Bank of America Corporation (NYSE:BAC) Q3 2023 Earnings Call Transcript

Bank of America Corporation (NYSE:BAC) Q3 2023 Earnings Call Transcript October 17, 2023

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 a question-and-answer session. Please note today’s call will be recorded and we will be standing by if you should need any assistance. It is now my pleasure to turn today’s conference over to Lee McEntire, Investor Relations. Please go ahead.

Lee McEntire: Good morning. Thank you. Welcome and thank you for joining the call to review the third quarter results. As usual, our earnings release documents are available on the Investor Relations section of the bankofamerica.com website, and it includes the earnings presentation that we will be referring to during the call. I trust everybody’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 we do that, let me just remind you that we may make forward-looking statements and refer to some 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.

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

Brian Moynihan: Good morning, everyone, and thank you for joining us. As usual, we’re starting on Slide 2. Our third quarter here at Bank of America was another strong quarter as we delivered $7.8 billion in net income. That is a 10% growth over the year-ago third quarter. And for the first nine months of the year, we have earned $23.4 billion, an increase of 15% over 2022. We grew clients and accounts organically and at a strong pace across all our businesses. Our operating leverage was about flat. We improved our common equity Tier 1 ratio by nearly 30 basis points in the quarter to a level of 11.9% against a current minimum of 9.5%. We saw an increase in our deposits and we maintained our strong pricing discipline. We continue to maintain $859 billion in global liquidity sources.

We also deliver a good return for you, our shareholders, with a return on tangible common equity of over 15% and a 1% return on assets. Just a quick note of what we see in the economy. Our team of economists predicts a soft landing with a trough in the middle of next year. We see that in our customer data, our 37 million checking customers, we see their spending slowing down. You can see that on Slide 34. The third quarter was up about 4% over last year’s third quarter. Earlier this year, that would have been more of a 10% increase year-over-year. And for the entire year of 2022, it increased 10% [round numbers over ‘21] (ph). This 4% level is consistent with the spending we saw in the pre-pandemic period from 2016 to 2019. That is consistent with a low-inflation, lower-growth economy.

As we move into October, the spending is holding at that 4% level. So growing, but growing at a basis more consistent with low growth, low inflation economy. With that, let me turn to Slide 3. We provide various highlights, and Al’s just going to cover a lot of this. Our team continues to focus on driving organic growth, driving digital progress, and operational excellence, which keeps us focused on operating leverage. A few words on organic growth as we flip to Slide 4. Every business segment had organic growth. In Consumer, in quarter three, we opened more than 200,000 net new checking accounts this quarter alone. We also opened another 1 million credit card accounts. We have 10% more investment accounts this year, third quarter, than we did last year.

In Small Business, we have seen 35 straight quarters of net new checking account growth. We’ve also seen good small business loan growth, and our loans are up 14% from last year. That was — in this quarter, our Small Business teammates extended $2.8 billion in credit to small business in America alone. In Global Wealth, we added nearly 7,000 net new relationships to the Merrill and Private Bank franchises. And our advisors opened more than 35,000 new bank accounts for the third consecutive quarter, fulfilling both investing and banking needs for those clients. We also increased our number of advisors. In the past year, across our wealth spectrum, in GWIM and in consumer investments, they have combined to gather $87 billion in total net flows.

In our Global Banking team, we added clients and increased the number of products per relationship. Year-to-date, we’ve added 1,900 new commercial and business banking clients. That is more than we added in the full year last year. Even while activity is low, the investment banking team continues to hold us number three position. In the Global Markets, we continue to see performance establish new records for our firm. I’m going to cover that in a little more detail in a moment. As you can move to Slide 5, you can see the digital adoption engagement and volumes continue to increase. We lead the industry in digital banking and continue to provide the best-in-class disclosures. You can find those disclosures by line of business in the appendix on slides 26, 29, and 31.

