Bank Of America Corp (BAC) — Q3 2020 Earnings Call Transcript

Good morning. Welcome and thank you for joining the call to review the third quarter results. I trust everybody has had a chance to review our earnings release documents, as usual they're available including earnings presentation that we will be referring to during the call on the Investor Relations section of the bankofamerica.com website.

Thank you, Lee, and thank all of you for joining. I hope all of you are staying safe. We are going to begin on slide 2. And today, before Paul takes you through the detail on the financials, I thought I'd give you some thoughts on the first three quarters of 2020 and how we're driving for you here at Bank of America. As an opening comment, the economy and markets this year have been defined more than anything else by the impact of the global healthcare crisis. This has created a sinuous path for the recovery. As we have said early on here at Bank of America, and what our data continues to suggest, is that we are seeing a return to the fundamentals of a generally sound underlying economy, but we won't get there until we fully address the healthcare crisis and its associated effects. These effects have been lessened by the monetary and fiscal policies, and by the core health of the US consumer given those policies. There are three key themes that I'd like to comment on: one is the economy generally, what we see in our data and the impact of the projected path on the company's earnings and prospects going forward; the second is how do we continue to think about and manage the risk resulting from the economic downturn and the subsequent beginnings of the recovery; and the third is how we're making progress given all that backdrop on our corporate strategies. Before I touch on these items, just a brief summary of the quarter. Overall, a solid performance given the operating backdrop we faced. We earned around $5 billion after tax or $0.51 per share. We ended the quarter with a capital ratio of 11.9% versus a 9.5% minimum. For the third period of this pandemic, we've earned more than twice our dividends, attesting to the strong balance sheet security of this company. The operating environment continues to require more operational excellence than ever before. It requires the delivery of immediate technology capabilities across our franchise from our group of talented teammates. It also has to deliver a customer experience that can be redefined on a daily basis.

Thanks, Brian. I'm starting on slides 5 and 6 together. Most periods, my earnings remarks are focused on year-over-year comparisons, but this quarter, many of my comments will be directed towards comparisons against Q2 2020, as most investors we speak with are more interested in our progress quarter-over-quarter as we work sequentially through this health crisis, and given that COVID has made year-over-year comparisons less relevant. Q3 net income of $4.9 billion or $0.51 per share compares to $3.5 billion or $0.37 in Q2. The earnings improvement was driven by lower provision expense, as we modestly added to the reserves for credit losses in Q3 compared to the more significant increase in reserves in Q2. The lower provision expense was mostly offset by lower NII and higher costs of litigation and costs of the COVID environment. Lower rates and loan balances caused NII compression, which I will discuss in a moment. The linked quarter decline in noninterest income was driven by the more robust trading and IB environment in Q2, as well as a $700 million gain on the sale of mortgages recorded in Q2. While down linked-quarter, fees from capital markets in both market making and investment banking were solidly up year-over-year. At $1.8 billion, investment banking fees was the second best quarter in the company's history. Brian noted progress in activity levels across many of our businesses, and that showed up in increased levels of fees, which helped to mitigate the linked quarter decline in capital markets revenue.

Hi, thanks very much. So you've historically been incredibly stable in trading. And again, you are this quarter, but I guess I have a question to rehash during times like this. You have some peers that will have bigger spikes, and then they'll come back down to earth at other times. I'm just curious if you could talk about – you are steady but you're not seeing the same spikes? Is that your risk tolerance? Is it a CCAR stress testing thing? Is it a mix of business and is it conscious, meaning are you investing to close some gaps? Just curious if you could tell us about that from the markets perspective? Thanks.

Sure. Well, look, again, our sales and trading results were solid with the total revenue up 4% year-over-year, equities up 6, FICC up 2. We had no days with trading losses again this quarter. If you look at, I don't really like talking about competitors, but every competitor is going to have a different business mix. And many of our competitors, I will say, take more risk in one quarter or another; clearly that can create some differences in relative performance. We don't really focus that much on individual quarters, but instead we look at results over longer time periods. And, as noted, sales and trading is up 22% year-to-date. I would also note that we're gaining share we think in equities and other parts of our markets business, and we've certainly gained share in investment banking. There have been quarters where we've done better than some of our peers; go back to Q1, wherein you'll see in equities where we basically did better than all our peers. So, we're staying focused on the medium to long term, we're investing in the business, and we are taking share.

