Bank of America Q4 2023 Earnings Call Transcript

Yeah. Well, I think, Jim, going back to last quarter, I don't think our views have changed a great deal. So our guidance isn't changing much either in that regard. If anything, Q4 deposits were a little better than we expected. So I think, you see and we sort of thought this quarter might be around $14 billion. It was a little better than that. So that's obviously a good starting point.

Now, when we look forward off of that slightly higher number, if you think about Q1, I'm thinking about it in terms of a date count, that might be $150 million, let's say. So, from where we are, that's going to get us to somewhere between $13.9 billion and $14 billion. It's going to be in that kind of a range.

Q2, we see going down just a little bit more. That's little bit of deposit seasonality in Q1 and a little bit of just catch up on rate paid and some rotation. But at that point, we see growing in the back half of the year, and that's largely, yes, deposits growing, it's loans growing a little bit. It's some restriking of the securities that come off the balance sheet and it's restriking some of the loans that come off the balance sheet. So it's all of those things.

You're right. When we got together last quarter, we thought there might be three rate cuts. Now it's up to six. So that's obviously a -- that's a little harder, but the deposit picture has been a little better. So, no particular change at this point.

Well, I mean, you look back, if you look at our loan growth in the materials, it's been a pretty slow loan growth environment. And I think what's going on underneath it is, obviously, you've got the economic activity. Offsetting that a little bit is lower revolver utilization, and you can start to see why with rates being much higher, it's a little more expensive to borrow revolver.

So, as corporate cash balances have come up and deposits have come up, that's just a natural headwind. That's beginning to fade. So, we kind of feel like the loan growth ought to be low-single-digits. Normally, we think about it as kind of GDP plus just a little bit of market share. So, in a low GDP environment, that's sort of what we're expecting for loans this year, and then we'll just need to see how the rate structure develops.

Yeah, okay. So, first of all, if I go back over the trajectory of deposits through the course of 2023, we troughed at $1,845 billion and we ended at $1,925 billion. So, underneath there, there's $80 billion of growth in deposits since May. So, that obviously informs our perspective around how we think about deposit gathering at this stage. That feels to us like it's a supportive environment of our NII forecast.

Second, obviously, over the course of this year, there's been a move towards more interest bearing, and that actually helps us in the event that we start seeing Fed cuts, because that's obviously going to allow us to take those rates down. So look, we're going to see a little bit of rotation, I think, here in Q1 and Q2. I think we'll likely see a little bit of deposit pricing lag.

But the last Fed hike at this point was July. So, there's been an awful lot of time at this point for deposit pricing to shake out. We won't be immune from anything. We have to compete for deposits along with everyone else. But combine all of those things and that's where we get our confidence.

Yeah. So, we -- If you think about it pre-pandemic, we reached a point where we've taken the expenses down a place where we said we'd kind of grow at sort of half the rate of inflation, etc. So, you're right, what we're thinking now is we're up $100 million in the fourth quarter over last year's fourth quarter. And if you think about that is -- and you look at the personnel side, it's up a little higher, the non-personnel is down a little lower.

We got the rise in first quarter expenses, then we start going down each quarter again. So, if you think about $100 million to $200 million of sort of inflationary growth over the quarters this year, you get between $64 million and $64.5 million. And most the firms out that we look at are sort of in that range and we feel comfortable with that. But that sort of allows us the room to use our good operational excellence, take out expenses and replace them with things like revenue-related expenses that we've seen. And we see that pattern reemerge now as we gotten stability and past the pandemic and past the great resignation and all the inflation that occurred in the '21-'22 time frame. We're now stabilized back to that ability to produce sequential declines in quarters during the year, year-over-year growth of inflationary 1% to 2% levels, and that gets you in that low 64s.

Yeah. Well, I mean, I think that the main thing is, number one, it obviously assumes a parallel shift instantly. So, the rate cuts that are in the forward projections, the earliest one comes in March, for example. So, you're not going to see a full year's worth of rate cuts all in the space of the first day or so. It doesn't work out that way.