We also continue to receive top accolades from third parties around these capabilities. Most important, these capabilities are valued by our clients and customers and allow us to grow with great expense leverage. Let me give you a few examples. Our Consumer and Merrill clients logged into our consumer banking app a record 3.2 billion times this quarter. Even at this scale and stage of maturity of this operation, logins are up double digits from the year prior. Customer use of Erica continued to beat our expectations with almost 19 million users, up 16% in the past 12 months. CashPro App sign-ins with our business clients are up more than 40%. And we recently added the Erica functionality to CashPro to help corporate clients benefit from that artificial intelligence.

Likewise, Zelle users continues to grow. Zelle transaction levels are up more than 25% from last year. And Zelle is becoming a meaningful way our customers move money. In fact, customers now send money with Zelle at twice the rate they write checks. We’re nearing a period where the Zelle transactions sent will exceed the combination of checks written and ATM withdrawal transactions. As you move across the lines of business on the slide, the story is the same. All these capabilities help us deliver faster, safer, and more efficiently. And all of it gets strong customer and client feedback. When you put that together, that helps us drive operating leverage, and you can see it on Slide 6. We have a strong record of driving operating leverage in our company.

We drove operating leverage every quarter for nearly five years before the pandemic. And then again, more recently, we’ve had an eight-quarter streak leading to this quarter. We acknowledged to you this last quarter that our operating leverage is going to be tough for a few quarters as we navigate through the trough of net interest income. But as you can see on Slide 6, we managed to grow revenue year-over-year faster than expense in dollar terms this quarter, even though the percentage change was basically flat. Now, in January, we told you we’d manage our head countdown to help make sure we got our expenses in line. Over the course of 2023 we’ve seen moving from 2022’s great resignation to our current level of a record low attrition in our company.

All that meant the team had to work harder to manage that headcount down. And they did it. Our headcount is now down over 7,000 FTEs [from a] (ph) peak in January, even with the addition of 2,500 college grads this fall. As a result, you’ve seen expense decline from $16.2 billion in quarter one to $16 billion in quarter two to $15.8 billion this quarter. By the way, we’ve done this without special charges or large layoffs. Expense will decline again in the fourth quarter, excluding any FDIC special assessment, of course. We expect to report $15.6 billion in expenses in 4Q. Now interestingly, the debt is up only around 1% from fourth quarter of last year. This is stronger expense guidance than we thought we could do earlier in the year and sets us up nicely for next year.

Shifting gears, let’s focus on the balance sheet. Slide 7 shows the breakout of deposit trends on a weekly basis — ending basis across the third quarter. We gave you this chart last quarter also. In the upper left-hand, you can see the trend of total deposits. We ended quarter three at $1.88 trillion, up from quarter two and better than industry results. What you should also note is the cost of these deposits. Our team has rewarded customers with higher rates for their investment [or in cash] (ph), re-initiated deposit growth and grown share with always superior mix in cost. You will note we’re now paying 155 basis points all in for deposits, which is up 31 basis points from last quarter. I ask that you remember two things when you think about the deposits.

The rate remains low relative to many because of the transactional nature of deposit relationships with $565 billion in non-interest-bearing deposits. And you can see in the upper right alone, in low interest and no interest checking, there’s $504 billion in Consumer. Secondly, remember the importance of the spread against the quarter’s average Fed funds rate. This position is very advantageous compared to past cycles because the transactional counts in the current cycle are a much higher mix of Bank of America’s deposits. I would also add that while we maintain discipline in deposit price and we pay competitive rates to customers with excess cash seeing higher yields across all the businesses, if rates fall, those particular products will see the rates come down also.

Dropping into the business trends. In Consumer, if you look at the top right chart, you saw a $22 billion decline. Note, the difference in the movement through the quarter between the balance of low to no-interest checking accounts and higher-yielding non-checking accounts. You could also see the low levels of our more rate-sensitive balance in consumer investments and CD balances broken out. In total, we have $982 billion in consumer deposits. In Consumer alone, this is $250 billion more than we had pre-pandemic. The total rate paid on consumer deposits in the quarter was 34 basis points. This remains very low, driven by the high percentage of transactional — high-quality transaction accounts. Most of the quarter’s rate increase is concentrated in CDs and consumer investment deposits where about — which are about 13% of the deposits.