Fair enough. Maybe just one follow up. You noted, obviously, loan demand stabilized, trough quarter for NII, don't expect to add to reserves, deferrals mostly over, and you have a $35 billion capital cushion. I'm curious what you feel is a more natural number. At some point, we'll get off buyback suspension. So, what's a more natural number for your capital cushion? And what might be your intentions on what to do with that excess because it feels like organic growth; you're going to make more money than you can pile into organic growth for a while.

That's a good list to work with in terms of citing things, and yes, we are generating twice our dividend or more, have been for every quarter even when you put up the reserves, even while the rate structure hits. So, trough quarter for NII last quarter, expenses coming down, built the reserves, we'd expect that we'll get through the stress test, and then we'll start to go into capital redeployment as we did before. Our general goal is to run about 100 basis points over the minimum. So for us, that's 10.5, which is another reason why the mix of business is so important to us that you referenced earlier. Remember, we had a stress capital buffer that was 2.5, and we didn't use all of it. But so, we've got plenty of cushions here from an operational basis in terms of the ability to use capital management once we're free and clear.

Good morning. Brian, considering the challenges in the industry and your competitive advantages, do you see an opportunity to leverage those advantages to gain market share, and what impact might that have on expenses if you pursued that?

Yes, I believe we've successfully increased our market share. According to the FDIC data, our aggregate deposit market share rose by 60 to 70 basis points from June 30 to June 30. While everyone's benefitted from monetary policy, we focus on ensuring our market share remains stable and broad. We are enhancing our team by adding commercial bankers and expanding into new markets and branches. This year, we have entered several new markets, and deposits in these markets have grown from $50 million per branch to $100 million per branch. Additionally, in our wealth management sector, we're continuing to add financial advisors to drive growth. We currently have $1.7 trillion in deposits, with over $800 billion in consumer deposits. It's important to note that our personal business in Global Wealth and Investment Management also accounts for over $200 billion in deposits. We have strategically focused on enhancing our consumer business, shifting the primary checking composition from 60% to over 90%, resulting in around a million new checking accounts year-over-year, despite facing some shutdowns for a couple of quarters. Our ability to manage expenses has been strong, maintaining a range between 13 and 13.5 billion per quarter. Additionally, we've invested significantly in technology, totaling $3 billion. Our deposit market share has grown, as has our loan share in competitive areas, and our Global Transaction Services business continues to expand. Investment banking has also seen growth, and we are consistently pushing forward.

That's helpful. And so, you feel comfortable that you can still add the $200 million to the $13 to $13.5, so $13 to $13.7. You still feel comfortable doing all that and keeping expenses in that range?

Yes, it just, that's this operational excellence platform. If you look at whatever page that was, look at all those quarters. And you go back even before that, it's been and think of all the investments we've made; make I think that's three years that we show you maybe so think of $9 billion to $10 billion in technology development, code development, new initiatives, and that too in a period of time and expenses stayed relatively flat. Think about redeploying, probably 300 to 400 or 500 new branches across that decade, across that three to four years in markets you'd never seen; think about refurbishing. We've done 300 or 400 branches this year so far. We opened in the new market, et cetera. So just this quarter, just this little quarter, we opened 13 branches in new markets. So we're pressing our advantage. The board asked me, and I, we'd have the discussions with our major shareholders, if you could press harder, and there's answers. I talked to market people, sure, they'd want to spend more money on marketing, but I think we spend enough to do the trick and drive it in the way that stick to the risk.

Hey, good morning. Thanks for the time. I wanted to dig in a little bit on the point you were making, Paul, earlier about the cash and the redeployment into securities. I just wanted to get a sense as to 4Q. How much of NIM uplift do you think you're going to get from that? And then what percentage of cash have you used already? What is going to be guiding you on how much more to use here? And is there a limit for how much cash you're willing to redeploy into securities?

Yes, sure. So, in the third quarter, we deposited about $100 billion of our cash into mortgage-backed securities and treasuries over the third quarter. And on a weighted average basis between the treasuries and mortgage-backed securities, that probably produced a lift relative to cash of close to a percentage point on what we deployed. You didn't see a lot of that come through in Q3 because of the timing of those purchases throughout the quarter; you'll see more of that impact in Q4. With respect to future deployment, we have some firepower left. I hesitate to give you a number, but call it maybe another $100 billion-ish; I'm not telling you we're going to deploy all of that in the fourth quarter. We're continuing to access deposits and will likely continue to deploy more cash, very likely to deploy more cash into securities moving forward, but no answer right yet exactly how much. The size and the pace of that will be influenced by a number of judgments, including things like loan demand and customer deposit behavior. We'll also balance the mix of purchases as we assess the trade-offs between capital, liquidity and earnings.

