Bank of America Corporation (NYSE:BAC) Q1 2024 Earnings Call Transcript

Bank of America Corporation (NYSE:BAC) Q1 2024 Earnings Call Transcript April 16, 2024

Operator: Good day everyone and welcome to the Bank of America earnings announcement. At this time, all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and one on your telephone keypad. You may withdraw yourself from the queue by pressing the pound key. Please note this call may be recorded. I’ll be standing by if you should need any assistance. It is my pleasure to turn the conference over to Lee McIntyre, Bank of America.

Lee McIntyre: Good morning. Thank you Liam. Welcome and thank you for joining the call to review our first quarter results. Our earnings release documents are available on the Investor Relations section of the bankofamerica.com website, and that includes the earnings presentation that we will be referring to during the call. I trust that everyone’s had a chance to review the documents. I’m going to first turn the call over to our CEO, Brian Moynihan, for some opening comments before Alastair Borthwick, our CFO discusses the details of the quarter. Before they begin, let me just remind you we may make forward-looking statements and refer to non-GAAP financial measures during the call. Forward-looking statements are based on management’s current expectations and assumptions that are subject to risks and uncertainties.

Factors that may cause our actual results to materially differ from expectations are detailed in our earnings materials and our SEC filings that are available on our website. Information about non-GAAP financial measures, including the reconciliations to U.S. GAAP, can also be found in our earnings materials that are available on the website. With that, I’ll turn the call over to you, Brian. Thanks.

Brian Moynihan: Thank you Lee, and good morning to all of you, and thank you for joining us. I am starting on Slide 2 of the earnings presentation. We once again delivered a strong set of results in quarter one. We reported net income of $6.7 billion after tax and EPS of $0.76. This included the additional expense accrual for the industry special assessment by the FDIC to recover losses from the failures of Silicon Valley Bank and Signature Bank. This lowered our quarter one EPS by $0.07. Excluding that expense, net income was $7.2 billion and EPS was $0.83 per share in quarter one. Alastair is going to walk you through details of the quarter momentarily, but first let me give you a few thoughts on our performance. We delivered good improvement in our fee-based business, driven both by continued organic growth and good market conditions.

Investment banking saw a nice rebound this quarter. We delivered nearly $1.6 billion in investment banking fees and grew 35% from the first quarter 2023. Matthew Koder and the team have done a great job delivering market share growth. In addition, our results reflect the benefits of investments made in our middle market investment banking teams and dual coverage teams. Matthew has utilized [indiscernible] power wisely to grow our middle market team from 15 bankers in 2018 across a dozen cities, to more than 200 bankers in twice as many cities today. Both groups work with our commercial bankers and wealth management advisors in those cities to deliver for our clients. Investment and brokerage services revenue across Merrill and the private bank grew 11% year-over-year in quarter one to nearly $3.6 billion.

Continued investments in our advisor training programs and digital delivery for our clients as well as positive market helped us deliver strong revenue. Asset under management flows were $25 billion in the quarter. Sales and trading excluding DBA delivered its eighth consecutive quarter of year-over-year revenue improvement. At $5.2 billion, this is the highest first quarter result in over a decade. We have allocated more balance sheet invested in talent to build our [indiscernible] for the last five years in this business. Those investments plus the intensity of the teams under Jimmy DeMare’s leadership have resulted in good momentum and market share improvement. From a balance sheet perspective, we entered the quarter expecting modest moves in loan growth and a decline in deposits – those were our expectations.

What we actually delivered was growth in ending deposits of more than $20 billion. Ending loans were down modestly due to the expected credit card seasonality, otherwise loans were pretty stable. This balance sheet performance along with our continued pricing discipline allowed us to deliver better than expected NII performance. We told you last quarter that we expected NII to decline from the fourth quarter of 2023 to the first quarter of 2024, a decline of about $100 million to $200 million. We actually reported today NII of $14.2 billion – that was $100 million higher than quarter four, exceeding our guidance. We continue to deliver strong expense management. Year-over-year expenses adjusted for the FDIC assessment was up a little less than 2% – that compares to the 4%-plus inflation rate.

We also continued to invest in our company while managing those expenses. We had several categories with stronger fee-based revenue in the first quarter this year. This drove higher formulaic compensation and processing costs of the increased activity. Fees and commissions were up 10% year-over-year. We are happy to pay for that revenue and deliver more earnings to the bottom line because of it. How did we do all that and hold expenses under the inflation rate? Well, we remain focused on three primary drivers at Bank of America. First, our operational excellence platform continues to deliver and improve processes. These savings from that growth help fund the future growth in the company and lower the risk. Second, we managed headcount as we eliminated work.

Recall, we noted an expectation in January of last year that our headcount would be down throughout the year. Our headcount at the end of first quarter 2024 was down by more than 4,700 people from the first quarter 2023. It declined 650 people just from the end of 2023. The digitization activity is also driving ongoing expense cost savings, customer retention and market share improvement, driving across all three factors. It also supports the ever-increasing volumes of client activity with little increased cost. I would highlight our continued capital strength with common equity Tier 1 capital of $197 billion. That amount of capital is $31 billion over the current regulatory minimums for our company. That capital has allowed us to both support our clients and return $4.4 billion to shareholders this quarter in share repurchases and dividends.

