Alastair Borthwick
Chief Financial Officer at Bank of America
Thank you, Brian. And I'm going to start on Slide 4 of the earnings presentation to provide just a little more context on the summary income statement and the highlights.
For the fourth quarter, as Brian noted, we reported $3.1 billion in net income or $0.35 per diluted share. That GAAP net income number included two notable items. First, we recorded $2.1 billion of pretax expense, that's $0.20 after tax earnings per share for the special assessment by the FDIC to recover losses from the failures of Silicon Valley and Signature Bank.
Second, on November 15th 2023, Bloomberg announced that they would discontinue publishing the Bloomberg Short-Term Bank Yield Index rate after November 15th, 2024 and many commercial loans in the industry had BSBY as a reference rate prior to SOFR becoming industry-standard.
As noted in an 8-K we filed earlier this week, we came to the conclusion in early January that BSBY cessation would not get the same accounting treatment allowed under LIBOR cessation, and therefore cash-flow hedges of BSBY indexed, products related to BSBY cash flows forecast to occur after November 15th 2024 would need to be moved out of OCI and into earnings in the fourth quarter '23 financials.
So, as a result of the accounting interpretation, we recorded a negative pretax impact to our market making revenue of approximately $1.6 billion. I just want to reinforce that's an accounting impact. It's not an economic change to the contracts and we'll see an offset to this over time through higher NII, mostly occurring in 2025 and 2026 after BSBY ceases in November of 2024.
The accounting lowered CET1 by 8 basis points during the quarter and we will recapture that in the next two or three years. Adjusted for the FDIC assessment and the BSBY cessation related impact, Q4 net income was $5.9 billion or $0.70 per share.
On Slide 5, we show the highlights of the quarter and we reported revenue of $22.1 billion on an FTE basis. And excluding the BSBY cessation impact, adjusted revenue was $23.7 billion and declined 4%, driven by net interest income.
Fourth quarter revenue is a tough year-over-year comparison as NII peaked in the fourth quarter of '22 at $14.8 billion, before slowly moving lower over 2023. Outside of NII, we saw good growth in treasury service fees and Wealth Management fees and those were offset by higher tax-advantaged investment deal activity, creating higher operating losses and the more tax credits associated with them and recognized across periods.
Expense for the quarter of $17.7 billion included the $2.1 billion FDIC charge. So excluding that charge, adjusted expense was $15.6 billion and consistent with our prior guidance. That allowed us to invest for growth as well as use good expense discipline to eliminate work and reduce headcount. And, on an adjusted basis, this then is the third quarter of sequential expense decline this year.
Provision expense for the quarter was $1.1 billion, that consisted of $1.2 billion in net charge-offs and a modest reserve release, reflecting the improved macroeconomic outlook. Net charge-offs reflect the continued trend in consumer and commercial charge-offs towards more normalized levels as well as higher commercial real-estate office losses.
Lastly, our income tax expense this quarter was a modest benefit as credits from tax-advantaged investment deals offset the tax expense on the lower earnings in Q4, driven by the notable charges.
So, let's review the balance sheet on Slide 6, and you'll see we ended the quarter at $3.2 trillion of total assets, up $27 billion from the third quarter. I'd highlight here, both the $39 billion growth in deposits and a decline in cash on balance sheet of $19 billion. Overall, you'll note that debt securities increased $92 billion, and that included a $9 billion decline in hold-to-maturity securities and $100 billion increase in available-for-sale securities reflecting short-term investment of liquidity from all of these activities.
We continue to put money into very short-term T-bills and hedged treasury notes this quarter, and those are essentially earning the same rate as cash. And you can see our absolute cash levels remain quite high. As Brian noted, liquidity remained strong with $897 billion of global excess liquidity sources. That was up $38 billion from the third quarter of '23 and it remained $321 billion above our pre-pandemic level in the fourth quarter of '19.
Shareholders' equity increased $5 billion from the third quarter as earnings and AOCI improvement were only partially offset by capital distributed to shareholders. The AOCI improved $4 billion, reflecting both the previously mentioned BSBY-related reclassification into fourth quarter earnings and other AOCI improvements. This included some improvements in other cash-flow hedges, which don't impact regulatory capital, driven by a decline in long-end rates.
During the quarter, we paid out $1.9 billion in common dividends and we bought back $800 million in shares, which more than offset our employee awards. Tangible book value per share is up 3% linked-quarter and 12% year-over-year.