Turning to Wealth Management, balances were flat. We saw a slowing in the previous quarterly trend of clients moving money from lower-yielding sweep accounts into higher-yielding preferred deposits and off-balance sheet products ones. Sweep balances were down by $7 billion and were replaced by new account generation and deepening. At the bottom right, note the Global Banking deposits grew $2 billion and have hovered around $500 million for the past six quarters. These are generally the transaction deposits of our commercial customers used to manage their cash flows. Noninterest-bearing deposits were 37% of deposits at the end of the quarter. Sticking with the balance sheet but moving to capital, let me give you a few thoughts on the proposed capital rules.

As you are well aware, our banking industry in the United States is the most highly capitalized the most profitable banking group in the world. It’s a source of strength for our country and its economy. The annual stress tests over — are now over a dozen years old, using ever-increasing harsher test scenarios have proven that capital is sufficient. Banks have proven to be a part of the solution during the more recent COVID pandemic and the banking disruption in March this year. We add to our capital and reduce our lending capacity to American business consumers, and those trade-offs are being debated. But as far as the rules are concerned, there are many parts of the rules that our industry doesn’t agree with because of double accounts or increased trading and market risk.

And we’re talking to those proposals and working, and we’re hopeful they’ll change. But in any event, they may not. If they don’t, how will they affect us? If you go to Slide 8, you can show the expected impact as we interpret those proposed rules. This assumes that they’re proposed today without any changes. The proposed rules would inflate our risk-weighted assets by about 20%. So if I apply the inflation against this quarter’s RWA of $1.63 trillion, that means, if nothing else changed in the rules, we’d end up with about $320 billion more risk-weighted assets. The biggest increase in RWA would be a couple hundred billion dollars in operational RWA. The next biggest category would be driven by a four-fold increase in the RWA against non-publicly traded equity exposures.

In our case, that really is mostly about the tax-advantaged investments in solar and wind. Looking at the capital to be held against the inflated RWA on the right side of the slide, I’d remind you today that our minimum capital requirement is to hold 9.5% in on Common Equity Tier 1. But based on our G-SIB charges, that going to come in effect on January 1, 2024, we moved to 10%. So I’m going to use that as a requirement. Holding 10% today means $163 billion, that we finished the third quarter with $194 billion. So today, we have more than $30 billion excess capital. Now, let’s assume the proposed change is going through in full. The proposed changes are phased in from ’25 — the middle ’25 to ’28 under the current proposal. When those are fully phased in, as we used to call Basel fully phased in, if you remember, we would have a need for $195 billion of total capital.

Now if you look on the upper right-hand side of the page, you’ll see that we’re today, we’re at $194 billion. So we hold the required capital today. And of course, we’d have to build a buffer to that throughout the implementation period. But if you look at the bottom of the page, you see just in the last nine quarters the kind of capital generation this company has. Once we understand the rules, we’ll of course have a bit — a chance to optimize our balance sheet and appropriately price assets to improve the return on tangible common equity. Now, before I turn it over to Alastair, I just wanted to highlight one of the businesses that we talked about over the many years. That’s our Global Markets business. Global Markets represent 17% of the company’s year-to-date earnings and it’s one of the top capital markets platforms in world.

It’s one ‘of a handful of firms that can do what is due, providing advice and execution in every major market around the world. Jimmy DeMare and the team who run the business asked us for additional investment around four years ago, and they’ve grown this business with an intensity that clients are appreciative and reward us with more of their business. This has produced strong revenue growth. We’ve grown the balance sheet here but have done it efficiently. That’s allowed us to grow sales and trading revenue over the past 12 months consistently, and now stands 32% higher than the average of the five years leading into the pandemic in the investment in the business. And through effective cost management, we also generated 11% to 12% returns on capital in this business.

This exceeds our cost of capital even as we continue to allocate more capital to the business. Returns are even larger if you combine it with the Global Banking business, that many show the businesses combined and take — because our corporate clients also take advantage of these industry-leading capabilities. With that, let me turn over the call to Alastair to walk through the quarter. Alastair?

