Bank of America : Webcast Transcript Q1 2023

Bank of America

First Quarter 2023 Earnings Announcement April 18, 2023

First Quarter 2023 Earnings Announcement

April 18, 2023

Participants

Presenters

Brian Moynihan - Bank of America, Chair and CEO Alastair Borthwick - Bank of America, CFO

Lee McEntire - Bank of America, Investor Relations & Local Markets Organization Executive

Participants

Jim Mitchell - Seaport Global

Erika Najarian - UBS

Ken Usdin - Jefferies

Mike Mayo - Wells Fargo

Glenn Schorr - Evercore ISI

Steven Chubak - Wolfe Research

Matt O'Connor - Deutsche Bank

Vivek Juneja - JP Morgan

Gerard Cassidy - RBC Capital Markets

Betsy Graseck - Morgan Stanley

Presentation

Operator

Good day, everyone, and welcome to the Bank of America earnings announcement. At this time, I'd like to turn the program over to Lee McEntire. Please go ahead, sir.

Lee McEntire

Thank you, Catherine. Good morning. Welcome. Thank you for joining the call to review our first quarter results. I trust everybody has had a chance to review our earnings release documents. They are available, including the earnings presentation that we'll be referring to during this call, on the Investor Relations section of the bankofamerica.com website.

I'm going to turn the call over to CEO, Brian Moynihan, and Alastair Borthwick, our CFO, to discuss the quarter. But before I do, let me just remind you that we may make forward-looking statements and refer to non-GAAP financial measures during this call. Our forward-looking statements are based on management's current expectations and assumptions and subject to risks and uncertainties. Factors that might cause those actual results to materially differ from those expectations are detailed in our earnings materials and the SEC filings that are available on our website. Information about the non-GAAP financial measures, including reconciliations to U.S. GAAP, can also be found in our earnings materials, and those are available on our website.

So with that, I will turn it over to Brian. Thank you.

Brian Moynihan

Good morning, and thank all of you for joining us. I'm starting on Slide 2 of the materials. Your company produced one of its highest core EPS earnings numbers in a challenged operating environment in the first quarter. Simply put, we navigated that environment well. The preparedness and strength of Bank of America and the trust of our clients reflects a decade-long Responsible Growth model and relationship nature of our franchise.

1

First Quarter 2023 Earnings Announcement

April 18, 2023

During quarter 1, importantly, our organic growth engine continued to perform.

Let me first summarize some points, and I'll turn it over to Alastair to take you through the details of the quarter. If you go to Slide 2 of the materials, Bank of America delivered strong earnings, growing EPS 18% over first quarter '22. Every business segment performed well. We grew clients and accounts organically and at a strong pace. We delivered our seventh straight quarter of operating leverage, led by a 13% year-over- year revenue growth. We further strengthened our balance sheet with our CET1 ratio increasing to 11.4%. Regulatory capital ended the highest nominal level in our history at $184 billion. We maintained strong liquidity. We ended the quarter with more than $900 billion in Global Liquidity Sources.

We earned good returns for you as our shareholders with a return on tangible common equity of 17% and 107 basis points return on average assets. Tangible book value per share grew 9% year-over-year. We did this as the economy slowed. And remember, our research team continues to predict a shallow recession that will occur beginning in the quarter 3 of 2023.

It's interesting, if we look at our consumer behavior, payments by consumer continues to drive the U.S. economy. We've seen debit and credit card spending at about 6% year-over-year growth pace, a little slower but still healthy. But remember, card spending represents less than a quarter of how consumers pay for things out of their accounts at Bank of America. Overall payments from our customers' accounts across all sources were up 9% year-over-year for March as a month. Year-to-date, they're up about 8% for the quarter.

After slowing the back half of '22 a bit, we saw the pace of payments pick back up in quarter 1, especially in the latter parts of the quarter. Consumers' financial positions remains generally healthy. They're employed with generally higher wages, continue to have strong account balances, and have good access to credit. As you think through all the tightening actions of the Fed, the flows to alternative yielding assets, investments, and the disruption of the past quarter, our deposits continued to perform well, ending the quarter at $1.91 trillion. If you think about it, that's about the same balance we had in mid-October of 2022. So we've seen these balances stabilize and remain 34% above what they were prior to the pandemic.

The team has managed well during these periods by remaining focused on the things we can control to drive value through our franchise. I thank them for a very strong quarter, near-record earnings, with strong returns.