Turning to the regulatory capital, our CET1 level improved to $195 billion from September 30th, while the CET1 ratio declined 9 basis points to 11.8% and remains well above our current 10% requirement as of January 1st '24. We also remain well-positioned against the proposed capital rules, as our current CET1 level matches our 10% minimum against anticipated RWA inflation from the proposed rules.
Risk-weighted assets increased $19 billion on loan growth and growth in Global Markets' RWA, and our supplemental leverage ratio was 6.1% versus the minimum requirement of 5%, which leaves plenty of capacity for balance sheet growth and our TLAC ratio remains comfortably above requirements.
So, let's focus on loans by looking at the average balances on Slide 7. And you can see loan growth improved this quarter as we saw improvement in both credit card and commercial borrowing, offset by declines in commercial real estate and securities-based lending. The commercial growth reflects good demand overall and was muted only at quarter-end by companies paying down commercial balances as they finalized their year-end financial positions.
Lastly, on a positive note, we've seen loan spreads continue to widen, given some of the capital pressures from proposed rules on the banking industry, and this combined with investments in relationship managers we've added over the past few years, has positioned us to take market-share and improve spreads.
Moving to deposits, I'll stay focused on averages on Slide 8, and the trends of ending balances saw a growth in Global Banking and Wealth Management and declines in consumer. Relative to the pre-pandemic fourth quarter '19 period, average deposits are still up 35%. Every line of business remains well above their pre-pandemic levels. Consumer is up 33% with checking up 40%, driven by the net-new checking accounts added that Brian noted earlier.
On a more recent performance basis, deposits grew $29 billion or 6% from Q3 on an annualized basis. The only business that saw a decline in deposits linked-quarter was consumer, and here we saw a decline of $21 billion. This linked-quarter decline slowed from the third quarter change. And in total, we have $959 billion in high-quality consumer deposits, which remains $239 billion above pre-pandemic levels.
The total rate paid on consumer deposits in the quarter was 47 basis points and this remains very low, driven by the high mix of quality transactional accounts. Most of this quarter's rate increase remained concentrated in CDs and consumer investment deposits, which together only represent 15% of the consumer deposits.
Turning to Wealth Management, balances on an end-of-period basis improved modestly, and we continued to experience a slowing in the trend of clients moving money from lower-yielding sweep accounts into higher-yielding preferred deposits and off-balance sheet. Our sweep balances were down $4 billion and were replaced by new account generation and deepening.
Global Banking deposits grew $23 billion, moving nicely above the $500 billion level that we've experienced over the course of the past six quarters. These deposits are generally transactional deposits of our commercial customers. They're the ones that used to manage their cash flows. And non-interest-bearing deposits were about 33% of deposits at the end of the quarter.
Now when we turn to excess deposit levels on Slide 9, you can see deposit growth exceeded loan growth this quarter. And that expanded our excess of deposits above loans, from Q3 to about $0.9 trillion, which is well above the $0.5 trillion we had pre-pandemic. You can see that in the upper-left of slide 9, which is where we've used and shown you how we think about managing excess liquidity.
We continue to have a balanced mix of cash, available-for-sale securities and held-to-maturity securities. And this quarter, the combination of the cash and the AFS securities now represent 51% of the total $1.2 trillion noted on this page. You'll also notice the change in mix of the shorter-term portfolio as we began to lower cash and increase available-for-sale securities buying mostly short-dated T-bills with similar yields.
You can know also the hold-to-maturity book continued to decline from paydowns and maturities pulling to par. In total, the hold-to-maturity book moved below $600 billion this quarter. It's now down $89 billion from its peak and it consists of about $122 billion in treasuries and about $465 billion in mortgage-backed securities along with a few billion others.
Also note that the blended cash and securities yield continued to rise and remained about 170 basis points above the rate we pay for deposits. The replacement of these lower-earning assets into higher-yielding assets continues to provide an ongoing benefit and support to NII. From a valuation perspective, given the reduced balance and the longer-term interest-rate reductions we've seen in the fourth quarter, we experienced an improvement of more than $30 billion in the valuation of the hold-to-maturity securities.