Alastair Borthwick: Thanks, Brian. And on Slide 10, we present the summary income statement. I’m not going to spend a lot of time here because Brian touched on this and the highlights that we show on Slide 3. For the quarter, we generated $7.8 billion in net income, resulting in $0.90 per diluted share. Both of those are up the double digits from the third quarter of last year. The year-over-year revenue growth of 3% was led by improvement in net interest income, coupled with a strong 8% increase in sales and trading results, and that excludes DVA, and a 4% increase in investment in brokerage revenue driven by our Wealth Management businesses. Expense for the quarter of $15.8 billion included good discipline from our team, which allowed us to reduce costs from the second quarter, even as we continue our planned investments for marketing, technology and physical presence build-outs, including financial center openings and renovations.

Asset quality remains stellar, and provision expense for the quarter was $1.2 billion. That consisted of $931 million of net charge-offs and $303 million of reserve build. The provision expense reflects the continued trend in charge-offs toward pre-pandemic levels and remains below historical levels. Our charge-off rate was 35 basis points, that’s 2 basis points higher than the second quarter, and still below the 39 basis points we saw in the fourth quarter of ’19. And as a reminder, that 2019 was a multi-decade low. 30-day delinquencies also remained below their fourth quarter ’19 level. Lastly, our tax rate this quarter was 4%, driven mostly by higher-than-expected volume of investment tax credit, or ITC deals for the rest of the year. And we can expect other income in Q4 will reflect seasonally higher renewables investment losses when these projects get placed into service.

Okay. Let’s turn to the balance sheet that’s on Slide 11. And you can see it ended the quarter at $3.2 trillion, up $31 billion from the second quarter. So not a lot to note here. The driver of the increase was a $34 billion increase in available for sales securities. With cash levels so high, we chose to reduce the cash and just put some of the money into short-term T-bills this quarter, and those earn essentially the same rate as cash. Our cash remains high at $352 billion. In addition to the cash level change, we saw another $11 billion decline in hold to maturity securities as those securities matured and paid down. And as Brian noted, global excess liquidity sources remain strong at $859 billion, that’s down very modestly from the second quarter, and still remains approximately $280 billion above our pre-pandemic fourth quarter ’19 level.

Shareholders’ equity increased $4 billion from the second quarter as earnings were only partially offset by capital distributed to shareholders. During the quarter, we paid out $1.9 billion in common dividends and we bought back $1 billion in shares to offset our employee awards. AOCI was $1.1 billion lower, reflecting both a modest decline in the value of AFS securities, modestly impacting CET1 as well as a small change in cash flow hedges, which doesn’t impact the regulatory capital. Tangible book value per share is up 12% year-over-year. Turning to regulatory capital. our CET1 level improved to $194 billion from June 30, and our CET1 ratio improved 30 basis points to 11.9%. It’s now well above our current 9.5% requirement as Brian noted.

Risk-weighted assets declined modestly as loans and Global Markets RWA both moved lower. Our supplemental leverage ratio was 62% versus a minimum requirement of 5%, which leaves capacity for balance sheet growth and our TLAC ratio remains well above our requirements. LCR ratios remain well above minimums for BAC metrics and stronger at the bank level. Let’s now focus on loans by looking at average balances on Slide 12. And loan growth slowed this quarter as a decline in demand for commercial borrowing more than offset our credit card growth. So we saw that lower commercial demand in lower revolver utilization among higher funding costs. And commercial balances were also impacted by term loan repayments due to borrowers accessing other capital market solutions.

Focusing for a moment on average deposits and using Slide 13. Given Brian’s earlier comments, I’ll just note the comparisons. Relative to pre-pandemic fourth quarter ’19, average deposits are up 33%. Consumer is up 36%, with consumer checking up 45%. And you can see the other segment comparisons on the page. Turning to Slide 14. Let’s extend the conversation we’ve been having over the course of the past couple of quarters around management of our excess liquidity. This slide serves as a reminder of the size of our high-quality deposit book, the magnitude of deposits we have in excess of those needed to fund loans and the way we’ve extracted the value of that excess to deliver value back to our shareholders. The excess of deposits needed to fund loans increased from $420 billion pre-pandemic to a peak of $1.1 trillion in the fall of 2021.