The one percentage point you're talking about, as in, is the yield left on the portfolio versus cash?

No. That is, if you compare what we're buying mortgage-backed securities and treasuries to what we were earning in cash or repo. The pick up in yield on that investment is a little less than 1%.

Yes. Okay. Yes, I got it. All right. And then maybe, if you could speak a little bit to both yourself and Brian, to the discussion around the C&I loan utilization. And I get that we're at a historic low or close to the lows in utilization. But what is it that you're seeing in your customer discussions that gives you an expectation that you could see that start to lift in for Q1 and into 2021?

What we observe is that it hasn't been decreasing; it declined throughout the second and first quarters, showing signs of panic with people drawing lines, and then it went down. Some companies are generating more cash flow than they ever have. What you're starting to notice is in sectors like automotive and retail, where inventories need to be replenished, but initially, they will have nothing to sell. So, they'll restock those inventories. Suppliers of parts are also increasing their inventories due to higher final demand for their sustaining products. This is crucial, and it's largely about engaging with people and recognizing that they have reduced their operations to as low as possible, considering daily operations for companies with $50 million in revenue, like those in business banking. They cannot cut costs significantly more because they need to meet payroll and other expenses. As they begin to expand to align with client demands, they will start to rebuild. Our conversations at this conference, through detailed reviews, indicate they are feeling more optimistic. Core demand has been increasing from May through September. The main uncertainty regarding loan balances lies at the higher end and who can access the markets, which could affect the middle markets and lead to shifts in loan balances on the investment banking side, as you're aware.

Hi, this is a follow-up to your pressing your advantage. I mean, it's good news, bad news. Good news is you're growing household deposits; the corporation up one fourth year-over-year, your digital banking is growing. So that's great. And your award is, your NII has gotten crushed, right? So short term versus long term trade off. Try to look at an environment with lower rates for longer as you acquire these customers. Have you changed your assumptions for a lifetime value because I assume you eventually want to monetize the benefits of the relationship, but it's just not happening yet?

So I think, Mike, you have to think about it two ways. One is for the new customers coming on bringing us $100 billion in incremental checking deposits year-over-year. That is money coming on at basically zero that you can redeploy, as Paul said. So there's a value to that incrementally to the company. The question is when you had a quick fall down or rates that we had, if you have to get underneath it come out the other side, as you well know. The value of the positive franchise represented by having core household relationships, and that's where you see things move forward. So what are we seeing? We're seeing a rebound in our auto lending; we're seeing a rebound in our card lending. Those are coming because we have the core relationships that are digitally inactive; 50% of the sales are coming digitally. That helps us grow. And then you think about just on the consumer; look at, if you look at page 15 on the investment side, you're seeing that build up by $40 billion year-over-year, $20 billion linked quarter. So that materializes the balance, and the good news is you've looked at the fee structure across the platforms and the different things; you're seeing the fees start to come back up, which is just core activity. You only have $200 million, $225 million in total quarterly deposit interest. So it can only go from $225 to zero; there's not much left. It was a billion that in the class year this quarter. We brought that down. Now we just got to grow the volume back out, and you're seeing that start to happen. That's what gives Paul comfort from the over rejections. It's the depth of relationship; it's not any single product, as you well know. We're pressing the advantage because frankly, even at a low rate environment, more core deposit customers, more core checking accounts than deposits, in addition to our wealth management business in GUM, more TTS business we will make more money on it. You might get a twist of rates in a given quarter, but just think back. We had this discussion in the mid-2000s. 2013, 2014, 2015 year, you saw the earnings come up even before the rates move.

And the rates, yes, we know, this typical linchpin to a customer relationship is just getting value today for that relationship, and you're mentioning the different products. Is there a way to think about charging more fees or something? If you have a low rate environment like this, again, it's getting your money's worth more for the effort you've put into gathering these new household?

Yes, well, I think, not penalty fees clearly, Mike, that does just as a bad customer experience, because the other thing is the attrition rate in the book is dropped at a very low because the high quality customer experience our team delivers; then it gives you the permission to do more with them. So penalty fees, I think, are not the way to go. But core account fees for the structures are there; but the reality is most of our preferred book, which is 80% of the consumer deposits by definition, is way above any minimum requirement for fees. You've got the volume; you get 80% of consumer deposits in a book with only about 20% of customers, so you make it up in your expenses and your operating capacity there. That's how you ultimately make it up even in a low rate environment; it's just the sheer. We have 4,300 branches in this franchise; Mike, in 1999, we had 4,800 distributors.

