activity, one thing worth noting is the increase in client referrals both to and from Merrill and the private bank advisors. This quarter we had nearly 15,000 referrals to advisors from other parts of the company, and advisors made more than 58,000 referrals back to our other lines of business. In Q2, these introductions added $7 billion to client balances in GWIM and helped us grow households. As you turn to slide 19, I know many of you look at global banking and global markets on a combined basis. So to help you with your comparisons, I know as I did last quarter that on a combined basis, these two segments generated revenue of $9.1 billion and earned $3 billion in Q2, which is nearly a 16% return on their combined allocated capital. Looking at them on a separate basis and beginning with global banking on slide 19, the business earned $1.9 billion and generated a 19% return on allocated capital in the quarter. Earnings were strong but down 9% from Q2 2018 driven by the absence of reserve releases for energy exposure in the prior year. Revenue was down modestly year-over-year as loan spread compression and ALM activities offset the benefit of loan and deposit growth. Strong deposit and loan growth reflects hundreds of bankers we've added, as well as continued investments in how we deliver our loan products and treasury services. With respect to expenses, lower deposit insurance costs mostly offset continued investment in technology and bankers. Looking at trends in slide 20, and comparing to Q2 last year, as you heard Brian mention earlier, we have made steady progress in investment banking over the last few quarters. We saw a nice finish this quarter with IB fees of $1.4 billion for the overall firm, down 4% year-over-year, but up 9% in Q1. This performance must be put in the context of overall industry fees which, according to Dealogic, were down roughly 20% year-over-year. In fact, using Dealogic data, our market share has improved across most major products comparing the first half of 2019 to the first half of 2018. Switching to global markets on slide 21, as I usually do, I will talk about results excluding DVA. Global markets produced $1.1 billion of earnings and generated a return on capital of 12%. Overall revenue declined 6%, while expenses declined 2% year-over-year. Within revenue, the year-over-year decline in sales and trading was partially offset by a gain on the sale of an equity investment. Sales and trading declined 10% year-over-year, FICC was down 8%, while equity fell 3%. The decline in equity to $1.1 billion reflects weaker performance and EMEA derivatives compared to a stronger year-ago period. The fixed income revenue decline was due to a weaker trading environment with lower overall client activity across most products. The 2% year-over-year expense decline was a reflection of lower revenue-related compensation. On slide 22, you can see that our mix of sales and trading revenue remains heavily weighted to domestic activity where global fee pools are centered. Within FICC, revenue mix remained weighted towards credit products, and we had no days with trading losses in the quarter. Finally, on slide 23, we show all other which reported a small net profit of $358 million, better than Q2 2018. There are two primary reasons for the improvement. First, provision benefit increased to $136 million from Q2 2018 driven by the non-core loan sale, which resulted in a recovery of $180 million. Second, we had an improvement in our tax rate compared to Q2 2018; the tax rate for the company was 18% in the quarter, a little lower than our expectations. We expect the tax rate in the back half of the year to be approximately 19% absent any unusual items. Okay, I think with that we're ready for some Q&A.

Hey, good morning, guys.

Good morning.

Just might as well ask the question on NII, appreciate the guidance for this year. How do we think about, I guess, number one, the impact of just one rate cut? Is it sort of half? Is it linear? And I guess number two, as we think about next year the forward curve as realized over the course of the next 12 months? How do we think about that impact into next year? And given the strong loan growth you guys have seen kind of accelerated in Q2, is there enough asset growth that you can still grow NII in this environment next year? Thanks.

Okay. So in terms of just isolating in on a 24 basis points cut on the short end. I guess the crude approximation is the $3 billion impact over the 12 months of a 100 basis points down rate shock on the short end. The quarterly impact of that is a little more than $175 million. But it will be even less than that because that $3 billion is measured relative to the forward curve, which already includes rate cuts, plus that analysis is just on our banking book. If you include our markets book, which is modestly liability sensitive, you get to the approximately $100 million level that I discussed in the prepared remarks. In terms of 2020, look, I would say it's a little early to be talking about 2020. We don't know what rate cuts we're going to get. We don't know when we're going to get them, which is important. So I think as we get a little closer, we'll be more likely to be able to talk about that.

Okay. Thanks.

Jim, I'd add one thing. Remember, if you think about the industry's thought process over the last three years, basically as rates rose, that was one thought process and how people price deposits and other things. And as that changes, you'll see a different thought process take hold at least in our company. And I think if you look at some of the statistics in the material, especially in the corporate GTS type business, the necessary increase for the highest balance customers, etc., that's occurred will slow down and come back the other way, and frankly that is just the nature of a change in the rate environment, which the pricing is still catching up to. And so I think as you think about it as you get out longer term in 2020, you have to think about that situation sort of reversing back to a different framework than the framework we had with literally 200 plus basis points of short-term rate increases.