Let me turn the call over to Alastair to walk through the details of the quarter.

Alastair Borthwick

Thank you, Brian. And I'll pick up on Slide 3, where we list some of the more detailed highlights of the quarter. And then on Slide 4, we present the summary income statement. So I'm going to refer to both of these together.

As Brian mentioned, for the quarter, we generated $8.2 billion of net income, and that resulted in $0.94 per diluted share. Our revenue grew 13%, and that was led by a 25% improvement in net interest income, coupled with strong 9% growth in sales and trading results, excluding DVA.

Our noninterest revenue was strong despite 3 headwinds. First, we had lower service charges as commercial clients paid lower fees for treasury services, since they now receive higher earned rates on balances. And obviously, that allows us to invest those funds to earn NII. On Consumer, we had lower NSF (insufficient funds) and overdraft fees as a result of our policy changes announced in late 2021. Second, we had lower asset management fees, and that just reflects the lower equity market levels and fixed income market levels. And third, investment banking fees were lower, just reflecting the continuation of sluggish industry activity and reduced fee pools. Now all that said, despite these headwinds, each of the fee categories saw modest improvement from the fourth quarter levels.

Asset quality remained strong and provision expense for the quarter was $931 million. That consisted of $807 million of net charge-offs and $124 million of reserve build. And that reserve build compares to a reserve release in the first quarter '22 of $362 million. Our charge-off rate was 32 basis points and still well

2

First Quarter 2023 Earnings Announcement

April 18, 2023

below the fourth quarter of '19 when our pre-pandemic rate was 39 basis points. And remember, 2019 was a multi-decade low. So credit obviously remains quite strong.

I want to make one other point on Slide 4, and that is simply to note that pretax, pre-provision income grew 27% year-over-year compared to reported net income growth of 15%.

So let's turn to the balance sheet. That starts on Slide 5. And you can see during the quarter, our balance sheet increased $144 billion to $3.195 trillion. Brian noted our liquidity levels. At the end of the period, those rose to more than $900 billion from December 31. That's $23 billion higher, and it remains $324 billion above our pre-pandemic level in the fourth quarter of '19. Shareholders' equity increased $7 billion from the fourth quarter as earnings were only partially offset by capital distributed to shareholders, and we saw an improvement in AOCI of $3 billion due to lower long-term interest rates.

The AOCI included more than $0.5 billion increase from improved valuations of AFS debt securities, and that flows through CET1. And the remaining $2.5 billion due to changes in cash flow hedges doesn't impact regulatory capital. During the quarter, we paid $1.8 billion in common dividends, and we bought back $2.2 billion in shares.

Turning to regulatory capital. Our CET1 level improved to $184 billion since December 31, and our CET1 ratio improved 14 basis points to 11.4%, once again, adding to our buffer over our 10.4% current minimum requirement as well as the 10.9% minimum requirement that we'll see on January 1, '24. That means in the past 12 months, we've improved our CET1 ratio by 100 basis points, and we've supported our clients and we've returned $12 billion in capital to shareholders. CET1 capital improved $4 billion, and that reflects the benefit of earnings and the AOCI improvement, partially offset by the capital we returned to shareholders.

Our risk-weighted assets increased modestly, and that partially offset the benefit to the CET1 ratio of the higher capital we generated. And then our supplemental leverage ratio increased to 6%. That compares to a minimum requirement of 5% and leaves plenty of capacity for balance sheet growth. And our TLAC ratio remains comfortably above our requirements.

So let's spend a minute on loan growth, and we'll do that by turning to Slide 6, where you can see the average loans grew 7% year-over-year, driven by commercial loans and credit card growth. The credit card growth reflects increased marketing. It reflects enhanced offers and higher levels of card account openings. The commercial growth across the past year reflects the diversity of commercial activity across Global Banking and Global Markets and, to some degree, Global Wealth. And on a more near-termlinked-quarter basis, loans grew at a much slower pace, partly driven by seasonal credit card paydowns after the fourth quarter holiday spending. And then commercial demand slowed in Q1, and we saw some paydowns by our wealth management clients as they lowered leverage as rates rose.

So let's turn to deposits, and there's obviously been a lot of additional focus this quarter. So I want to spend extra time here, and I'm going to start with Slide 7 and talk about average deposits. Just a few points we need to make before focusing on a more detailed discussion of the recent trends.