Let me highlight a few points on our organic growth before I pass it over to Alastair. Now I’m turning to Slide 3. You can see on Slide 3 the highlights of quarter one successful organic activity across the businesses. We continue to invest and enhance our digital platforms. We provide our customers with convenient and secure banking experiences. By leveraging our technology and continuous investment in that technology and putting customers at the center of everything we do, we have successfully deepened our relationships and expanded our customer base across all our businesses. In consumer, we had added 245,000 net new checking accounts this quarter. This completes 21 straight quarters of net additions. Dean Athanasia, Aron Levine and Holly O’Neill helped drive that business for us and continue to perform well, driving strong performance across our consumer franchise.

These checking balances continue to drive the performance of our consumer deposits. These checking additions are important for many other reasons. On average, 68% of our deposit balances have been with us for more than 10 years; 92% of the customer checking accounts are primary checking accounts in the household, meaning that they’re the core operating account for the household for their financial lives. When we on-board a client, we start a long-term valuable relationship. About 60% of our checking accounts customers use a debit card and on average they do about 400 transactions per year on that card. The new checking accounts have traditionally opened savings accounts, about 25% of the time within a few months of opening that checking account.

Opening a new checking account on average brings about $4,000 in balances below our averages, but that continues to grow and within a year, it’s two times that amount. Likewise when we open a new savings account, it on average brings about $7,000 in balances. This also deepens by about two times during the year. Investment relationships and credit card account openings continued to be strong in the first quarter as well. While we believe some of these statistics are best in class, rest assured there are plenty opportunities for further growth in our franchise and our company. As we think about our global wealth team led by Eric Schimpf, Lindsay Hans and Katy Knox, that team added 7,300 net new wealth relationships with Merrill and the private bank.

Our advisors opened 29,000 new bank accounts in the quarter with our customers, deepening their relationships. More than 60% are investing clients in Merrill and 90% of our private banking clients now have a core banking relationship with us. In addition, across our wealth spectrum we saw $60 billion in total flows over the last year. As you can see on this slide, we now manage more than $5.6 trillion in total client balances across loans, deposits and investments, and consumer and wealth management. When we move to global banking, we added more new relationships in this quarter than we did in last year’s first quarter. We also increased the number of solutions per relationship with preexisting clients. Just like in our consumer business, we have seen good growth in customers seeking the benefits of both our physical and our online capabilities and also the care of our talented relationship managers, who provide financing solutions and advice for our clients with global needs.

A couple other points I’d make on our digital success. Erica, our virtual banking assistant, reached a key milestone of more than 2 billion interactions since its introduction about six years ago. It took four years to reach 1 billion interactions; it took just 18 months to reach the second billion. In August, we extended Erica’s reach and launched Erica in our global treasury services business and CashPro. Erica has resolved 43% of the CashPro chat inquiries automatedly, demonstrating more and more clients are able to self-solve. This is a great example of best practices being shared across the scale of our company. Second, as an example of our digital success, Zelle continues to grow. It wasn’t long ago that we noted that the number of Zelle transactions in a quarter had surpassed the number of checks written.

Shortly after that, Zelle transactions reached two times the number of checks written. This quarter, Zelle transactions have now passed the combined number of checks written plus the amount of cash withdrawals from tellers and from ATMs. That is a rapid adoption and represents continued cost savings and convenience and security for the customers. These stats and others are included in our quarterly activity for our digital banking progress. That’s included in Slides 20, 22 and 24. I encourage you to read them. They show our market-leading efforts representing billions of dollars of our investment over the years, and we are continuing to drive growth with expense growth under control. The solid earnings results achieved this quarter are a testament to the dedication and talent of our 212,000 people who work here and deliver for our customers every day.

I thank them for another great quarter. With that, I’ll turn it over to Alastair.

Alastair Borthwick: Thank you Brian. I’m going to start on Slide 4 of the earnings presentation. Brian covered much of the income statement highlights and he noted the difference in our reported results and the results adjusted for the FDIC assessment, so I’m not going to repeat that; I’d just add that we delivered strong returns. On a reported basis, our return on average assets was 83 basis points, and return on tangible common equity was 12.7%. When adjusted for the FDIC assessment, our efficiency ratio was 64%, ROA at 89 basis points, and ROTCE at 14%. Let’s move to the balance sheet on Slide 5, where we ended the quarter at $3.27 trillion of total assets, up $94 billion from the fourth quarter, and the bulk of that increase was in global markets to support seasonally elevated levels of client activity.

Outside of the global markets activity, we’d highlight both the $23 billion growth in deposits and the $20 billion decline in cash levels. With that increase in liquidity, you’ll also note that debt securities increased $39 billion, which included an $8 billion decline in hold-to-maturity securities and a $47 billion increase in AFS securities. Those are mostly hedged U.S. treasuries added with yields effectively at cash rates. At $313 billion, our absolute cash levels remain higher than required. Liquidity remains strong with $909 billion of global liquidity sources, and that’s up $12 billion from the fourth quarter and remains $333 billion above our pre-pandemic fourth quarter ’19 level. Shareholder equity increased $1.9 billion [indiscernible] earnings, as they were only partially offset by capital distributed to shareholders, and AOCI was little changed in the quarter.