Okay. Thanks.

Hi.

Good morning, Glenn.

One quick one on follow-up on cards. You mentioned spending up, margin compressed and the reward costs continuing to be there, but obviously producing some growth. Can you talk a little bit more about the reward dynamic? How long do you think the current environment will last? And how do you know that it's going to continue to fuel that growth? Maybe something a little bit more of growth coming from the current customer base versus new ones, things like that? Thanks.

So, just to start at the end of your question working backwards, we generated another million plus cards this quarter. We've been fairly consistent doing that. What has really happened in our card business over the last few years has been a continual repositioning, and you're starting to see it start to work its way up and grow just in terms of balances and numbers of cards and things like that. If you think about the rewards question generally, remember, you mentioned it, Glenn, it's a relationship pricing piece. So our cards come with a relationship pricing across the whole relationship including deposits. So, you could have $20,000 deposits from these customers and so you reward them with a card, because that's the way you can do it but you're actually getting the deposit. So we'll keep working that. But if you look at the more recent quarterly trend you're going to see that you're seeing the impact decline. Although it's still going to hit, you're seeing that help fuel our deposit growth and checking deposits especially 6% year-over-year in consumer, and that is a huge payback for the rewards pricing. So you'll see the dynamic continue. We haven't seen big breakage fees and that's not so volatile. It's kind of steady. But the industry dynamics and how people are using rewards not only for card activity but also more broadly, I don't expect to change. But in the Bank of America context, we've been using it for the broadest part of the franchise, and that's why you see the good growth in the other parts of the business.

Appreciate that. One other one, a follow-up on wealth management. You mentioned new household growth up 45% year-to-date. Are you doing anything specific on incentives to spur that growth? That seems like a big number for such an already big business. And the related question is, do you think of there being a ceiling to margins because they're already huge at 29%?

We made some changes to our incentive system two years ago that included a modifier for bonus eligibility based on household growth. This adjustment has led to increased activity within the team. On the private banking front, we've added more sales team members, and their efforts have resulted in significant year-over-year growth, which is essential for our business’s profitability and inventory levels. This improvement is a direct result of the system modification and our operational approach in markets, especially regarding referrals. There’s a strong referral flow between the FSAs on the Merrill Edge platform and financial advisors. When clients come in with assets and interest in an advisor, we transition them accordingly. We've seen around 15,000 referrals directed to Merrill, and we monitor these in every market, ensuring high success rates. This energy is invaluable, generating significant results each year. This year, we expect to achieve 7 million referrals across all our markets. As loan-to-deposit ratios continue to improve, our margins will grow. Although we're facing fee compression in asset management, we have advantages in scale and operational digitization. We're progressing towards having 50% to 60% of our consumer statements digital, though we still have a long way to go in wealth management. These changes take time, but they contribute to our goal of making the business more efficient. We believe we can continue to push our industry-leading margin even higher.

Thanks. Appreciate everyone.

Hi. I was intrigued by your comment about 16 million millennial customers, $200 billion of deposits, and I think that's the first time that you've disclosed that information. So, I guess what's the growth rate and profitability of those customers? And as you look at the millennial customers set, what's your assumption for how long they'll be customers with you, since they are younger and you have more digital banking? Do you now assume that they'll be with you say 20 years instead of 10 years? And if so, how do you change the pricing of the product for that millennial customer set?

One of the things I want to share is that we've provided some context by mentioning the 16 million clients, which represent $400 billion in client balances. When we analyze our checking sales, millennials account for approximately 24% of those sales, while individuals aged 18 to 24 contribute 11%. Notably, the sales rate for the millennial group is at 40%, indicating we're selling to them at one and a half times the rate of the overall population. Currently, millennials hold about $70 billion in checking balances with us, and this figure is rapidly increasing. We are successfully capturing more market share within this demographic. It's vital for us to remain attentive, as this segment is highly valuable. Our retention rate is excellent, and checking accounts for millennials constitute about 40% of our total. Historically, they have remained loyal to us, and we anticipate they will continue to do so in the future, provided we maintain our commitment to delivering exceptional experiences. Referring back to the consumer strategies mentioned earlier, the activity levels among those under 40 are generally higher. However, this may not apply universally across our entire suite of services. Many of our promotions, activity levels, mobile app log-ins, and customer interactions have improved significantly, and we are very satisfied with our team's performance in these areas. Ultimately, it is about service, experience, and fostering long-term relationships with our customers.