And as you can see, it remains high at $835 billion today. That $1.1 trillion of excess liquidity has always included a balanced mix of cash, available for sale securities, and securities we hold to maturity. In late 2020 and into 2021, we concluded that additional stimulus was going to remain in client accounts for an extended period, and we increased the hold to maturity securities portion so we could lock in value from those deposits. And we made these investments given the core nature of our customers’ deposits. Note, the split of the shorter-term investments in cash and available-for-sale securities, and then the term hold to maturity securities. And I just draw your attention to just how much cash we have above the actual level we need to run the company.

On the available-for-sale, we would just note the duration is less than six months as it’s mostly all short-term treasuries. And the combination of the cash and available-for-sale securities represents about 47% of the total noted on this page in the third quarter of ’23 to give us the balance we’re looking for. And if we look at the hold-to-maturity book, it had grown from $190 billion pre-pandemic, peaking two years ago, and now falling to just over $600 billion currently. That $600 billion consists of about $122 billion in treasuries. Those will mature in a little more than six years, and about $474 billion in mortgage-backed securities and a few billion other. Hold to maturity securities peaked at $683 billion, and we’re now down $80 billion from the peak and $11 billion in last quarter.

That $80 billion decline from peak was all driven by the reduction of mortgages from $555 billion to $474 billion. With less loan funding needs over the past several quarters, the proceeds from security paydowns have been deployed into higher-yielding cash, and this mix shift has been happening at about a 300 basis point spread benefit for these assets. Given the increased cash rates, the combined cash and security yield has risen now to more than 3%. It’s up more than 200 basis points since the peak size of the portfolio in the third quarter of ’21, and it’s risen faster than the rate paid on deposits. In fact, today, it’s 178 basis points above what we pay for deposits. And remember also, we have $1 trillion of loans that are largely in floating rate in addition.

From a valuation perspective, we did experience a decline in the valuation of the hold-to-maturity book this quarter, and that’s in the context of mortgage rates reaching a two-decade high. Comparing the valuation change to the year-ago period, it worsened $15 billion. And over that same time period, we grew regulatory capital by $19 billion and hold global liquidity sources in excess of $850 billion. And importantly, as we move to Slide 15, I’ll make one final comment here, which is the improved NII over this investment period. The net interest income, excluding Global Markets, which we disclose each quarter, troughed in Q3 ’20 at $9.1 billion, that compares to $13.9 billion in the third quarter of ’23 or $4.7 billion higher every quarter on a quarterly basis, and that gives a sense of the entire balance sheet working together.

Okay. Let’s now turn our focus to NII performance over the past quarter, and we’ll talk about the path forward, and I’m going to use Slide 15 for that. On last quarter’s call, we guided to expect Q3 NII to be about $14.2 billion to $14.3 billion on an FTE basis. Our third quarter performance turned out to be better than our guidance. And on an FTE basis, NII was $14.5 billion this quarter. We expect Q4 will be around $14 billion fully taxable equivalent, and that increases our full year guidance for NII in 2023 versus 2022 to 9% growth per year. We believe NII will hover around this expected fourth quarter $14 billion level, plus or minus, in the first half of next year, and then we anticipate modest growth in the half of 2024. By the time we get to the fourth quarter of 2024, we believe we can see NII up low single digits compared to the fourth quarter of 2023.

The good news is we believe NII will likely trough around the fourth quarter level of $14 billion and begin to grow again in the middle of next year. I’d note a few caveats around that forward view I just provided. It includes an assumption that interest rates in the forward curve materialize and it includes rate cuts for the second half of 2024. It also includes an expectation of modest loan and deposit growth as we move into the second half of 2024. Focusing again on this quarter, $14.5 billion NII was an increase of nearly $700 million from the third quarter of ’22, or 4%, while our net interest yield improved 5 basis points to 2.11%. The year-over-year improvement was driven by higher interest rates and partially offset by lower deposit balances.

