Operator: We’ll take our next question from John McDonald with Autonomous Research. Please go ahead. Your line is open.
John McDonald: Yeah. I was hoping you could give a little color on what you’re seeing on credit. Your outlook as you look at roll rates and migrations, how are you thinking about the trajectory of charge-offs in the near term?
Alastair Borthwick: Well, John, I’ll just point out, you can see the trajectory, we’ve laid it out on the slide. Most of the net charge-off increase over time has been really due to card and Consumer card. And the charge-offs at this point are still lower than they were in the fourth quarter of ’19, which was a stellar period. And I’d anticipate in the short term that you’d see things begin to — or just continue that trend. Because it normally follows 90 days past due delinquencies and those are up ever so slightly against quarter. So we’re inching closer to the fourth quarter of ’19. And at some point, that’s going to begin to stabilize. From there, it’s just a question of what does the economy do. So right now, as Brian has pointed out, we’ve had a slow growth economy in the plan.
So I’d anticipate as we get back towards that kind of fourth quarter ’19 number, it’s going to normalize in there. But from that point, it will be very economic dependent. On the Commercial side, the asset quality has been excellent. The only place where we’ve got particular elevated concern is office, which is a very small part of our portfolio. It’s less than 2% of our loans. But the Commercial side has been terrific. And again, that will depend on how the economy plays out, and whether we’re talking about a soft landing, whether we’re talking about a recession or whether we’re talking about robust growth. So all of that is going to have to play itself out. With the Commercial numbers being so low, that one could bounce around a little bit, but it’s only because it’s coming off a base that’s so low at this point.
Brian Moynihan: John, just one thing on as you think about the Commercial credit. Remember, we have a strong, disciplined ratings change, rating capability in this company. And so we are pushing through the reviews of the commercial real estate portfolio, et cetera. We put them on, criticized quickly. We had to deal with the charge-offs, and that’s why you see them come back already in. And we’re adjusting those activities as we show in the slides in the part of the deck, to current appraisals, under market conditions, under current rent rolls, et cetera. And so even though it’s a very small part of our portfolio, frankly, a lot of the issues are through the system for us because the high ratings integrity and ratings conservatism we’ve had in this company for many, many years.
And that holds us well. And I always — if you think back like in the oil and gas thing in the end of ’15, ’16, we put up all of this reserve that was pre-CECL and then end up bringing it back in because the charge-offs were very modest. So I think we feel very good about the original underwriting, but you also have — because of our ratings integrity on the office part of the portfolio, we pushed a fairly significant amount through reappraisal and relook, and we have the CECL reserves. But importantly, the charge-offs are falling already.
John McDonald: Got it. And one bigger picture question as you think about the Basel III and the opportunity to mitigate and optimize. Does a 15% ROTCE feel like a good aspiration for the company over time, Brian, through the cycle? I mean I’m recognizing that’s where you are already today. But as you factor in the potential for new rules, anything about that?
Brian Moynihan: Yeah, so I think we’re doing on a — I think a simple way to think about is we’re doing on $194 billion of capital, which we did at this quarter. And that is — you need about another, say, $10 billion to put a buffer on the end state need, $10 billion to $11 billion, $195 billion plus, 0.5% which is our normal buffer, without any mitigation. That would be a very modest increase of $10 billion over $200 billion, let’s make it simple. And that would hit the ROTCE a bit. And I’m sure we can figure out ways to price to get that back. But remember, we’re different than everybody else, John, because we’re actually sitting on this amount of capital today. And so we are getting a 15% return on it. So I don’t want to — don’t take that as saying, I agree with the rules, but saying, we’ve got to deal with the cards that are dealt to us.
The rules say that you have to have $195 billion plus about $10 billion cushion for, and maybe a little bit more cushion, but depending on, for 50 basis points or so. But, we’re doing 15% today, so that’d be a slight dilution to that number, but not something we couldn’t make up. And that’s before any mitigation, honestly. And there’s always mitigation. You know that. You’ve been around this industry for a long time. So there’s always mitigation, how you construct things, what you’ll do, what you’ll not do. And I fully expect there’ll be modifications in the rules, which ought to help also. But I think the simple point is we earn that amount of capital today, so it’s not like some calculation I have to think through. It’s right there today.
John McDonald: Yeah, that’s a good perspective. Thanks, Brian.
Operator: We’ll take our next question from Vivek Juneja with JPMorgan. Please go ahead. Your line is open.
Vivek Juneja: Thanks. Alastair, question, just want to clarify your NII comment. So if rates stay higher or better, are you implying that rate cuts would therefore be negative for you from an NII standpoint?
Alastair Borthwick: Yeah, I’m saying right now, Vivek, that if you think about what rate cuts look like in the back half of next year, in the absence of that, we might guide NII higher, yes. That’s what I’m trying to communicate.
Vivek Juneja: And is that because your assets — you have that many floating rate assets that would reprice faster than you can cut funding costs?
Alastair Borthwick: Yeah. On the way down, I’d anticipate that as rates are going down, it’s going to cut into our margin on our deposit spreads. So that’s essentially what we’re talking about.
Brian Moynihan: Yeah, Vivek, I think I’ve just listened to you and Alastair. I think, remember, the forward curve has multiple cuts in it next year. And I think the question earlier was, if those didn’t occur, what would happen? And I think Alastair said NII would be higher if those cuts didn’t occur. It’s not a rate, — it’s just mathematically at 75 basis points in the second half of next year of not being cut would hold us higher because of all the deposits being worth more and the floating rate assets holding pricing up better. That’s a dominant part of our balance sheet. I just sensed that you were talking about each other, but maybe not.
Vivek Juneja: Okay. Thanks.
Operator: We’ll take our next question from Ken Usdin with Jefferies. Please go ahead. Your line is open.