And the other question that I had, how long do you assume these customers will stay with you, and how does that compare to the past? The reason I ask that is you look at some of the offers out there you can get $400, $500, $600 simply for opening accounts at certain banks. And the assumption is that once you get these customers, maybe they'll stay with you longer than they would have say 10 years ago?

Well, that goes back to your colleague's question about the rewards and things like that. Our preferred base of customers in the consumer business is a 99% plus retention rate. They really stay with us, and so that's extremely powerful dynamic. So the assumption, I don't have that top of my head that the team puts in our models and stuff like that, but if you're retaining 99%, it's a pretty long duration.

Good morning. Core loan growth continues to remain solid at 4%, Paul. Are you seeing some improvement in momentum in the middle-market and small business? And also, the 2% reported has closed some of the gap to that core number. I guess, as you think about the run-down pace, could we continue to see a narrowing so that your overall balance sheet growth looks closer to that core?

I guess I'll do the second one first. The answer is yes. I mean, we have $45 billion in the non-core portfolio. Of that $45 billion, I would say half is sort of legacy home equity and residential mortgages that will run off and/or depending on market conditions we may see some more sales. The other half is mortgages that previous treasurers or CFOs bought many years ago; they're good mortgages. They're going to run-off as well. Together they're running off at about $2 billion a quarter. So, yes, you can just do the math. It's becoming a smaller component of the overall picture. And as you point out, when you look at our lines of business, they were up 4% year-over-year this quarter. And we are seeing good growth in small business. In fact, I think we are the largest lender to small business companies in the U.S. now surpassing a competitor recently. We're seeing a pickup in growth in the middle market this quarter that really complemented the consistent growth we’ve been seeing for many quarters now from large global corporate borrowers. I mean, we don't see anything on the horizon that suggests we cannot continue to grow, kind of what we've been telling you, which is the low mid-single digits for the company from the business segments.

I'd just add two thoughts to that. One is Sharon runs our small business for us and the consumer business and Alastair Borthwick runs middle market. They got their teams sort of moving along and, as you said, growing at a consistent pace depending on the product set. So we feel good about that. Remember that the runoff pace and that 'All Other' book has been accelerated by the sales over the last few years to reduce our potential credit risk and stress, and you've seen that reflected in terms of the extra capital return based on selling a bunch of loans during the year which had higher charge-offs in the CCAR process. And secondly, the operating risk of the company comes way down because those loans would have a tendency and we sell them servicing release. So we're getting to the bottom of the barrel. It’s now 4% or 5% of the portfolio. It used to be 8%, 9% of the total portfolio, and maybe 10%. So, we feel good about that impact really narrowing now. The sales are largely through; the money and stuff we have now is actually 12 years of current pay and the thoughts on these loans were made since the crisis. So we forget about that. And last thing is think about in the Merrill side in terms of the private banking side, the lending growth we're seeing solid performance there, and the integration in the middle market investment bank and we feel good.

Great. Brian, and then you touched on this a little bit, but could you talk about your feelings or your ability to maintain the strong checking account growth that you've had, given the stance on rates paid? What's your outlook for checking account growth to continue maybe relative to GDP or to the industry?

If you look at it, we have maintained that pace. If you look at retail deposit growth since the beginning of 2016, I think our gross of balances have grown about 20%. The peer groups have grown about 12%, and so that's a significant difference. We've been pretty consistent growing $20 billion in checking. That is the core transaction account. So if you look at what we're seeing now is the average balance in our checking accounts, I think, are $7,000 plus, and 90% are current, yet we're still in the last couple of years starting to net accumulate. We feel good that we can keep that checking balance growth. It's not depending on rate pay because of the core transactional account. So even though there's some payments to either interest-bearing checking, the dominant part is non-interest-bearing just as a core transaction account. If you look in the money market and stuff, you can see the rate; that's where people get paid for excess balances. But this is the money that's flowing through the household on a daily, weekly, monthly basis and then we feel very good about it. We believe that we can continue it because we have and all the environments and all the rate changes.

Great. Thank you.

Hey, good morning, guys. A couple of questions. First, I wanted to key in on something you said, Paul, on the rate sensitivity. You mentioned, I know it's a crude approximation, but 25 basis point cut on the short end, it's about a $175 million quarterly impact, but that's just the banking book and your liability sensitive in your trading book. And I think you mentioned it's $100 million if you kind of net that out. So should we, is my math right in suggesting that you get something in the neighborhood of a $75 million benefit per quarter for every 25 basis point cut in your trading book? Because obviously in the past sometimes we've kind of looked at your NII growth and expansion in the rising rate environment, and maybe it hasn't grown as much as we thought because of the headwinds in the trading portfolio, but as short-term rates move down should we see the opposite side of that also occur and some of those headwinds get mitigated by expanded margins in your trading book?