On a linked-quarter comparison, NII improved $239 million from Q2, and that comes from the benefit of an extra day of interest, a rate hike and higher global markets NII, partially offset by increased deposit pricing. And the net interest yield improved 5 basis points. Turning to asset sensitivity and focused on a forward yield curve basis, the plus 100 basis point parallel shift at September 30 was $3.1 billion of expected NII benefit over the next 12 months from our banking book. And that expects — or that assumes no expected change in balance sheet levels or mix relative to our baseline forecast, and 95% of the sensitivity is driven by short rates. The 100 basis point down rate scenario was $3.3 billion. Okay. Let’s turn to expense, and we’ll use Slide 16 for the discussion.

Previously highlighted that we guided you to a trend of sequential declines in our expense each quarter this year, and we achieved that in Q3 with our expense down $200 million to $15.8 billion. Additionally, we expect the fourth quarter to go down another couple of hundred million to $15.6 billion, excluding any FDIC special assessment. That would mean our fourth quarter expense of $15.6 billion, compared to the fourth quarter of ’22, would be up by only $100 million or less than 1%. And we’re proud of that work by the team, especially considering our regular FDIC insurance expense alone increased by $125 million quarterly starting in the first quarter of this year. So without that, we would be flat year-over-year in Q4. The decline this quarter from the second was driven by the reduction in litigation expense and lower headcount, offset somewhat by investments in inflationary costs.

Our headcount is down nearly 2,800 from the second quarter to 213,000. And that includes the addition of 2,500 or so full-time campus hires we brought into the company. So that’s good work by the team after we peaked at 218,000 in January month-end. And you see the movement here across the past year at the bottom left of the slide. As we look forward to next quarter, we’d add $1.9 billion of expense for the proposed notice of special assessment from the FDIC as a possibility. Absent that, we’d expect our fourth quarter $15.6 billion expense target to more fully benefit from the third quarter headcount reductions, and that will allow expense to continue the decline experienced throughout the year so far. All of that is going to set us up well for next year.

Let’s now turn to credit, and we’ll turn to Slide 17. Net charge-offs of $931 million increased $62 million from the second quarter. The increase is driven by credit card losses as higher late-stage delinquencies flow through to charge-offs. For context, the credit card net charge-off rate rose 12 basis points to 2.72% in Q3, and it remains below the 3.03% pre-pandemic rate in the fourth quarter of ’19. Provision expense was $1.2 billion in Q3, and that included a $303 million reserve build. It reflects a macroeconomic outlook that on a weighted basis continues to include an unemployment rate that rises to north of 5% during 2024. On Slide 18, we highlight the credit quality metrics for both our Consumer and our Commercial portfolios. And on Consumer, we just note that we continue to see the asset quality metrics come off the bottom.

And for the most part, they remain below historical averages. 30 and 90-day consumer delinquencies still remain below the fourth quarter of 2019 as an example. Commercial net charge-offs declined from the second quarter, driven mostly by a reduction in office write-downs. And as a reminder, our CRE credit exposure represents 7% of total loans, and that includes office exposure, which represents less than 2% of our loans. We’ve been very intentional around client selection and portfolio concentration and deal structure over many years, and that’s helped us to mitigate risk in this portfolio. We continue to believe that the portfolio is well positioned and adequately reserved against the current conditions. And in the appendix, we’ve included a current view of our commercial real estate and office portfolio stats we provided last quarter.

We’ve also included the historical perspective of our loan book de-risking and our net charge-offs, and you can see all of those on Slides 36, 37, 38 and 39. Okay. Let’s move on to the various lines of business and their results. And I’m going to start on Slide 19 with Consumer Banking. For the quarter, Consumer earned $2.9 billion on good organic revenue growth and delivered its 10th consecutive quarter of operating leverage, while we continue to invest for the future. Note that the top-line revenue grew 6%, while expense rose 3%. Reported earnings declined 7% year-over-year given credit costs continue to return to pre-pandemic level. And we believe this understates the underlying success of the business in driving revenue and managing costs, because PPNR grew 9% year-over-year.