During the quarter, we paid out $1.9 billion in common dividends and we bought back $2.5 billion in shares, which more than offset our employee awards. As part of those share awards in the first quarter, we announced our seventh consecutive year of share and success compensation awards, covering more than 95% of our associates and further aligning their interests with shareholders. Tangible book value per share of $24.79 is up 9% year-over-year. Looking at regulatory capital, our CET-1 level improved to $197 billion from December 31, and the CET-1 ratio was stable at 11.8% and remained well above our current 10% requirement. We also remain quite well positioned against the current proposed capital rules as our CET-1 level is also above the 10% requirement even when we include estimated RWA inflation from those new proposed rules.

Risk-weighted assets increased modestly, driven by client activity in global markets, and our supplemental leverage ratio was 6% compared to a minimum requirement of 5%, which leaves capacity for balance sheet growth. At $475 billion of total loss absorbing capital, our TLAC ratio remains comfortably above our requirements. Let’s turn our balance sheet focus to loans by looking at the average balances in Slide 6. Average loans in the first quarter of $1.048 trillion were flat compared to the fourth quarter, and they improved 1% year-over-year as solid credit card growth was partially offset by declines in securities-based lending. Commercial loans grew modestly year-over-year. We experienced modest improvement in revolver utilization in commercial lending in the first quarter, and that’s being offset for the most part by pay downs as larger client financing solutions are being met through capital markets access.

Lastly on a positive note, loan spreads continued to widen. Moving to deposits, we’ll stay focused on averages on Slide 7, and relative to pre-pandemic Q4 2019, average deposits are still up 35%. Every line of business remains well above their pre-pandemic levels and consumer is up 32%, with checking up 38% driven by net new checking accounts added, as Brian noted earlier. Linked quarter total average deposits remained steady at more than $1.9 trillion. The total rate paid on consumer deposits in the quarter was 55 basis points, and while the rate increased nine basis points from the fourth quarter, the pace of increases continues to slow. The mix of low rate and high quality transactional accounts keeps the rate paid low. Wealth management and global banking also saw a slowdown in the increases in their rate paid and slowdown in the rotation out of non-interest bearing accounts in the first quarter.

Focusing for a moment on ending deposits and movement from the fourth quarter, this quarter we delivered good deposit growth. Total deposits grew $23 billion and are now $100 billion above their trough in mid-May of 2023. Consumer banking deposits saw growth in both consumer interest-bearing and non-interest bearing. Global banking continued their more normal pattern of deposits seen for the past five quarters and up more than $30 billion over the last year. Deposit growth exceeded loan growth for the third straight quarter and our excess of deposits over loans expanded to $897 billion, and that’s nearly two times the $450 billion we had pre-pandemic. You can see that on the upper left-hand side of Slide 8. We continue to have a mix of cash, available-for-sale securities and held-to-maturity securities, and this quarter our combination of cash and AFS is now 52% of the total $1.2 trillion noted on this page.

You’ll also notice the continued change in mix of the shorter term portfolio as we again lower cash and increase AFS securities that are mostly hedged and at similar yields to the cash. Note also the hold-to-maturity book continues to decline from pay downs. In total, the hold-to-maturity book is now down $96 billion from its peak and consists of about $122 billion in treasuries and about $458 billion in mortgage-backed securities, along with $7 billion of other securities. Lastly, a blended cash and securities yield of 360 basis points continued to rise and remained about 168 basis points above the rate we paid for deposits. The replacement of lower earning assets into higher yielding assets continues to provide an ongoing benefit to NII.

Let’s turn our focus to NII performance using Slide 9, where you can see on a fully tax-equivalent basis NII was $14.2 billion. Good deposit growth provided a strong start to the year for NII, and as Brian noted, NII of $14.2 billion increased by $100 million from the fourth quarter. That compares to our expectation and guidance of a decline of $100 million to $200 million, and that would have resulted in NII this quarter of $13.9 billion to $14 billion, so we did quite a bit better than we had originally expected. The improvement in quarterly NII in Q1 compared to Q4 included the benefits of higher yielding assets and improvement in global markets NII, partially offset by higher deposit cots and one less day in Q1 than 4Q23. Deposit balance activity more generally also aided in the beat versus our expectations.

As we look forward for Q2, we expect some modest impact of lower deposits in wealth management as client make their seasonal income tax payments, and we expect global markets NII to decline mostly seasonally a little bit as well, so we expect second quarter NII could approach $14 billion on an FTE basis. Further, we continue to expect that Q2 will be the low point for NII and we expect the back half of 2024 to grow. Compared to our guidance last quarter, we’re obviously growing off a larger base of NII after having outperformed in the first quarter. With regard to that forward view, let me just note a few other caveats. It includes our assumption that interest rates in the forward curve at the end of the quarter materialize, and at the end of first quarter there were still three cuts expected this year, starting in June.

Our forward view also includes an expectation of low single-digit loan growth and some moderate growth in deposits as we move into the back half of 2024. Given our recent deposit and loan performance, we continue to feel good about these assumptions. Turning to asset sensitivity and focused on a forward yield curve basis, our sensitivity to the plus and minus-100 basis points parallel shift in the forward curve at March 31 remains well balance. Let’s turn to expense, and we’ll use Slide 10 for that discussion, where we reported $17.2 billion expense this quarter including the FDIC assessment. Adjusted for the assessment, expenses were $16.5 billion and the increase over the fourth quarter included a little more than $400 million in seasonal payroll tax expense, as well as higher revenue-related costs and, to a lesser extent, annual merit increases and other annual awards, like sharing success awards provided this quarter.