I think you're close, but the one piece you're missing is that in addition to being modestly liability sensitive in the trading book. When you look at those disclosures about the impact of a 100 basis point shock on the downward rate scenario, remember that's below the forward curve.

Right.

So, you're discussing a situation where short-term rates could drop to 75 basis points and long-term rates could be at one percentage point. In that case, the $3 billion would have a greater impact as rates decrease. However, the initial 20 basis points won’t equal $3 billion divided by the undisclosed amount.

Great.

So you've got to factor in both of those things.

Did you disclose the size of the gain on the sale of the equity investment?

We didn't disclose the equity investment, trading, yes. No. It was $200 million.

200 million. Okay. Awesome. Thanks so much.

Thank you.

Hey, good morning. So I wanted to start off with the question on the investment banking business. So it's nice to see fee share increasing in the quarter. We have seen some share loss in some of the more recent quarters. And I was hoping you would speak to some of the factors that may be driving some improvement in business momentum, whether it's leadership changes or anything else that you could attribute it to?

Certainly. To summarize, the market fees decreased by 21% year-over-year according to Dealogic, while our reported fees only fell by 4%. Dealogic indicated that our fees dropped by 11%, suggesting we have gained significant market share this quarter. This improvement results from our renewed focus, as we believe we should be among the top three in investment banking, despite some previous setbacks. We decided to increase our banker presence, especially in the middle market, leveraging our established commercial bankers who maintain strong client relationships. By adding more dedicated bankers in this segment, we are well-positioned to assist companies needing investment banking services. Our regional bankers are now actively engaging with commercial bankers, and the revitalization led by our leadership team across various departments is yielding positive outcomes.

Helpful color. And then, Paul, just one more from me on the topic of NII. I mean a slightly different tack. There's obviously pretty heavy lines across the industry on the 10-Q disclosures, which I know are inherently flawed; it's a very static snapshot. Also maybe you speak to some of the factors that are driving more benign impacts in terms of the rate sensitivity that you cited versus what's explicitly disclosed in the 10-Q, whether it's volume growth, some issues relating to your comparisons versus the forward curve, deposit offsets, or anything else you can speak to?

Just one thing to be precise, Paul said a couple of times that gets lost sometimes. When we disclosed 900 basis points shock down to 100 basis points across the curve, that is on top of what the forward curve has in it. And so sometimes people get confused by that because they think it's from the current rate and by stable rate environment we see today minus 100. It's actually in the case of forward curve having the rest of the year two cuts and it's 50 off and then another 100 off. And so that dynamic, Paul has mentioned twice that sort of make sure people don't get ahead of us. But Paul can take you through the broader factors. But just be careful that you're not making that miscalculation which we've seen other people. We're not saying you have, but other people have.

Sure. Look, I'm not sure what else I can add. I mean if you think about our clients, right, you've got GWIM clients, we've got Global Banking clients where if rates change, the pass-through rate on those clients are going to be roughly the same up or down, and you've got consumer clients where because of the great job we've done on rate paid in the cycle, there just isn't a lot of room on the downside. But if rates go up, they probably be a little bit more pass-through. So, that's the dynamic we're living with. On top of that, you've got to factor in when long-term interest rates go down, the quarter later or the month later you're going to see an impact. That doesn't continue forever. It's only an impact when the rates go down you get a lag effect on some increase in write-off of premiums and that’s what's going on.

I appreciate that.

You mentioned earlier about some puts and takes on the expenses and gave guidance for this year to be little bit below what you had thought a few months ago. But what are your thoughts kind of beyond this year? I think at one point, you have said try to keep costs relatively flat at $53 billion. And then you did mention, if I think you're alluding to call it capital market-related or volume-related areas if those were weaker, there's some levers to pull on costs. But if it's just a lower rate environment, is there any other area on the cost side that you can pull? So I guess the question is like on a stable environment your base case, what are you thinking on costs? And if the revenue shortfall is just rate driven, are there some areas that you can tie in?