So, John, I think the way to start would be just use what we've disclosed, which is that $3.1 billion. You can see what we say in terms of, much of that is the short end. And then I just take that number and use that as the beginning point. And just keep in mind, we still see some deposit growth, some loan growth, and some securities and loan repricing that offsets all that.

Yeah. Well, look, if you look at Global Markets, in any given quarter, it moves around just based on the customer behavior. But over the long arc, if you look over the course of past two or three years, it's liability sensitive. So, I'd expect if -- you see rate cuts that'll benefit Global Markets' NII just a little bit. And you can almost like -- if you think about just retracing the steps of what they've conceded in NII, you'd sort of expect to get that back over time.

John, this quarter was a drop, third quarter, fourth quarter, a pretty good amount. And so -- and that's partly due to the fourth quarter being lower activity, just lower inventory carry and things like that. That reversed itself and we're off to a good start so far in the first quarter here and the balance sheet moves back up. So, there's a little bit of quarter-to-quarter linkage third to fourth quarter typically. Yeah.

Well, I think if we got the three rather than the six, Mike, we'd do modestly better, I think. Let me put it this way. If we hadn't seen the three more since last quarter, we might have a higher guide, but -- because we've come off of a base with better deposit gathering in Q4, so we're starting in a better place. So, those two things have sort of evened themselves out. But obviously, if it pushes out later, that's a good thing for us.

So, I think our research team has rate cuts in next year and has a soft landing, as you referenced, Mike. So that's it. As you see the customers today, as I said earlier, the year-to-year spending growth in the fourth quarter versus last year's fourth quarter or in the first quarter so far versus the first part of last year is a 4% to 5% rate in movement of money, and that was across $4 trillion plus out of the consumer accounts and Bank of America into the economy.

That 4% to 5% is similar to what it was in '17, '18, '19 when the Fed rose -- took rates up, inflation was under control and economy was growing at 2% -- 1.5%, 2%, 2.5%. And so, the spending level should sustain an economy, albeit our core prediction is it's slowing down from a higher growth rate in the third quarter, 4.5%, 5%, whatever it was, down to a percent or something like that in the first couple of quarters next year. But we see the consumer activity indicating that they're still in the game, they're still spending money. Where they spend, it's a little different, more in services and going out in restaurants and experiences and less on goods at retail.

They're employed. If you look at the estimates by any of you -- any of your economists, the unemployment rate projected is really a modest deterioration from here and most of them are in the core base case. Our reserve is actually set at almost a 5% unemployment rate by the end of this year, to give you a sense. So that's good news.

They're using their credit responsibly. Much is made of higher credit card balances, but on the size of the economy and the size -- people are forgetting that economy is a lot bigger than it was in '19 because of the inflation and everything. And as a percentage, we don't see any stress there. We see a normalization in that credit. So they're working. They're getting paid. They have balances in their accounts. They have access to credit. They've locked in good rates on their mortgages and they're employed. It's -- we feel it's good. So we think the soft landing is a core thesis. And our internal data supports what our research team sees, and they get -- they see it also through our institute.

Yeah, there's always more to go. So if you -- I think we've got lined up. If you take what we're doing this year and next year, meaning '24, '25 and the roll it in '26, it's a couple of billion dollars plus, which helps us to the dynamic Erika was talking about avoiding growth and expenses, keeping below inflation, because you think of us as rolling that expense taken out back into good things. This year we'll be, I think, $3.8 billion on technology initiatives. That's up from '21 to '22 by $500 million or more, and then sort of flattish '22 to '23. They're being applied in different ways.

We added relationship managers across the board. We keep opening the branches largely through the rehab of the branches that we're keeping, and these are all spending to grow. And that's what you're seeing. So net new checking accounts, 600,000 for the year. That's 20 straight quarters of net checking account growth. All good core accounts, flows into the asset management business. $80 billion or more in our Merrill Edge program. The advertising has driven the business. We have 10% more customers. And those customers, which is 300,000 or 400,000 customers added in the last 12 months, those customers bring an average opening balance of $80,000 to $100,000. To give you a sense, they're not small accounts, that's good.