And I think, Mike, you deepen with them, you deepen with them in loans, you deepen with them in wealth management. We're making progress in all those areas.

Good morning. I want to follow up on expenses. You talked about $13.7 billion in the fourth quarter. I just wanted to figure out is that still an elevated number from COVID? And because if you analyze it, and yes, the 1Q is seasonal bump, you're kind of calling it the mid-$55 billion range for next year, which feels high, but I want to give you guys the benefit of the doubt.

Yeah. I think the three points, the $13.7 billion roughly $13.7 billion to 4Q that probably includes net COVID expenses of $300 million to $400 million.

Okay, and how do you think about the timing of that $300 million to $400 million coming off? I guess it can be tricky that everybody is assuming at this point.

$300 million or $400 million, right, on the $300 million to $400 million per quarter. I mean, in the fourth quarter, it was higher this quarter. But in the fourth quarter it kind of baked into that number is $300 million to $400 million of net COVID expenses. So that'll come off, over 2021 and we'll get more of it at the end of the year than we were on beginning of the year, but it'll, I don't know, ratably come down. I can't, I would expect maybe half of that to be in the fourth quarter on a full-year basis.

Okay then a separate on upon net income, you talked about moving higher in 2021? I assume that's on a linked-quarter basis, and obviously from day down and challenges in the third quarter, but maybe just elaborate a bit on the outlook for net interest income for next year, based on the assumptions that you have.

Sure, look, we are not providing any specific guidance. I'll give you a few thoughts for next year. Obviously, the lower reinvestment yields are expected to continue; that's going to impact NII, but that headwind early in the year should be offset by the deployment of cash into securities. Then by the middle year, we're hopeful that loan growth will be a tailwind as the economy recovers. So we think NII should move forward and up from here.

If I work in that math and think about, again, adjusting for the day count and some of those nuances. Would your expectation be that net interest income dollars in 3Q of next year be higher than this year?

Yes. I mean, 3Q to 3Q?

Yes.

Yes. I'd have to think of it; I'd have to look at that. I mean, certainly higher than, yes, I would say that would affect the 3Q next year, it will be higher than 3Q this year. Yes.

Hi, Paul, two NII questions just near term. So it sounds like you might be expecting a little bit of lift net of all the factors you talked about in NII in the fourth quarter or kind of flattish up a little, just kind of what's the near-term outlook on NII?

So the near-term outlook is, as I said, it's going to be we think, at least flat and we're optimistic it's going to be up. We think we're at the low point for NII. We've got the ones of reinvestment on security, and we've got the lower average loan balances, given we're ending this quarter on loan balances. But we think those headwinds are going to be offset by the deployment of the excess cash that we've done, and we'll probably continue to do in the fourth quarter. So for at least flat and optimistic up.

How do you balance the risk of locking in low yields and duration risk with protecting net interest income, especially considering that loan growth might return, which you seem to be optimistic about?

Yes, it's a very good question. We are always balancing our liquidity, capital and earnings. I want to go into a lot of detail, but we are maintaining the assets sensitivity of the company with these purchases.

Okay, and then one nitpick here in the other income category, the net loss in noninterest income minus $250 million. So you mentioned, tax advantaged investments and other things, is that kind of what we should expect going forward, and you're getting the benefit in the tax rate, but this other income kind of runs it a little bit of a loss, or there's some other issues there?

Yes, no, I think that I would expect that. I think other income is going to bounce around quarter-to-quarter, but it should on average, be down a couple of hundred million, given, as you said, the investment in our renewable energy products and other ESG efforts, which create partnership losses.

Okay. So that's kind of a new runway for that.

And remember in the fourth quarter, those partnership losses are always higher. So think maybe a couple hundred million higher.

Okay, more than the $250 million this quarter.

Yes, but we get the benefit in the tax line throughout the year.

Yes, 10% for the fourth quarter. And do you have an idea of like tax rate for annual basis going forward with this new arrangement?

I don't have an expectation for next year to share with you. But the fourth quarter, absent unusual items, 10%. I would just remind everybody that these tax advantaged investments are things we're doing to help society. We're talking about low income housing; we're talking about wind and solar. These are things that are part of our ESG effort. Yes, we are a militaristic company. But on the other hand, we're also doing it because it's a good business for us and helps us generate the benefits net of the cost of losses are positive for the company's earnings.