$16.5 billion was just a little above our forecast for Q1 which we made last quarter, and the increase is driven by better than expected fee revenue across wealth management, investment banking, and sales and trading, and as Brian said, that’s a trade-off we’re more than happy to make, bringing more earnings to the bottom line. While expense is up almost 2% from last year, we simply remind you inflation is up by more than 4% and we’ve increased our investment, and we’re paying for the revenue growth, so we think it represents good work by our teams. As we look forward in Q2, we expect a decline from the Q1 level as we typically see about two-thirds of the Q1 elevate payroll tax expense come back out, and the remainder of the year expense is expected to trend down.

Continued digital engagement savings and operational excellent initiatives should help us offset other cost increases for people and technology through the back half of the year. Turning to credit on Slide 11, provision expense was $1.3 billion in the first quarter, and that included $179 million of reserve release due to a modestly improved macro environment outlook as the baseline consensus expectations improved from the fourth quarter. On a weighted basis, we remain reserved for an unemployment rate of nearly 5% by the end of 2025 compared to the most recent actual 3.8% rate. Net charge-offs of $1.5 billion increased $306 million from the fourth quarter, driven by continued credit card seasoning and commercial real estate office exposures as swift revaluations from current appraisals and resolutions drove higher charge-offs.

The net charge-off ratio was 58 basis points, a 13 basis point increase from the fourth quarter. On Slide 12, we show you the credit quality metrics for both our consumer and commercial portfolios. Consumer net charge-offs increased $150 million versus the fourth quarter from the flow-through of higher late stage credit card delinquencies. We included a credit card delinquency slide, No. 28 in our appendix, and we’re encouraged by the trend of delinquencies because the late stage increases slowed and early stage delinquencies improved as well, and that leads us to believe we should begin to see consumer net charge-offs start to level out over the next quarter or so. All of this is still well within our risk appetite and our expectations, and it’s consistent with the normalization of credit we discussed with you in prior calls.

Commercial net charge-offs increased $191 million versus the fourth quarter, driven by commercial real estate losses and office exposures. On office losses this quarter, we recorded charge-offs on 16 office loans. Four were a result of sales activity, i.e. final resolution, seven were from losses that we expect on exposures that are in the process of expected resolution in the course of the next 90 days, and the rest we took as a result of refreshed valuations. We use a continuous and thorough loan-by-loan analysis and we’re quick to recognize impacts in the commercial real estate office space through our risk ratings, and that’s resulted in several downgrades in the last few quarters. As a result of these quick actions and our downgrades in categorization, we’ve also refreshed the valuation of our reservable criticized properties, and we’ve taken appropriate reserves and charge-offs in the process.

Roughly one-third of our office exposure is now categorized as reservable criticized, and importantly the pace of the increase in reservable criticized exposures has slowed each quarter since the second quarter of last year, so we believe the losses on these office properties have been front-loaded and largely reserved. We expect the losses to move lower in the second quarter and we expect a notable decline in the second half of the year when compared to the first half of this year, absent any material change in expected real estate prices. In the appendix on Slide 29, we’ve included a current view of our commercial real estate and office portfolio metrics, as we usually do. Let’s turn to the various lines of business and offer some brief comments on their results, starting on Slide 13 with consumer banking.

For the quarter, consumer banking earned $2.7 billion on continued strong organic growth. The reported earnings declined 15% year-over-year as revenue declined from lower deposit balances compared to the first quarter of ’23. Credit card loss normalization also caused year-over-year provision expense to increase. As Brian noted, customer activity showed another strong quarter of net new checking growth, another strong period of card openings, and investment balances for consumer clients which climbed 29% year-over-year to a record $456 billion. That included market appreciation and also very strong full-year flows of $44 billion. As noted earlier, loans grew nicely year-over-year from credit card as well as small business, where we remain the industry leader.

Expenses were flat year-over-year, fighting off inflation, merit increases, higher minimum wages, and new and renovated financial centers and technology investments, so holding expense flat reflected very good work by the consumer team. As you can see on the appendix, Page 20, digital adoption and engagement continued to improve, reaching a record of $3.4 billion digital log-ins in the quarter, and it showed good year-over-year improvement. Customer satisfaction scores at near record levels illustrate the continued appreciation of the enhanced capabilities we provide. Moving to wealth management on Slide 14, we produced good results, and that included good organic client activity, market favorability and strong flows. Our comprehensive suite of investment and advisory services coupled with a commitment to personalized wealth management planning and solutions has enabled us to meet the diverse needs and aspirations of our clients.

In first quarter, we reported record revenue of $5.6 billion and a little more than $1 billion in net income. That net income was 10% from the first quarter of ’23. The business generated positive operating leverage and grew revenue faster than expense, while improving the pre-tax margin year-over-year. While overall average loans were down year-over-year, driven by the securities-based lending, it’s worth noting the strong growth we’re seeing in custom lending, and ending loans in the wealth management custom loan book are up 6% year-over-year. As Brian noted earlier, both Merrill and the private bank continued to see strong organic growth and produce good assets under management flows of more than $60 billion since the first quarter of ’23, which reflects a good mix of new client money, as well as existing clients putting money to work.