So we're just investing. But there's a thousand levers. None of them are simple. But even this year, when we said we got to get the headcount growth back in alliance after the great resignation in '22, when we had to hire fast, we went from 218,000 people in January down to 212,900 at the end of the year. And in that we're rolling over teammates from one business to another business where we need help and retraining people and reskilling people. And as AI comes in and to the extent that we can deploy it, deploy it wisely, it'll allow us to redeploy people.

And even with our very low turnover rate, which is 7% for year '23 and actually down from 12% in the year '22 and I think 6% in the fourth quarter, we still can manage headcount down just by not hiring people, because that gives us an opportunity. We hired 15,000 people this year. So we hire -- we can always hire a little less if we see the efficiencies coming through and redeploy the people we have.

Yeah. I'm not sure the media report, but in the end of the day, Jim DeMare and team have done a great job of [Phonetic] deploying capital and growing market share in the sales and trading business. So they're up 7% year-over-year in revenue. FICC was up 11% for the year. Equity was down a little bit, down 1% or so. And they've done a great job, $17.6 billion of revenue, highest by a lot -- over the last few years. And think about it, in the '19 time frame, we were $13 billion in revenues. So, they fundamentally moved up.

That was deploying more balance sheet, you got little bit more capital inherently, but not a lot. They're not taking a lot of risk. They made money every trading day in '23, again, I think. And so they do a great job of serving the clients. So, don't think there's a big capital, a massive amount of capital. They get the capital they need.

They have the balance sheet and the risk appetite they need. But we're continuing to put money towards that business because they've proven to be successful. We gave them the balance sheet a few years ago and they were able to deploy.

More broadly, we pay out the dividend. We then have a bunch of capital. Today, we meet the standards as best, as Alastair said, we could divine from the rule, and we'll see what the final rule looks like when it comes out. But right now, the $194 billion of CET1 is the level of notional CET1. We have to meet the RWA inflation. I'm not saying it's a good rule, I'm just saying we make the math work.

And so, from now on, we can basically deploy capital to the dividend payment, couple of billion dollars a quarter, and then everything above that will go to support business growth if we have it, build a little bit of cushion. We need to build over some period of time to meet these new rules if they come through, and then share buybacks, which we bought $800 million or so last quarter, and you'd expect that to keep ticking up.

Yeah. What's -- it's too early for us to predict what the quarter will look like. We'll get a much better feel for that four, five, six weeks from now. But I think you can use the '23 numbers as a baseline starting point. And then, for the first quarter, I just applied sort of a typical kind of seasonality. Q1 tends to be a very good quarter for us, Q4 less so just with the client activity. And then just recognize that we're starting from a Q4 record. So that's the only thing I would consider.

And then, actually you had mentioned investment banking. Matthew and the team exceeded what we thought in the quarter and seemed to perform better than the industry, and actually we're up a little bit year-over-year, but there's a full pipeline. The question is sort of when is the clarity? And you're seeing some stuff get done, and with stability in rates, you'd expect that to kick back up.

We typically are running about $1.5 billion before the added activity because of the rate falling and pandemic a quarter. We're now $1.1 billion, $1.2 billion, you expect it to move back into those levels, and we are actually been gaining share over the last few quarters as the markets gone down around us, we held -- our relative position grew. So we -- I think Matthew and the team is in good shape and this middle market execution has added a lot of throughput to the team and is building up over time.

Yeah. So, Glenn, you're making me had deja vu, because basically, I think you would have asked this question in the first quarter of '23 too, on a theory that this was all going to run off. And so, when we looked at it, we always said, we had grown sort of in the period up a time the pandemic at sort of 4%, 5% a year in terms of deposit growth. If you strung that line out, we're still above that line, let's just say that. And now we're turning and growing.