Average total deposits for the first quarter were $1.89 trillion, that is down 2% linked quarter and down 7% year-over-year. Our deposits peaked in the fourth quarter of 2021. And even as the Fed has continued to withdraw money supply, our deposits have held around $1.9 trillion because there's a lot more industry deposits today in a much bigger economy today compared to pre-pandemic.

Our average deposits are up 34% compared to our pre-pandemic Q4 '19 balance, and the industry's deposits are up 31% to $17.4 trillion. So we've obviously fared a little bit better than the industry. We put our pre- pandemic deposits for each line of business on the slide so you can compare our balances then and now.

I want to highlight Consumer checking balances, which remained 53% higher than pre-pandemic. And as I think all of us would expect, GWIM combined client deposits are up a lesser 23%, as those are the clients that generally move their excess cash into other off-balance sheet products. And in Global Banking, you can see the rotation to interest-bearing across time as rates rose.

3

First Quarter 2023 Earnings Announcement

April 18, 2023

So let's get a little more granular and a little more near term. And we'll use Slide 8 for that, where you can see the breakout of deposit trends on a weekly ending basis across the last 2 quarters. You can also see that we plotted the timeline of Fed target and rate hikes on the top left chart just for comparison through time.

In the upper left, you can see the trend of our total deposits. We ended Q1 '23 at $1.91 trillion. That's down 1%. And as Brian mentioned, over the course of the past 6 months, those balances have been relatively stable. In Consumer, looking at the top right chart, we show the difference here in the movement through the quarter between the balances of low to no interest checking accounts and the higher-yielding nonchecking accounts. And across the entire quarter, we saw a modest $4 billion decline in total.

Checking balances obviously have some variability around paydays in particular, but note the relative stability of checking deposits because these are the operational accounts with money in motion to pay the bills and everyday living costs for families.

I'd also point out that our checking balances were modestly growing, even ahead of March 9 upheaval and continued to move higher through the quarter on the back of disruption. Lower nonchecking balances mostly reflect money moved out of deposits and into brokerage accounts where we earn a small fee. Rate paid increased 6 basis points from the fourth quarter to 12 basis points on this $1 trillion of total consumer deposits and remains low because of the 52% mix that is checking

Lastly, I just note that the rate movements in this business are concentrated in the small CDs and consumer investment deposits, which together represent about 5% of the deposits.

In Wealth Management, as you would expect, it shows the most relative decline. And you can see the continued trend of clients moving money from lower-yielding sweep accounts into higher-yielding preferred deposits and off balance sheet to other investment alternatives. Now if we went back further, you'd see that roughly $90 billion has moved out of sweeps in the past year, which leaves $80 billion in these accounts. So you can see how, with the pace and size of rate hikes slowing, we expect the declines in balances to lessen from here.

At the bottom right, note the Global Banking deposit movement where we hold about $500 billion in customer deposits. These are generally operational deposits of our commercial customers, and they use that to manage their cash flows through the course of the year. Those are down $3 billion from the fourth quarter. And what's interesting to note is that our total deposits in this segment have been stable at around $500 billion for the past 6 months. And this business just continues to see rotation into interest bearing. The mix of interest-bearing deposits on an ending basis moved from 49% last quarter to 55% in Q1. And obviously, we pay increased rates on those interest-bearing deposits. And it's this rotation in Global Banking that's driving the rotational shift of the total company, and it's pretty typical and to be expected in this environment.

So in summary, deposits continued to behave as we would expect. The cash transactional balances have shown some recent stabilization. And for investment cash, we've seen deposits move to brokerage and other platforms for direct holdings of money market, mutual funds, treasuries, and we're capturing many of those flows as you see in our numbers. It's just we expect that to slow going forward.

So now that we've examined trends for the different lines of business, I want to make some important points about the characteristics of our deposit franchise using Slide 9, and this will just help reinforce for shareholders who own Bank of America that they're invested in one of the world's great deposit franchises, all of it based off of relationships we have with our customers and the value they place on the award-winning capabilities and convenience they have access to.

Starting from the top focus, first on Consumer. You can see that more than 80% of deposits have been with us for more than 5 years, and more than 2/3 of our Consumer deposits are balances with customers who've had relationships with the bank for more than 10 years. Also, more than 3/4 of these customers are very highly engaged in their activities with us. They're also geographically dispersed across the United States, given our presence in 83 of the top 100 markets.

4