So, let's turn our focus to NII performance using Slide 10. And a strong finish to the year helped us report $57.5 billion in NII on a fully tax-equivalent basis for the full year of 2023. That's up 9% compared to 2022. On an FTE basis, we reported $14.1 billion in NII, which was modestly better than we told you to expect last quarter, driven by modestly better deposit growth. The $14.1 billion was a decline of $400 million from the third quarter, driven by the unfavorable impacts of deposits and related pricing and lower Global Markets NII, partially offset by higher rates benefiting asset yields.
And as we look forward, given that we've got one less day of interest in the first quarter and that's worth about $125 million to $150 million, and given the rate curve shift, we believe the first quarter will be somewhere between $100 million [Phonetic] and $200 million [Phonetic] lower than the fourth quarter. It could move a touch lower in Q2 and then we believe it should begin to grow sequentially in the second half of 2024. So, very consistent with our prior guidance.
With regard to the forward view I just provided, let me note a few other caveats. It would include an assumption that interest rates in the forward curve materialize. And the forward curve today has six cuts compared to last quarter when we had three cuts in the 2024 curves. So, it's bouncing around a little and shifted in the past quarter.
Forward view also includes our expectation of low-to-mid-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.
Before moving away, it's worth noting our net interest yield declined 14 basis points to 197 basis points, and that's driven by the decline in NII, as well as higher average earning assets, reflecting prior period builds of cash and cash-like securities.
Turning to asset sensitivity and focusing on a forward yield curve basis, the plus 100 basis point parallel shift at December 31st was $3.5 billion of expected NII over the next 12 months, coming from our banking book. And that assumes no expected change in balance sheet levels or mix relative to our baseline forecast, and 93% of that sensitivity is driven by short rates. The 100 basis point down scenario is $3.1 billion.
Let's turn to expense and we'll use Slide 11 for the discussion. And we reported $15.6 billion in adjusted expense this quarter, which excludes the FDIC assessment. This was in line with our projection from last quarter and down $199 million from the third quarter, driven by reductions in headcount earlier in the year and seasonally lower revenue-related expense. These reductions outpace the continued investments that we're making to drive growth.
Our average headcount was down from the third quarter to 213,000 people, and that's good work after peaking at 218,000 last January. We lowered our headcount through the year by 5,000 and did so without taking an outsized severance charge as we used attrition to lower our headcount along the way.
One more point to acknowledge the good work of our teams on expense, Q4 '23 adjusted expense of $15.6 billion is only $94 million higher than the fourth quarter of '22. And just remember, we began 2023 with a $125 million lift in quarterly FDIC expense. So, through some good operational excellence work and otherwise, we've managed through all of the additional costs of investments in new tech initiatives, and merit, and financial center openings, as well as some stronger revenue and higher marketing costs.
As we look forward to next quarter, we expect to see the more typical Q1 seasonal elevation in expense of $700 million to $800 million compared to Q4, so we believe expense will be around $16.4 billion in the first quarter. That includes elevated payroll tax expense and the expected costs of higher revenue in both sales and trading and Wealth Management, as well as merit cost increases.
And as we move through 2024, we expect the quarterly expense to decline from Q1, reflecting a drop in the elevated payroll tax expense and revenue changes, as well as some additional operational excellence initiative work. Continued digital transformation and adoption is also going to help us as we go through the year.
Now, turn to credit and I'll use Slide 12 for that. Provision expense was $1.1 billion in the fourth quarter and it included an $88 million reserve release due to a modestly improved macroeconomic environment. On a weighted basis, we're reserved for an unemployment rate of nearly 5% by the end of 2024 compared to the most recent 3.7% rate reported. Net charge-offs of $1.2 billion increased $261 million from the third quarter, and the net charge-off ratio was 45 basis points, a 10 basis point increase from the third quarter.
On Slide 13, we highlight the credit quality metrics for both our consumer and commercial portfolios, and the overall increase in net charge-offs was driven by three things. First, $104 million of the increase was driven by credit card losses, which continued to normalize as higher late-stage delinquencies flowed through to charge-offs. Second, $65 million of the increase was driven by a broad range of smaller commercial and industrial losses which were mostly previously reserved and monitored for the past couple of quarters. And lastly, $76 million of the increase was driven by commercial real estate losses, primarily due to office, also mostly reserved.
In the appendix, we've included a current view of our commercial real estate and office portfolio stats provided last quarter, and we've also included the historical perspective of our loan book derisking and long-term trend of our consumer and commercial net charge-offs, and you can see those on slides 30 to 33.