Expense growth here matched the revenue growth, otherwise fighting off higher investment costs and inflation. Let me also highlight the continued digital momentum here. As an example, Merrill has 86% of its clients now engaging with us digitally and 80% utilizing e-delivery. 76% of their eligible accounts are now opened digitally, so the cost for us to open is half and the customer cycle times are improved greatly. On Slide 15, you’ll see our global banking results, and the business produced earnings of just less than $2 billion, down 22% year-over-year as improved investment banking fees and treasury services revenue were overcome by lower net interest income and higher provision expense. Revenue declined 4% driven by the impact of interest rates and deposit rotation to interest-bearing, and that impacted NII.

The diversification of our revenue across products and regions continues to reflect the strength in this platform, and GTS and investment banking fees are good examples. In our global treasury services business, some of the NII pressure from higher rates on deposits is offset by the fees paid for moving and managing the cash of clients, and that continues to grow with existing clients as well as with new client generation. As Brian noted, investment banking had a strong quarter, and at $1.6 billion in investment banking fees, this quarter was the strongest quarter in seven years, absent the pandemic 2020 and 2021 periods. An increase in provision expense included the commercial real estate net charge-offs I discussed earlier, as well as a larger reserve release in the prior year period.

Expense increased 2% year-over-year, including the 35% lift in investment banking fees from the first quarter of ’23. Switching to global markets on Slide 16, we’ll focus our comments on results excluding DVA, as we normally do. The team had another terrific quarter with $1.8 billion in earnings, growing 7% year-over-year. Revenue improved 6% from the first quarter of ’23 and return on average allocated capital was 16%. Focusing on sales and trading ex-DVA, revenue improved 2% year-over-year to $5.2 billion, which is the highest first quarter result in over a decade. FICC was down 4% while equities increased 15% compared to the first quarter of ’23. The decline in the FICC revenues versus the first quarter was driven by a weaker macro trading quarter that was partially offset by better mortgage trading results.

Equities was driven by strong trading results in derivatives, and year-over-year expenses were up 4% from continued investment in the business. Finally on Slide 17, all other shows a loss of $700 million driven by the FDIC assessment. Revenue declined year-over-year, reflecting higher investment tax credit yields, and expense adjusted for the FDIC assessment was down $133 million, driven by lower unemployment processing costs. Our effective tax rate for the quarter was 8%, and excluding the FDIC assessment and other discrete items, it would have been 9%. Further excluding tax credits related to investments in renewable energy and affordable housing, our effective tax rate would have been 26%. Thank you, and with that, we’ll jump into Q&A.

Operator: [Operator instructions] We’ll take our first question from Steven Chubak of Wolfe Research.

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Q&A Session

Steven Chubak: Hey, good morning.

Alastair Borthwick: Good morning Steven.

Steven Chubak: Maybe just to start off with a question on capital management, just given the strength of your excess capital position, maybe still some uncertainty around Basel III end game and where the proposal could ultimately shake out, I was hoping you could just speak to where you’re comfortable running on CET-1 and when can we expect that you’ll return to 100%-plus type payout.

Brian Moynihan: I think you should expect, so if we run a cushion, whatever rules come out and when they come out and get clarity, we’ll expect to run the requirements plus 50 basis points, up to 100 basis points of excess, and anything above that will be either used to continue to grow the company, if needed; if not, it will be returned. We’re just, as all of us are, waiting for the finalization of these rules. Right now, we’re sitting on $30 billion under the old rules. We have enough under the new rules as previously proposed, but obviously they’re talking about changing them, so you should expect clarity on that. What you’d also expect is as we think about it, beginning now, you’re basically at the point where you’re sitting on the capital with a very modest need to build a cushion to the rules as proposed, and any changes will be more favorable to that, I assume, so expect us to continue to return capital at a fairly strong rate as we move through the second quarter and beyond, and the rules become clarified.

Steven Chubak: Great color, Brian. For my follow-up, just on the NII commentary, Alastair, it sounds like you’re still assuming some modest deposit growth in the back half as part of that NII trajectory, that recovery off the trough in Q2. Just given your deposit balances increased $500 billion since COVID, I know some of that is going to be a function of share gains, but as we prepare for some QT driven outflows, how are you handicapping the risk of the deposit attrition and how does that impact the NII guidance? If you can frame any sort of sensitivity, recognizing many of those tend to be high money or higher cost deposits.

Alastair Borthwick: Yes, so first thing I’ll just say, Steven, is we’ve been up against QT now for the last couple of years, so the deposits are beginning to settle in now. If we were to go back to–if you take, for example, consumer, if you were to go back to pre-pandemic and think about what long term sustainable growth rates looked like for consumer, if you just extended that through from the fourth quarter of 2019 to today, given that the economy is 30% larger, we kind of feel like consumer is approaching that floor, so we’re still in this belief that Q2 is going to be–Q3 may be the turning point for consumer. You can see that slowing now. The rest of our business, if you look at the exhibit we put together on deposits, if you look at that bottom left chart on wealth, you’ll see it slowed and grew this quarter.

Then in global banking on the right-hand side of that page, they’re kind of back to pre-pandemic growth rates – they’re up 7% year-over-year, so we’re seeing some structure now in the deposit base even with QT over the course of the past year. Our deposits are up $100 billion, so it has been a point of conviction of ours that as we get towards Q2, we should see the consumer side begin to stabilize. That’s what’s driving our conviction that NII will go up in Q3 and Q4. We’re in that transition period right now.

Steven Chubak: Good color. Thanks so much for taking my questions.