So, as Alistair said, we troughed in the middle of the year. So, we've outgrown what our sort of implied growth rate would have been against size, etc. So, we feel good about that. It's all core. Now, if you look at the online dynamics, think about the different clients we have. If you start with the Wealth Management clients discreetly in GWIM, those balances came down and are bouncing around $290 billion, $300 billion on a given day. And they've been relatively stable now for, I don't know, five, six months, I think.

If you look at the wholesale banking, what's happened is, they came -- they've shot up, came down after the pandemic, and then they've been growing back and they're actually stronger because just the activity has picked up and the stabilization of line usage has -- shows that the environment around their borrowing and cash is more consistent. So, that's been good.

And if you look at consumer, that's what we were saying earlier. If you think about consumer, where you see, you take the people accounts with this -- their balances in all their deposit accounts pre-pandemic to now, if you look at people had in Consumer, not in Wealth Management, $50,000, $100,000, $250,000, $1 million in collected balances pre-pandemic, they are down 20%. They move the money, they're going to move.

And so for Wealth Management and Consumer, largely people who are going to move money out to get rate have done that and is it still bouncing around a little bit in consumer? Yeah, they're $950 billion more or less on a given day. But it's stabilized and been relatively consistent for the last four, six, eight weeks. But that's got to settle in and then you grow out from there.

But that -- what that's really telling you is they've kind of moved the money they're going to move, mostly because they did it and you don't get that money twice. So you move the chunk in these higher end consumer balances. They moved 20% of their balances over into get and money market funds, which we captured into other things. And they don't have it to move again because that was accumulated balances that they had in a zero interest rate environment, pre-pandemic plus whatever other things they got.

So, if you look at the Slide 8, you can see this deposit slides laid out by non-interest bearing and interest bearing. But the key is that consumer with $700 [Phonetic] million going into the pandemic, sits at $950 [Phonetic] today. And if you look at the checking, it's still up $140 billion, and that's kind of bouncing around. You can see it's moved down a little bit, but that's really the high -- people with high end checking balances that have moved it into the market.

Just one back [Phonetic].

Look at the Consumer Banking page. It's 47 basis points all in, and it was six quarters ago. And so -- and that's all driven by the CDs. We're going to have a lot of CDs in some of the high end money market pricing. But the point is, if it was going to be moved, it's -- think about that. So the money that's moved is moved and we pay higher rates for very high balances and stuff like that, so -- especially in like the Merrill Edge platform. So, a lot of that dynamic is through the system right now, for lack of a better term.

I think we're getting pretty close now because things are beginning to stabilize. They're beginning to normalize. The whole -- this appeared to transition for the economy and it's a period of transition for our clients, too. A lot of them are dealing with higher interest rates and they're just beginning to moderate and change their spending behaviors.

So, we've seen a trend over the course of the past few quarters. It's pretty predictable around the consumer side. You can see that in our disclosures. I think it's slide 12 and 13, but that's going to bounce around over the course of the next couple of quarters. Now that we're back towards 2018-2019 levels, it's going to settle in, we think, in the first half of this year.

And then, on the commercial side, the asset quality remains really in a very good position. We happen to have a couple of names that popped up this quarter. But to your point, we were pretty fully reserved against them. That wasn't a surprise to us. We had seen those for the course of the past six months. So, we think we're getting close there, Glenn, and obviously, the closer we get to a soft landing, the better we're going to feel about that.

Glenn, as you think about it, when you said reserves, remember because under the CECL stuff, we've always got sort of the lifetime reserve methodology, which we're all still getting clear now. We've operated under for a few years, but this quarter we actually had commercial reserves come down to pay for the charge-off on a specifically prior period reserved properties or loans and that happened. And so you saw some of that.