Thanks. Good morning, guys. I was wondering if you could elaborate a little bit more on just your expectations for how the last cycle is going to evolve? Paul, I believe you mentioned that you wouldn't expect losses to really start moving up until mid-year next year. As we start to evaluate whether or not and how much stimulus we get versus what we've already gotten baked in the cake. Just how are you expecting to see both the consumer and the commercial side project us as we move forward? Thanks.

Yes, sure. So look, regarding the charge-offs, I think we've covered but in consumer, given the lack of significant delinquencies we've seen so far, even on those customers will come off deferral. Given the fact that net charge-offs don't occur without bankruptcy until 100 days past due, it's just not likely we're going to see consumer net charge-offs, which show up until kind of mid 2021.

Yes. If you go back and think about it, what we thought was going to happen in the third quarter this year pushed out; going back to the first quarter we looked at, then the second quarter, we looked at, we pushed out further the third quarter, we pushed out further, so it just keeps pushing out based on, frankly, the characteristics of our consumers are stronger than the characteristics generally in the United States, and characteristics of United States are their consumers are doing better; because of all the things you mentioned, than the unemployment statistics would indicate in models. So, it's just pushed it out. But it's now in the second half of next year.

Yeah, I am just curious. Please continue.

But remember, the near-term path of charge-offs is going to be driven by delinquency roll and things like that; what's delinquency at the end of this quarter? As Paul said, the 30 day delinquencies are down year-over-year in mortgages, cards and things like that; it's down as a percentage and down as dollar amount and down as a percentage on a smaller balance; so it's, their credit quality has been strong.

Yes. And you made the point about not being quite clear yet on, if you should release reserves, just given the uncertainties, I guess, how much is future stimulus a part of that equation? What do you look forward to kind of get that comfort zone that you can say, I know, you said the builds are done, but just in terms of starting to utilize and feel comfortable that you can lead even more of those reserves kind of flow back into capital?

A stimulus plan would help the unemployed, the businesses, they're still struggling to get their business capacity – to get their business utilization of those obvious businesses, you all know, and then states and towns, so they don't have further reduction in budgets or, and/or in schools and other things, hospitals, all these people have been heavily affected. Stimulus affecting those would help all these speed up the pace of the estimates coming down, quite frankly. Right now, there hasn't been – right now there's – it's not baked in, as Paul said earlier, but if stimulus comes in, it would move us further, and you'd see the reserves come out further, because their lifetime expectation of loss would be lower. It's kind of the way it works for less.

Yes, two quick questions. In your guidance on no more reserve builds. I'm trying to make sure I understand that because you've also talked about the possibility of loan growth. At the very least, you'll cover charge-offs, but we also provide for loan growth.

We would but just think about a couple of percentage of loan growth; given the level of reserving wouldn't change it dramatically. If we had fast loan growth, which I don't think the economy is going to support in the near term, we'd have to grow faster; but that'd be a high quality problem to have to build reserves for loan growth.

Sure. And then the second question is can you give us some color on the pipeline for investment banking? What that looks like versus the second quarter or the year ago fourth quarter?

Yes, the pipeline looks solid for investment banking; again, the second quarter was a record quarter for us. The third quarter was the second best quarter for us. Investment banking normally down sequentially third quarter, the fourth quarter. I don't think you could expect to see the same type of volume in the fourth quarter that we saw in the second quarter or perhaps the third quarter, but the pipeline looks solid. We are even seeing some M&A pickup or at least from a discussion standpoint.

Tom Montag and I have been very pleased with the work that Matthew Koder has done with their team over the last year and a half or so since he took over, driving great coverage, driving great connectivity to our middle market businesses, and the fees there continue to grow. He's done a very good job of the management team in that business, and we'd expect him to keep making progress.

Yes, we've gone from just a middle market alone, we've gone from fourth to second in a year with 9.5% market share; we talked about market share gains earlier.

So number one; thank you all for joining us and your interest in our company. Second; a solid quarter of $5 billion plus in earnings, nearly $5 billion in earnings, $0.51 a share. Good business progress across the board in terms of client activity and client household growth. We also saw the economy continued to progress in terms of our customer spending, and it continued to see that continue in October. So nearly $5 billion in earnings, solid, very strong capital, very strong liquidity, continuing our responsible growth management. Thank you.