Operator: We’ll take our next question from Mike Mayo of Wells Fargo.

Mike Mayo: Hi. Thanks for the outlook for NII and the consumer charge-offs, but once again I go back to efficiency. You highlight the 2 billion Erica interactions, the last billion the last 18 months. You mentioned Zelle transactions now double the check transactions, or more than checks plus cash withdrawals from ATMs plus cash withdrawals from tellers, so for all the great tech work, the efficiency ratio improved 66% to 64% quarter-over-quarter, but I know you’re still not happy with that 64%. As you see the NII decline in sight and as you have this tech evolution continuing, when do you think you can get below a 60% efficiency ratio? What’s your outlook for that, because I’m just reconciling the numbers that we look at with all the progress you’re making internally. Thanks.

Brian Moynihan: Mike, I think as NII moves along the path that Alastair mentioned, all that sort of flows through because there’s no more activity attached, as you’re pointing out, namely continuing to reduce marginal expense of that activity because largely that’s consumer, wealth management and global banking, which don’t add lots more clients and stuff and lots more activity, even though the numbers go up out of efficiency, so that’s continuing to improve our efficiency ratio. As you also well know, when the revenue growth is coming through the wealth management business, which by definition because of the way the compensation process works, has a lowest efficiency ratio in the company, that’s a good thing because it grows and we get good profitability growth out of it.

But we’re fighting that trend, and as one of the largest wealth management businesses in the world, if not–you know, it’s a higher percentage of our revenues in our expense base, and so we’re continuing to drive it down. We’re at 64, you’d expect that to improve as the deposit balance is stabilized for many quarters now and starting to grow. The rate paid has really flattened out sequentially by quarter, and the yield of the portfolio and the yield of the assets continues to grow, so we feel good about how it’s going. Our focus is really on deploying expenses in operating leverage, and as we get through the twist in NII, you should start to see us return to that again, and that would then obviously drive down the efficiency ratio.

Mike Mayo: But what are you thinking about expense growth for the rest of the year or next year? I get it – inflation has gone up quite a bit, but what are your thoughts about expense growth looking ahead?

Alastair Borthwick: Well last year, remember Mike, we told you we thought we could drive expense down every quarter. We believe this year, the expense will trend down over the course of this year, and obviously Q1 is inflated a little bit with just payroll tax and some of the revenue seasonality, but underneath that there’s pretty significant revenue strength, so I think that probably cost us $100 million or so this quarter. I think we probably are looking–you know, if this environment continues, we’re looking at another $100 million per quarter going forward, but it’s–to Brian’s point, it’s the good expense that comes with revenue growth over time. That’s really the only change I’d say with respect to how we think about the expense picture.

Mike Mayo: All right, thank you.

Operator: We’ll take our next question from John McDonald of Autonomous Research.

John McDonald: Thanks, good morning. Wanted to follow up on the helpful deposit commentary. Alastair, you mentioned the consumer, you’re thinking that that will stabilize in the back half of the year on deposits. I’m wondering what your mix shift expectations are – you know, earlier this year, you kind of thought that those customers that moved for rate seeking already had, and just wondering if higher rates for longer could put some pressure on rate-seeking behavior again, and what you’re baking in, in terms of mix shift from non-interest bearing into interest-bearing in your outlook and your planning.

Brian Moynihan: John, I think if you look at Slide 7, you can see the mix in the left-hand corner. Remember that one of the things we all have to be careful about is in the global banking area, the way the fees are paid and earnings credit, it messes up the simplicity of non-interest bearing and interest-bearing, so it’s complex. But if you look at the quarters coming across from the first quarter of ’23 through the first quarter of ’24, you can see that you’re seeing the rate of change slow dramatically and kind of settle in. A lot of the money has moved. If you look at the seven-day average for consumer, going all the way back to the early part of October, it’s been relatively stable at $950 billion, $960 billion, so we’re just getting through the tax season and the ins and outs in the wealth management business and consumer, people paying taxes out on the wealthier side and receiving benefits on the tax refund side, so as we stabilize in that, we expect it to grow.

We don’t expect a massive change in how the deposits are structured from what’s in money markets, what’s in savings, what’s in checking and that. It’s really slowed down and been relatively stable, so things jump around but it’s all very good value. Even the highest paid balances in the wealth management business are good value for the company. But if you look at what really drives the value, so the $950 billion-odd in checking balances you can see on Page 7, the core checking balances, that’s what drives it.

John McDonald: Are you still feeling, Brian, like the bulk of people that have kind of moved on rate-seeking behavior likely have done so?

Brian Moynihan: Yes, if you look on the consumer business and you think about tracking those deposit accounts from pre-pandemic to now, which is one thing we’ve talked about for different purposes, but if you look at where all the deposit balances, if people with lower average balances are still multiples of where they were pre-pandemic, people in the higher balances are actually lower because obviously they were sitting on cash in the pandemic and accumulated more cash, and when rates came up, they moved it. All in, that gives you want you see in consumer, which is at the end of the day a couple hundred million dollars above where it was pre-pandemic. But the people have moved, and you’re seeing it month to month relatively stable as we track that every month on both sides, frankly.

The lower average balance accounts from pre-pandemic are basically bouncing around at the same level right now, not going down, not going up, and the higher ones are stable but they are down 15%, 20% for people with a half million, million dollar balances, largely because they moved it in the market, so we feel it’s stabilized. There will be ins and outs and we’ll see it play out, but it’s extremely valuable no matter how you look at it.