Be careful on the consumer side because basically the pay-as-you-go side, the consumer side is still building up to a nominal amount of charge-offs, consistent where it was in '18-'19. So if you look at card in '18-'19, the charge-off rate across the eight quarters ranged from a low of 2.90% to high of 3.26%.

We're at 3.07% today, but we're $6 billion, $8 billion higher balances. So you got to be careful the nominal amount to get that right. If you go look at it more broadly in all the company, we had a 45 basis points this quarter, and the range in those eight quarters are 34% to 43%. But what's different is the CRE piece of that and the charge-off.

So, the reserve-to-loans and all the classic factors look at are very strong. The reserve has set itself with basically half the reserve is driven by the adverse case scenario, to give you a sense, versus the base case, and then some judgmental on top of that. And so, as it becomes clear that we're in a soft landing, to Alistair's point, there's less allocation to those scenarios. We always will make some. But when you put all that together and wait, it has unemployment pushing up in the high 4s, and you look at unemployment today, it's nowhere close to that, and there's no prediction to get there in a base case.

So, that's what will start to ease up on the general reserving. But remember, on card it's a bit of pay-as-you-go. And we were running around 6% reserves. We're up to 7% against card now. So, there might be a little bit coming back, but not that -- I'd rather have the growth to sop that up down to 6% in cards than give them back to reserves.

Okay. Hey, Ken, Happy New Year. It's this year's '24, so.

So, Ken, yes, you got it right. We'll get some of it back at the back end of 2024. So we'll get a little bit in the fourth quarter, and then I'd say we get most of it back in '25, most of the remainder back in '26. That's the easiest way to think about it. But you had it right.

A little more front-load.

No, it's got a little more in 2025 than 2026.

Yeah. I think you should expect our Global Markets' performance to continue right now. I mean, obviously, there's a pretty constructive environment for the Markets business at this point. I don't think anything has changed there. There's a lot of client repositioning going on. So, yeah, I think the fourth quarter is sort of the right number to start with. And then you've just got to, I think, adjust for the fact that obviously, you've got a step up in their activity in Q1. I don't know if I misinterpreted, if you're talking about the Wealth Management.

Then those fees are obviously just going to work on the monthly lag, based on where the markets go over time. So, obviously the markets are elevated right now, and that should pretend well, for the future.

Correct. That tends to be a lag by a month or so. So, you'll see that in Q1.

Yeah. So, I don't think -- let me put it this way. I think it's too early to conclude that it's anything other than just a momentary spike-up. But if you look at that chart, essentially what's going on is two things. First, we've got a little bit of office, and that's going to bounce around over the course of time. It just takes a while to resolve that portfolio. It's pretty small for us, obviously. We feel like we're doing all the right things with it, but that was a little elevated this quarter relative to the prior three.

And then, more broadly in commercial, there were a couple of other things that took place this quarter. Again, we were pretty fully reserved against them. So we sort of saw those coming. Asset quality generally in commercial remains in a very, very good place outside of the office sector. And you can, again, see that in terms of -- look at our reserve well criticized, that declined this quarter. So I don't think there's any change there. The issue is just that we're starting with such small numbers in commercial that anything appears like a spike.

Tail end of this now, partly because we're now six months away from the last time that the Fed raised rates, and then partly because if we do have rate cuts, it's going to start to disincent people moving out of non-interest bearing. So. that's what we're describing over the course of time, we've got to see how that develops through the course of the year.

I'm not -- I agree with you. I'm not sure that there's a relevant comparison to blockchain, but let's just focus on AI. If you look at '21, you can see the digital movement. One of the things in the digital movement you see is Erica in the lower left-hand page -- lower left-hand chart on page 21, Gerard, and you can see that in the fourth quarter, the 170 million interactions with Erica, where people effectively answered on question, another 2 million people from last year to this year using it on a basis, 16 million up to 18 million people using it, unique users.

