Bank of America : Webcast Transcript Q2 2023

Bank of America

Second Quarter 2023 Earnings Announcement July 18, 2023

Second Quarter 2023 Earnings Announcement

July 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

Gerard Cassidy - RBC Capital Markets

Glenn Schorr - Evercore ISI

Mike Mayo - Wells Fargo

Jim Mitchell - Seaport Global

Betsy Graseck - Morgan Stanley

Chris Kotowski - Oppenheimer

Erika Najarian - UBS

Charles Peabody - Portales Partners

Ken Usdin - Jefferies

Presentation

Operator

Good day, everyone, and welcome to the Bank of America earnings announcement. It is now my pleasure to turn the program over to Lee McEntire. Please go ahead, sir.

Lee McEntire

Thank you, Katherine. Good morning. Welcome, and thank you for joining the call to review our second quarter results. I trust everyone has had a chance to review our earnings release documents. They're available on the Investor Relations section of the bankofamerica.com website and include the earnings presentation that we'll be referring to during the call. 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 I do that, let me remind you that we may make forward-looking statements and refer to non-GAAP financial measures during the call. The forward-looking statements are based on management's current expectations and assumptions that are subject to risks and uncertainties. Factors that may cause the actual results to materially differ from expectations are detailed in our earnings materials and SEC filings that are available on the website. Information about our non-GAAP financial measures, including reconciliations to U.S. GAAP, can also be found in our earnings materials that are available on the website.

So with that, it's my pleasure to turn the call over to you, Brian. Thanks.

Brian Moynihan

Thanks, Lee, and good morning to all of you, and thank you for joining us. I'm starting on Slide 2 of the earnings presentation.

This morning, Bank of America reported one of the best quarters and one of the best first halves of net income in the company's history. Our results this quarter once again include solid performance on things we can control by delivering organic growth and operating leverage. We did that in an economy that remains healthy, that had a slowing rate of growth. It was also a quarter that included volatility from the debate about the debt ceiling, continuation of Central Bank monetary tightening action, and a slowing in consumer

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spending and slowing inflation. As you look at it now, our customer spending patterns are now more consistent with the pre-pandemic lower growth, lower inflation economy.

Before Alastair takes you through the details, let me summarize Bank of America's quarter 2 performance. On Slide 2, you can see the highlights. We earned $7.4 billion after tax and grew earnings per share 21% over the second quarter of 2022. All business segments performed well. I thank all my teammates for doing so. We grew clients and accounts organically and at a strong pace. We delivered our eighth straight quarter of operating leverage, led by 11% year-over-year revenue growth. We further strengthened our balance sheet, improving our common equity Tier 1 ratio more than 110 basis points year-over-year to 11.6%. And we have $867 billion in global liquidity sources. We also produced strong returns for our shareholders with a return on tangible common equity of 15.5%, continuing a streak of many quarters at that level or above.

While our businesses have performed well this quarter, I would particularly highlight our Global Markets Sales and Trading team and our Investment Banking teams. Both have appeared to outperform their industry peers. Investments made over the past couple of years in Global Markets capabilities under Jimmy DeMare's leadership as well as Matthew Koder's leadership in the Global Corporate Investment Banking area allowed us to improve our market shares for both of these fee pools. I'd also note the strong contribution by our middle market clients to that, and our teammates there, led by Wendy Stewart.

I'd also like to touch a few additional points before turning the call over to Alastair. These points will help illustrate continued investment in the franchise and work we do to drive growth. Let's start with the organic growth slide on Page 3. And on that page, we highlight some of the important elements of organic growth. You can see evidence in every business segment as you look at the page.

In Consumer, in quarter 2, we opened 157,000 net new checking accounts. Consumers has now had 18 straight quarters of positive net new checking account growth. Now these are core primary checking accounts across the board, allowing our tremendous deposit franchise to continue to prosper and take market share. While the progress may appear inchmeal, over the last 3 years, we've grown our core customers and consumer checking account customers from 33 million to 36 million. We opened another 1 million+ credit card accounts this quarter and have 10% more investment accounts this year than we did last year in the Consumer business. Consumer Investment business balances reached a new high of $387 billion, aided by a 30% increase in new funded consumer investment accounts year-over-year and frankly, moving money from our depositors into the market as they've done so.