John McDonald: Okay, and maybe as a quick follow-up for Alastair, it’s nice to see the core NIM, the net interest yield ex-markets inflect positively this quarter. Is that sustainable, do you feel like, and what are some of the fixed asset re-price dynamics that are tailwinds beyond the $10 billion per quarter in securities, in terms of loans and swaps that will come due over the next year or two and help the NIM a bit? Could you talk a little bit about that?

Alastair Borthwick: Sure. We’ve talked about the fact that the net interest yield, obviously, this quarter benefits from the NII growth, so you’re getting in the numerator; but we inflated the denominator in terms of the average earning assets last year as we just made the balance sheet more liquid, so that’s going to allow us to continue as deposits grow to grow the net interest income over time without necessarily growing the other earning assets. Q2, we’ll have a little more of a challenge, but going forward I expect all the NII improvement in Q3 and Q4 to drop into that net interest yield, and part of things supporting that, John, as you pointed out, is we do have loans re-pricing. Because we’ve got loans coming off the balance sheet, we’re booking new loans at higher rates, so that’s one element.

The second element is we’ve got securities that we’re re-investing underneath all this too, so obviously we’re sweeping the hold-to-maturity pay downs and reinvesting those at much higher rates. Then third, the teams have been working hard at re-pricing the balance sheet broadly for things like loans, and I believe we’ve now had seven quarters in a row of improving loan pricing, so we’ve just got to keep grinding away at that.

John McDonald: Thank you.

Operator: We’ll take our next question from Betsy Graseck of Morgan Stanley.

Betsy Graseck: Hi, good morning.

Brian Moynihan: Good morning.

Betsy Graseck: Thanks very much for taking the question. I guess I just wanted to follow up on the conversation you were just having, and Alastair, I know that–look, your NII guide improved this quarter due to 1Q results being better than what you had anticipated a quarter ago. My question is on the second half ’24 improvement, I guess it is going to be an improvement from first half, right – that’s basically the base that you’re looking at? I’m wondering how you’re thinking about the NII trajectory on a year-

. I believe NII is down about 3% year-on-year in 1Q. Should we anticipate that that is stable pace throughout the year, or that reduces as well when we’re talking about second half ’24? If you can just give us a sense of year-on-year, that’d be helpful, thanks.

Brian Moynihan: Betsy, before Alastair answers your question, it’s good to have you back and wish you good luck with everything. Alastair, why don’t you hit that?

Betsy Graseck: Oh, thanks so much, Brian, really appreciate that.

Alastair Borthwick: It’s good to have you. I guess a couple things. The first thing is we haven’t changed our perspective in terms of this idea of Q2 being the low point in the trough for the year. We haven’t changed our point of view on growing in terms of Q3 and Q4. I think the important thing we’re trying to convey is because of the continued stability in pricing rotation and because of this continued stability in deposits, we feel like that extra couple hundred million in Q1 is something that should flow through in Q2, Q3 and Q4, and then there will be a second dynamic to watch for as well, Betsy, which is if we have less rate cuts, we’re going to benefit from that. We won’t necessarily benefit a lot in Q2 because there isn’t enough cuts or time in Q2, but I think by the time we get to Q3 and Q4, we’ll know more about the rate structure at that point and we’ll be able to tell you more about what we expect for the growth in the back half of the year, but we’re reasonably optimistic there.

Betsy Graseck: Super. That’s perfect, thank you. Then just one follow-up is on the AOCI, so we all know the HTM is a portfolio that you’re in run-off on, I guess, if that’s fair to say, as balances are pulling off, and this quarter we did have a back-up in the long end of the curve, your AOCI really didn’t flex that much. Part of my question is, is that a function of how the securities book is comprised and you’ve been shifting towards treasuries and that’s reducing this risk as the back end of the curve increases. I just wanted to understand how that’s trajecting in your mind, because it is a concern that people raise, and what I saw today suggests that it’s much less of a concern than it had been a year ago, say for example. Would you agree with that?

Alastair Borthwick: Yes, I mean, we’ve deliberately worked on that over time, but we’ve always, I think, had a pretty good program of hedging the fixed rate securities in the FS book so that they’re swapped, and that means that if rates go up, we obviously benefit from that. It doesn’t necessarily hurt us in terms of AOCI, so. Most all of the treasuries that you see in our portfolio are swapped, so I would expect very little in the way of AOCI impact there.

Betsy Graseck: Thanks so much.

Operator: We’ll take our next question from Glenn Schorr of Evercore.

Glenn Schorr: Perfect lead-in to this question. On Friday, you talked about AFS securities mostly hedged, your floating rate swaps [indiscernible] less than a half a year. I know the Fed forward curve keeps not being correct, but at some point it’s going to be correct and rates are going to come in. My question is what do you do about that? How much do you think about extending duration and managing your swaps a little differently as we eventually [indiscernible] transition to [indiscernible] rate backdrop?