And that's just an example. And that's AI in an early stage. We built that starting ten years ago. It operates on our data, it use natural language processing. We have to keep updating that for the way people use words, that process. But think of 170 million phone calls, walks into branches, emails, etc., where that inquiry had -- would have to go through another place and it's enabled the clients to do things and find them. So, we think that there's vast promise for AI and we're deploying it in places, a lot of internal stuff. We help employees work better, work faster. We're doing it.

We have it in our coding shop. There's coders using it to continue to improve their effectiveness in learning it. But it's still -- there's still the care that has to be taken on data and usage and models and accountability. It's -- all that stuff is still high. So we're using for things that are a little easier and we think it has great promise.

It's just going to -- I'd say it's going to be more similar to digital. What the pace will be, it'll be a little bit of how far it can go before you start to run into difficulties, applying it effectively. But it plays off of the same thing that we've done in digital and Erica and other things. We brought Erica over the commercial side now, so that -- CashPro uses Erica to answer questions and we're seeing the use of that grow and you can see the customers can interface and be comfortable with it, and that's good.

So it will have tremendous help as it's applied in more and more ways. We are still trying to hear and seeing if it really works. How much benefit it generates? Can it be controlled under the model outputs controlled and also the things. But we've had algorithmic machine learning type models all over our company for years.

And so the billions we've spent literally over the last ten years on data -- cleanliness data, or getting the data in the right place, making sure it's dependable, and the models that operate are either [Phonetic] under that aren't -- these open autonomous natural language models, but are models that are machine learning models.

We've seen great promise. That's partly how we operate the company now, basically on the same dollar amount of expenses we had in 2015 or '16, to give you a sense. So yes, it's been digitization, but it's also been using more than that. So it's got -- we have high hopes for it. We just have to make sure it does a great job for the customer.

Well, that's all the issues that we got to balance on a given day. But -- and we can originate loans into their platforms and there are lots of things we can do. So we continue to work through that.

I think, to take it more broadly, my colleagues and I've made it clear that the strictures around our industry, the methodology operating and the openness and the ability to operate outside has led to the mortgage business largely being done outside the industry and most other asset classes, lack of better term, being outside the industry and the private lending is just another case of that.

And I think we're very competitive. We do a great job and we have $0.5 trillion of commercial loans outstanding. We have hundreds of billions of dollars of mid-sized companies, etc. So, we think there's a way that we can do this with our clients and help them and help us. A lot of them are asking, can you help us originate loans? I think there's still a question ahead of whether the policy of having more things going on the bank industry is a good policy.

We -- of course, we in the banking industry don't think it's a good policy because the reality, I think one that's inherent in part of your question was when these companies bounce around because of economic stress or in there -- for them as an operator, the banking system has a workout methodology, not a liquidation methodology or trading methodology, and that served American enterprise very well.

And so, I think we have to be clear and see how it affects the economy that way. And those are issues that were true pre-pandemic and have become more acute. So we feel we'll be competitive no matter what. Nothing scares us. We've got a great team and they do a great job.

But it's endemic of the issue that if you keep -- you pushing too much capital regulation, stuff will find its way outside the system, and that doesn't mean the risk has changed, it just means it's moved from purview of the regulators and that's one of the points we make. But on the other hand, we are working with those enterprises to help us be a combined effective competitor.

Happy New Year to everyone. Thank you for all the time today and on a very busy day with lots of us reporting. As we summarize, fourth quarter was a good quarter and another strong year for our company, driven by organic growth from all our customer segments.

Our digital capabilities continue to grow. Our deposits and loans grew, and that's good news. Our NII continues to exceed what we tell you each quarter in terms of what we think is going to happen, which is good news. We gave you new guidance which we plan to hit. Our capital markets activity remains good on both the investment banking side and the sales trading side.

But -- and importantly, to get the value of that revenue, we have to have good expense management. You saw us during the course of the year take headcount down from 218,000 to 212,900. You saw us take the expense down sequentially, sets us up good for next year. And with all that, our capital and asset quality remain strong, as does our liquidity.

So thank you, and we look forward to talking to you next quarter.