In Global Wealth, we added 12,000 net new relationships in Merrill and the Private Bank, and our advisers opened more than 36,000 new banking relationships in the quarter, showing a strong differentiation in our model of fulfilling both investing and banking needs for clients. In the past 90 days, we added 190 experienced advisers to our sales force in addition to digital capabilities to help us deliver at scale.

In Global Banking, we added clients to increase the number of solutions per relationship. Over the past 3 years, we've added net new relationship managers and increased our client-facing headcount by nearly 10%. We've also improved our tools for prospect callings through investments in technology, and it's benefiting our ability to add customers and to improve our solutions per existing clients. Year-to-date, we've added over 1,000 new commercial and business banking clients across the United States, which is the same number we added in the full year of last year. Again, operationalizing that ability to do this at scale increases our speed of onboarding these clients.

In our Global Markets area, we saw one of the highest second quarters for sales and trading in our history.

It's another quarter of good organic growth. To achieve that growth while managing our expense trajectory, which Alastair is going to cover, requires an inherent efficiency progress from digital and other applied technology across all our units.

Digital superiority is key to our operating dynamics. First, it produces a great customer experience, resulting in strong customer retention and strong customer scores. Second, it ensures our position as a lead transactional bank for our customers, whether they're consumers, companies or investors. Third, it preserves

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a strong deposit balance at a good pricing due to the core nature of transactional deposits. And last, but importantly, it leads to efficiency.

So how are we doing on digital progress? You can see that on Slide 4, first, with the consumer. In Consumer, we now have 46 million active users that are digitally engaged with our digital platform and are logging in over 1 billion times a month. And even with this scale and the stage of maturity, log-ins is up double digits from last year.

Customer uses of Erica continues to beat expectations. This was an early application of natural language processing and artificial intelligence that we built in our company that continues to learn about it with additional use. Interactions with Erica rose 35% in just the past year and now has crossed over 1.5 billion client interactions in the first 5 years of introduction. As there's a lot of questions about artificial intelligence out there, but one can't glue together a series of systems. We have to build a system in this highly regulated, high customer-focused business, and Erica is one such application you can see its impact.

Likewise, Zelle hasn't slowed down either. The number of people using Zelle grew 19% this past year. Remember, these aren't new functionalities at this point. They've been around for years, but they continue to grow very strong growth rates, showing customer desire and acceptance to the activities. You can see the digital sales continue to grow.

We continue to have both great high-tech and high-touch options. As part of that, we've added 310 new financial centers since 2019. And by the end of this year, we have refurbished every one of our existing centers in our company. We plan on opening 50 more centers a year for the next few years, which includes an expansion in 9 new markets we announced a few years ago -- a few weeks ago, excuse me. Our entrance to these markets is enhanced by digital and leads to strong success. Just to give you a point of reference, for all the expansion markets over the last several years, for branches open a year or more in those expansion markets, our average deposit balances per those branch are $160 million in each branch.

If you go to the Wealth Management digital on Slide 5, you can see that they continue to be the most digitally engaged clients in our company. Our advisers have led the way in driving a personal-driven advice model supplemented by our digital tools. You can see the client adoption rate of 83% in Merrill and 92% in Private Bank. 78% have embraced digital delivery as a tool of service, providing even more convenience for them and our advisers. Erica and Zelle also continues expanding in these client sets. A new program we announced just a few quarters ago has generated 20,000 digital leads to 7,000 advisers. It's called Advisor Match, matching our clients with advisers of their choice.

On Slide 6, you can see the digital engagement in the Global Banking area. Corporate treasury teams for our clients appreciate the ease of doing business with us digitally. Cash Pro App sign-ins are up nearly 60% from last year, where the value of payments through Cash Pro App are up 20%.

As you can see every line of business is delivering strong organic growth. Investments made in technology have enabled us to grow industry-leading positions in digital tools, while enabling our clients to do great things, making us more efficient. This provides us with a very satisfied, stable customer and client base with Bank of America as primary provider. And by doing it with a digital application, that also produces operating leverage.