Alastair Borthwick: Yes, so Glenn, ultimately we’ll use the same philosophy and strategy that we do to this point. We are in obviously a very good position where we have substantial deposits in excess of loans – that’s what creates this excess in the top left of Page 8, and it’s what allows us to put everything to work in the top right. The balance that we try to strike, you can sort of see in the left-hand side – we’re trying to make sure that that cash and securities yield compared to the deposit rate paid performs in any environment, so in an environment like this one, where there’s an awful lot going on with rates, we feel like if you look at that spread, I think it was one basis point different quarter-over-quarter, so we’re trying to make sure that we lock in the value, monetize the deposits regardless of whatever the rate environment turns out to be, and we feel like we’re pretty balanced now.

We’ve got a pretty good balance of short dated, long dated, fixed and floating that should allow us to perform, whether rates go up or down from here. One final thing I’ll just say, and I think you know this, underneath all of this, obviously we’ve got some securities re-pricing, and to the point, I think it was John asked earlier, we’ve got loans re-pricing as well, and all of that gives a little bit of underlying resilience to this.

Glenn Schorr: Yes, I get that. I guess you have a lot of flexibility [indiscernible]. Just one follow-up, you talked deposits to debt. You had a smidgen of year-on-year loan growth, mostly in cards, I think. I know how we got here, but it’s a weird environment – we’re seeing a really strong economy with up markets, and yet no loan growth.

Alastair Borthwick: Yes.

Glenn Schorr: Is this just any way you slice it, we have to go through another year or two of super low loan growth, or are there any leading indicators that would lead you to believe we can get back to a little bit more normal BofA loan growth and not have to wait two years for it?

Alastair Borthwick: Yes, well I think we’re probably getting closer now because, remember, in the big macro, we’re in that transition period where post-pandemic, the economy is sort of recovering and rates are settling in, and it’s changing people’s behavior. We’ve actually got pretty good credit card growth, and that’s just offset by the fact that, for example with securities-based lending at rates that are 5% higher, people are doing less of it; or in commercial, we’ve got some loan growth but the revolver utilization is still suppressed because revolver costs a lot more, so as the Fed has raised rates, it’s changed some of the borrowing patterns of our clients. But that’s not going to last forever because, as you point out, the economy powers through at 3%, 3.5%, whatever it end ups being, loan growth is going to catch up to that over time.

For right now, we’re in that transition period, but we’re anticipating that loan growth will pick up at some point in the future, but it’s not an enormous part of our NII guide at this point.

Brian Moynihan: And just remember that the capital markets opened up and a lot of the larger clients accessed them as they’ve, frankly, have gotten used to the higher rate structure and need to refinance. If you look across the businesses, you’ve got the commercial [indiscernible]. If you look across the commercial businesses in middle market and business banking, the segment up to $50 million of revenue companies and up to $2.5 billion, they actually saw progress in loan growth. It was really in the high end global corporate investing banking business where you saw sort of pay downs to bring that down. That phenomenon is one that occurs from time to time. It’s probably stabilized now and we’ll see it play out, but we are fighting for loan growth and, frankly, line usage stabilized.

It’s better than it’s been for the last few quarters in terms of trend and so again that all speaks to people feeling fine, but they’re not quite as aggressive as they would be when you read the economic statistics, and that’s one of the great debates that you can read about in the paper every day.

Glenn Schorr: Thank you both for all that.

Operator: We’ll take our next question from Matt O’Connor of Deutsche Bank.

Matt O’Connor : Good morning. Obviously there’s been a lot of questions on net interest income and a lot of the color, I guess. Just when you put it all together, when you think about the higher for longer environment, obviously it’s good on the re-investments, you’re trying to max the deposits like you talked about, but how would you just boil it down? You know, the rate disclosure is still [indiscernible] $3 billion kind of exposure to either side is stable–you know, is stable rates for a couple years, is that good or does that accelerate the deposit re-pricing? Just boil that down, thanks.

Alastair Borthwick: Sure, well I’d say generally speaking, higher for longer is probably better for banks, as a general statement. The question will become why are rates higher, like what’s going on in the economy? Are we talking about inflation, is it under control, is it coming down? Right now, that appears to be the case, so that’s obviously a good place. The Fed’s in a good place because they appear to have rates that are a real rate that is high enough to make sure that inflation stays in a good place. Things can change, Matt, so an awful lot will depend upon just the why for rates; but generally speaking, if it’s just because it’s taken a little while longer for the inflation to nudge down before the next set of cuts, that’s probably a good environment for us.

I would expect us to perform relatively better than we’ve disclosed so far. Then you’re asking a second question, which is around what does the sensitivity look like to plus-100 or minus-100. We’ve tried to just make sure that we continue to stay balanced. If anything, that corridor of plus-100, minus-100 has gotten narrower and narrower over time as we’re trying to lock in NII that’s $4 billion or $5 billion higher per quarter today than it was three years ago, and just make sure that the shareholder benefits from that through the course of time. We’ll see how the environment plays out – it’s only been a quarter since we were last here talking about six cuts. Now it’s three, so we just have to watch this play out and stay patient.

Matt O’Connor: Okay, fair enough. That’s helpful, thank you.

Operator: We’ll take our next question from Ken Usdin of Jefferies.

Ken Usdin: Thanks very much, good morning. A real breakout quarter for the IB fee line, and just wondering a couple things within that. One, there was a bit of a back and forth from some of the other banks about whether or not DCM was pulled forward a little bit from future – I wonder what you think about that. But more broadly, you guys have done a good job taking share, what inning do you think you are in terms of not just so much just green shoots but in terms of where that incremental productivity is in terms of getting that IB line to a more permanent higher level? Thanks.