Let's move on to the various lines of business and their results and I'll start on Slide 14 with Consumer Banking. For the quarter, consumer earned $2.8 billion on continued good organic growth. And despite their good client activity, it's difficult to outrun the earnings impact of higher rates on deposit costs while the credit is also normalizing. The reported earnings declined 23% year-over-year as top line revenue declined 4% while expense rose 3% and the credit costs rose.
Customer activity showed another strong quarter of net new checking growth, another strong period of card opening and investment balances for consumer clients which climbed $105 billion over the past year to a record $424 billion. Our full year flows were $49 billion as accounts grew 10% in the past 12 months.
Loan growth was led by credit card and that broke above $100 billion this quarter. Deposit decline slowed in the quarter with continued strong discipline around pricing. And our expense reflects continued business investments for growth. And as you can also see on the appendix page 21, digital engagement continued to improve and showed good year-over-year improvement as customers enjoy the continuation of enhanced capabilities.
Moving to Wealth Management on Slide 15, we produced good results earning a little more than $1 billion after adding 40,000 net new relationships in Merrill and the Private Bank this year. These results were down from last year as the decline in NII from higher deposit costs still catching up from the interest rate hikes, more than offset higher fees from asset management, driven by higher market levels and assets under management flows.
As Brian noted earlier, both Merrill and the Private Bank continued to see strong organic growth and produced solid assets under management flows of $52 billion since the fourth quarter of '22, which reflects a good mix of new client money as well as existing clients putting their money to the work. Expenses reflect continued investments in the business and revenue related costs.
On Slide 16, you see the Global Banking results. The business produced strong results with earnings of $2.5 billion as a decline from peak levels of NII was offset by lower provision expense, leaving earnings down 3% year-over-year. Revenue declined 8%, driven by the NII.
Our Global Treasury Services business remained robust with strong business from existing clients as well as good new client generation. In addition, we continued to see a steady volume of solar and wind investment projects this quarter and our investment banking business continued to perform well in a sluggish environment. Year-over-year revenue growth also benefited from lower marks on leveraged loan positions.
The company's overall investment banking fees were $1.1 billion in Q4. That grew 7% over the prior year despite a fee pool that was down 8%. And for the year we held on to the number three position overall, given that performance. In the component parts, we ended the year number one in investment grade, number two in leverage finance, number four in equity capital markets, and number four in mergers and acquisition.
The diversification of the revenue across products and regions reflects the growing strength of our platform. And a good example of that is our focus on the equity capital markets' Blocks business, where we finished number one in the United States for the first time since 1998, and in EMEA, we were also number one for Blocks.
Provision expense reflected a reserve release of $399 million and that comes from an improved macroeconomic outlook as well as realized charge-offs better, as noted before. Expense decreased 2% year-over-year as continued investments in the business were more than offset by reductions in other operating costs.
Switching to Global Markets on Slide 17, the team had another strong quarter, with earnings growing 13% year-over-year to $736 million, driven by revenue growth of 4% and we refer to results excluding DVA, as we normally do. Good results in sales and trading and comparatively low remarks on leveraged loan positions drove the year-over-year performance. And focusing on the sales and trading ex-DVA, revenue improved 1% year-over-year to $3.8 billion, which is a new fourth quarter record for the firm.
FICC was down 6% from a record quarter, while equities increased 12% compared to the fourth quarter of '22. And the FICC revenues were down versus that record fourth quarter level with higher revenues in mortgages and municipal trading. Equities was driven by improved trading performance in derivatives, and our expense was up 3% on continued investment in the business.
Finally, on Slide 18, all other shows a loss of $3.8 billion, as the two notable items highlighted earlier negatively impacted net income by $2.8 billion in that segment; revenue adjusted for the $1.6 billion, BSBY cessation was flat year-over-year and expense adjusted for the $2.1 billion FDIC assessment was down a couple of hundred million, driven by lower litigation and lower unemployment processing costs.
I noted earlier we reported a modest tax benefit this quarter. The tax credits from tax advantaged investment deals throughout the year, including their benefits in the fourth quarter, exceeded taxes on reported earnings because we had the two notable items that lowered results this quarter.
For the full year, our tax rate was a little more than 6%. And excluding the impacts of BSBY cessation and FDIC and the other discrete tax benefits, that rate was 10%. And further excluding our investment tax credits, our tax rate would have been 25%.
So, thank you. And with that, we'll launch into the Q&A please.