On Slide 7, you can see our streak of operating leverage continued in the second quarter of 2023. We're now back at eight quarters in a row. The chart on Slide 7 covers 8.5 years or 34 quarters, and in all but 8 of those quarters - and you can see those identified, 6 of which were in the heart of the pandemic - we've achieved operating leverage. Operating leverage is that simple: it's the simple task of growing revenue at a better growth rate than expense. As I said, Alastair is going to discuss with you our good and declining expense trajectory which sets us up to continue to provide operating leverage even with a shifting economy.

In sum, in the quarter we delivered earnings that are 19% higher and a 15% return on tangible common equity. That was driven by continued strong organic growth and operating leverage in a volatile economic environment. Alastair is going to talk to you about a bit more strength we see ahead in our net interest

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income for the balance of the year, and that provides a better start as we think about 2024. You're going to hear our expectations for the quarterly decline in expenses in the following quarters for the rest of '23, even as we keep investing. And you'll hear about the resilience of credit and strong trajectory of capital. This all positions us well to continue both our streaks of organic growth and operating leverage.

With that, let me turn it over to Alastair.

Alastair M. Borthwick

Thank you, Brian. And on Slide 8, we list the more detailed highlights of the quarter. And then Slide 9 presents a summary income statement. So I'm going to refer to both of those.

For the quarter, we generated $7.4 billion in net income, and that resulted in $0.88 per diluted share. Our year-over-year revenue growth of 11% was led by a 14% improvement in net interest income, coupled with a strong 10% increase in sales and trading results ex-DVA. Revenue was strong, and it included a few headwinds, and I thought I'd go through those headwinds first.

We had lower service charges from both higher earnings credit rates on deposits for commercial clients and the policy changes we announced in late 2021 to lower our insufficient fund and overdraft fees for our consumer customers. The good news on the consumer piece is year-over-year comparisons get a bit easier starting next quarter as the third quarter of '22 reflects the full first quarter of these changes. Second, we had lower asset management and brokerage fees as a result of the lower equity and fixed income market levels and market uncertainty that impacted transactional volumes compared to a year-ago quarter. Third, we had a net DVA loss of $102 million this quarter compared to a gain in DVA of $158 million in the second quarter a year ago. We also recorded roughly $200 million in securities losses as we closed out some available-for-sale security positions and their related hedges, and we put the proceeds in cash. Lastly, and just as a reminder, our tax rate benefits from ESG investments. And those are somewhat offset by operating losses on the ESG investments, which show up in other income.

So this quarter, our tax rate is a little bit lower. And the operating losses are a little bit higher from volume of these deals. So you have to be careful in analyzing the lower tax rate without considering the operating losses. And that in turn, often offsets what would have been higher revenue elsewhere. Our tax rate for the full year is expected to benefit by 15% as a result of the ESG investment tax credit deals. And absent these credits, our effective tax rate would still be roughly 25%, and we continue to expect a tax rate of 10% to 11% for the rest of 2023.

Expense for the quarter of $16 billion included roughly $276 million in litigation expense, which was pushed higher this quarter by the agreements announced last week with the OCC and the CFPB on consumer matters.

Asset quality remains solid, and provision expense for the quarter was $1.1 billion, consisting of $869 million in net charge-offs and $256 million in reserve build. The provision expense reflects the continued trend in charge-offs toward pre-pandemic levels, and it's still below historical levels. The charge-off rate was 33 basis points, and that's only 1 basis point higher than the first quarter and still remains well below the 39 basis points that we last saw in Q4 of 2019. And remember, 2019 was a multi-decade low.

I'd also use Slide 9 just to highlight returns, and you can see we generated 15.5% return on tangible common equity and 94 basis points return on assets.

Let's turn to the balance sheet, starting with Slide 10, and you can see our balance sheet ended the quarter at $3.1 trillion, declining $72 billion from the first quarter. A $33 billion, or 1.7%, reduction in deposits closely matched a $41 billion decline in securities balances through paydowns from the hold-to-maturity and sales of available-for-sale securities. Securities are now down $177 billion from quarter 2 '22. Cash levels remained high at $374 billion, and loans grew $5 billion. As Brian noted, our liquidity remained strong with $867 billion of liquidity, up modestly from the first quarter of '23, and still remains nearly $300 billion above our pre-pandemic fourth quarter '19 level.

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