Much of this success is driven by the pace of organic growth of checking and card accounts, as well as investment accounts and balances, as Brian noted earlier. And expense reflects the continued investments by the business for their future growth. Moving to Wealth Management on Slide 20. We produced good results, and we earned a little more than $1 billion. These results are down from last year, due to a decline in NII from higher deposit costs, which more than offset higher fees from asset management. While lower this quarter, NII of $1.8 billion derives from a world-class banking offering, and it provides good balance in our revenue stream and a competitive advantage in the business for us. As Brian noted, both Merrill and the Private Bank continued to see strong organic growth, and they produced solid assets under management flows of $44 billion since the third quarter of last year, reflecting good mix of new client money as well as our existing clients putting their money to work.

Expense reflects continued investments in the business as we add financial advisers and capabilities from technology investments. On Slide 21, you see the Global Banking results. And this business produced very strong results with earnings of $2.6 billion, driven by 11% year-over-year growth in revenue to $6.2 billion. Coupled with good expense management, the business has produced solid operating leverage. Our GTS, or Global Treasury Services business has been robust. We’ve also seen a steady volume of solar and wind investment projects this quarter, and our investment banking business is performing well in a sluggish environment. Year-over-year revenue growth also benefited from the absence of marks taken on leverage loans in the prior year-ago period.

The company’s overall investment banking fees were $1.2 billion in Q3, growing modestly over the prior year, despite a pool that was down nearly 20%. And we held on to number three position given our performance. Provision expense reflected a reserve release of $139 million as certain troubled industries and credits outside of commercial real estate continue to have improved outlooks. Expense increased 6% year-over-year, reflecting our continued investments in this business. Switching to Global Markets on Slide 22. The team had another strong quarter, with earnings growing to $1.3 billion driven by revenue growth of 10%, and I’m referring to results excluding DVA as we normally do. The continued themes of inflation, geopolitical tensions and central banks changing monetary policies around the globe have continued to impact both bond and equity markets.

And as a result, it was a quarter where we saw strong performance in our FICC businesses, as well as a record third quarter in equities. Focusing on sales and trading, ex DVA, revenue improved 8% year-over-year to $4.4 billion. FICC improved 6% and equities improved 10% compared to the third quarter of last year. And at $1.7 billion, that’s a record third quarter for our equities teammates. Year-over-year, expense increased 7%, primarily driven by investments for people and technology. Finally, on Slide 13, all other shows a profit of $89 million. So revenue improved from the second quarter, driven by the absence of prior period debt security sale losses and available-for-sale securities, and partially offset by higher operating losses on tax credit investments in wind, solar and affordable housing.

As I mentioned earlier, our effective tax rate in the quarter was 4%, and that reflects a higher-than-expected volume of investment tax credits in which the value of the deals are recognized upfront. We also had a small discrete benefit to tax expense from a state tax law change. Excluding renewable investments and any other discrete tax benefits, our tax rate would have been 25%. And as we wrap up 2023, we expect our full year tax rate, excluding discrete and special items, such as the FDIC special assessment, we expect that full year tax rate should end up in the 9% to 10% range. So to summarize, we grew our earnings double digit year-over-year. We reported NII that was above our expectations, and we increased our full year expectations. We’ve managed costs aligned with our guidance and brought expenses down in every quarter so far this year, and we expect to do that again in the fourth quarter.

We earned more than 15% return on tangible common equity. We returned $2.9 billion in capital back to shareholders, including a 9% dividend increase. And we built 30 basis points of CET1, positioning us well for the proposed capital rules. So all in all, it was a strong quarter. It was one where our teams executed well against responsible growth. And with that, David, I think we’ll open it up for the Q&A session.

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Q&A Session

Operator: [Operator Instructions] And we will take our first question from Gerard Cassidy with RBC. Please go ahead. Your line is open.

Gerard Cassidy: Thank you. Hi, Brian. Hi, Alastair.

Brian Moynihan: Hi, there.

Alastair Borthwick: Hey, George.

Gerard Cassidy: Brian, can you come back to your thoughts. You’re talking about the consumer spending holding at 4% right now, obviously, down from the very strong levels of a year or two years ago. When you look out and you mentioned how you guys were thinking the economy troughs in the middle of next year, do you think you could hold that 4% consumer spend? Do you think your consumers will hold that 4% spending number or could it actually deteriorate from here?