So I think if you think about it over the last two years plus, I think we've run around $13.1 billion, $13.2 billion, $13.3 billion in quarterly expenses. Except for one quarter, we had $13.8 billion, which was sort of the seasonality of a strong markets quarter plus it was the first quarter with the FICA and stuff like that. So basically, we got this thing at a run rate. But you got to remember, in 2019, that run rate has picked up. If you go back to when tax reform came through, we said we'd put $500 million more in technology investment platform. A chunk has run through last year, and about $200 million or $300 million of it's run through this year. So that was increased expense. We laid out the share for success, which did over $1 billion in the two programs; there’s a near-term cost to it, and then there's an amortization of the deferred part, so there's stock. That's all in the P&L today. We anticipated reaching $53.2 billion due to incentives, higher rent, and various benefits, especially considering the investments we've made. Back in 2016, we projected hitting $53 billion, specifically in the low $53 billion range, and many were skeptical. Yet here we are, having invested significantly more, and we remain at that $53 billion mark. This reflects the core capabilities of the new BAC, operational excellence, and organizational health, which may not be clear to everyone, but our team understands the significance of this as it enables us to continually enhance the company's efficiency. And even in an environment where the world just kind of goes on, you have a 2% growth. We know there's more we can do. What we don't want you to do is to get ahead of us because frankly the investment year-over-year in marketing was $150 million last year, second quarter this quarter, additional in the quarter. That won't sustain at that kind of level, but it's part of driving that customer satisfaction delight scores through the roof, which then means those millennial accumulation accounts at twice the rate of population, turns into customers. To Mike's point, of the future that the digital comp still allows us to serve more efficiently, which then drives down the efficiency ratio. That is the operating model. And so those investments pay back, they're all part of driving customer satisfaction through our service model. But that said, we're saying we gave you a flattish from 2018 to 2019 to 2020, and we're basically saying you shouldn't push 2020 down in your models, because we will see what happens. But right now, we think 2019 is going to come in a couple of hundred million under what we said, which just goes by the teammates here is good management. We didn't do anything. We didn't pull any lever. We just kept driving the basic efficiency of this platform through and we'll continue to do that. And if that comes in lower than the number we're talking about for 2020, and we get there, it's going to go to you. But importantly, as we shouldn't change our investment strategy, our belief and our Board's belief and our shareholders' belief, frankly, is that we shouldn't change our investment strategy. Because right now you're seeing the market share accumulations come, and we won’t change it to pick up expenses by $100 million in the quarter. A penny wouldn’t make good, but the investments are long-term strategic drives that are happening. And just on investment banking, adding 50 middle-market investment bankers and doubling that again over the next few years pays back.

Okay. It's helpful. And then just separately, the CCAR ask and approval is impressive, $30 billion as you mentioned earlier. Do you plan to use all of that? And should we assume the timing if you do plan to use all that is spread evenly or do you have flexibility to the front end if you wanted to?

Yes. We plan to use all, and it's spread equally over the quarters under the way the method works and the guidance they give you. So it's spread evenly over the four quarters. And yes, we plan to use 100% of it.

Thanks. Good morning, guys. Brian, you mentioned in your opening remarks just how strong credit is and expect it to continue. And you guys have then talk about charge-offs kind of living in the $900 million to a billion range a quarter. We went under that even this quarter. So I guess can you just talk about any reasons why we should see any chance in this kind of $900 million-ish run rate even with card losses or barely even moving as is? Just an update on what you're expecting would be great? Thank you.

I'll let Paul hit that one, just because he talked about it. Go ahead, Paul. So, you're right. I mean, our net charge-offs were lower than a billion this quarter. But that's because we wrote back charge-offs we took earlier associated with the loans we sold this quarter. So to back that out, it's approximately $1 billion in net charge-offs. And that number, if we think, is a good number, approximately that number; it will bounce around because we're bouncing around the bottom on commercials, you know. One commercial client or another can always move things. But it's been a billion now for many, many, many quarters and we see, if we think the environment stays where it is, that's where we think it’s going to be. And then provision will follow that.

When considering our performance, cards are crucial. Our live charge-off rate remains stable, reflecting a consistent portfolio and steady credit. Cards account for 80% to 90% of our activities, and this has shown to be stable. This year marks the lowest year-over-year increase in card activity since 2013. Our focus on prime customers through combined rewards should strengthen our customer base. We are optimistic about credit, and our economic outlook suggests steady growth in the low to mid-twos, with projections for next year around 2%. Consequently, we do not anticipate any changes.

Thank you very much for your time and your interest in our company. We had a strong quarter of record earnings. We have continued to manage it the right way, growing responsibly by driving customer growth, by managing risk well, and by investing in the franchise on a sustainable basis. We'll continue to do that. We're moderating the environment is the question Mike just said, in terms of focused on any issues we see where we have to change the operating model. But we continue to deliver a good share of value and plan to push the capital back to you that comes from this wonderful franchise that we have. Thank you.