Brian Moynihan: I think, a couple of things, Gerard. One is the — there’s obviously external events, which could change the situation in the globe dramatically. And so — but given just the pathway that those — that doesn’t — that kind of event doesn’t take place, you think that the rate they’re spending out now is consistent with a lower inflation. So embedded in our teams [indiscernible] team’s economic projections is a return to inflation, the 2% target at the end of ’25. The rate structure comes down beginning in the middle of next year, but still stays around 4% at the end of ’25. And so given that the economy — the inflation is coming down, the economies would still be growing then and getting back towards trend growth, I think it would hold steady.

And so it’s been pretty steady, the month of August into September into October, at this 4%, 4.5%, 5% level. And that’s kind of just people get paid more, they spend a little bit more and pricing goes up. And then you have the ebbs and flows within it, what they spend on. And right now, you’ve kind of seen all the adjustments that came through the pandemic into the last couple of years sort of adjust out of the system. What I mean by is you had a lot of goods purchase, then you had a lot of travel. You had a lot of return-to-office spending. We can track that people buying stuff. All that’s kind of leveled out of the system, including a drop in fuel prices and an increase — and basically, it’s relatively bounce around about the same and they’re spending about the same amount of money on gas as they spent last year.

So all that being said, in the big aggregate numbers, I think, yes, it can keep bumping along at that level, which is consistent of low inflation, low growth economy, and effectively shows the consumer has been brought more in line with the scenario of the Fed reaching their target. That’s what we see. Now, we’ll take some time for all that to work through the system and the retail sales number seems to be stronger today, but that will all shake through, but this is what they are doing at the moment.

Gerard Cassidy: Very good. And then as a follow-up question, you guys gave us good detail on Slide 8 about the potential changes coming from Basel III end game, and you showed us, obviously, the organic capital generation. Can you share with us possibly some of the mitigation strategies you might use? And specifically, if you could touch upon these changes for the equity investments, particularly in the alternative energy space, I guess they’re going up from 100% RWAs to 400%. Would that change your thinking in that line of business as we go forward, should they stay in the final rules?

Brian Moynihan: So I think, number one, I think the first thing is there’ll be — at the end of November, the comments are due, there’ll be comments by our company, by all the other companies, by industry participants, and then the staff at the Fed will have to sort through all that and think to what they all mean. And there’ll be very rigorous points about our views of the wisdom of the changes, the need that changes, the balance of the changes, the double accounting, all the things you’ve heard much about. That being said, it is a little puzzling that you see some of the RWA increases for mortgage loans or for these types of investments in the environmental and housing and other spaces, which sort of counter the policy that we want to do it.

Now what would happen is we’d have to adjust the pricing and it would become more expensive. It’s been a great business for us. We continue to drive it. But ultimately, it’d have to go through the market. You have the equity cost go up by a four-fold increase to get the returns. And so think about a pricing model, just increasing the amount of equity we have to dedicate, therefore, we have to get returns on that. And so that would happen. It just seems a little counterintuitive that people would be doing that on a set of rules that, basically, after the financial crisis, Dodd-Frank put in a set of rules and said here’s how you count the RWA, without much evidence that this is an issue for companies because the Volcker Rule and all the stuff that are having issues of write-downs or changes here.

And so the idea going up four times seems odd to us from a public policy standpoint, and also absent any evidence that this is an issue for the banking system.

Gerard Cassidy: Very good. Thank you very much, Brian.

Operator: We’ll take our next question from Jim Mitchell with Seaport Global. Please go ahead. Your line is open.

Jim Mitchell: Hey, great. Good morning. Alastair, at a conference a month ago, you noted that if the Fed is done, you think deposit pricing is close to its peak, and I think you kind of talked us through that a little bit today. Some of your peers have been more fearful of a potential future material repricing in consumer savings, for example, from greater competition or further outflows. So — and to be fair, they’re worried about that for a while and you’ve been more right. But can you just kind of discuss your thoughts on that and perhaps the outlook on deposit pricing in general?