Bank of America Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 12, 2024

There are 13 speakers on the call.

Operator

Please note this call may be recorded. I'll be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Lee McIntyre.

Speaker 1

Good morning. Welcome and thank you for joining the call to review our Q4 and full year results. We know it's Busy day for all of you. As usual, our earnings release documents are available on the Investor Relations section of the bankofamerica.com website And they include the earnings presentation that we will be referring to during this call. I trust everybody has had a chance to review the documents.

Speaker 1

I'll first turn the call over to our CEO, Brian Moynihan, for some opening comments before Alastair Borthwick, Quick, our CFO discusses the details of the quarter. Let me just remind you that we may make forward looking statements and refer to 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. Factors that may cause our 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 our non GAAP financial measures, including Reconciliations to U.

Speaker 1

S. GAAP can also be found in our earnings materials and our website. So with that, I'll turn the call over to you, Brian. Thank you very much.

Speaker 2

Thank you and Happy New Year to everyone. Good morning. Thank you for joining us. I'm starting on Slide 2 of the earnings presentation.

Speaker 3

Here at

Speaker 2

Bank of America, our teammates finished 2023 with a solid 4th quarter. Reported EPS was $0.35 but that included 2 notable items that Alistair will describe in more detail. Adjusted for those two items, net income was $5,900,000,000 Before Alistair covers quarter 4 results, I want to take a moment and briefly review the 2023 full year results. Our team at Bank of America delivered strong profits for shareholders across a challenging year, navigating a slowing economy, geopolitical tensions, Bank failures and the impact of a rate hike of historic speed. We began the year with a pretentious aura as economists predicted a mild recession within the year.

Speaker 2

Instead, 2023 showcased economic resilience led by U. S. Consumers despite higher interest rates. We ended 20 23 with economists projecting the Fed has successfully steered the U. S.

Speaker 2

Economy to a soft landing. In regards to the economy, during 2023, We consistently made a few points regarding what we were seeing in our customer data here at Bank of America. First, the year over year Growth rate and spending from the beginning of 'twenty three started declining. And it went from in the early part of 'twenty three over the early part of 'twenty two from a 9% to 10% growth to this quarter's 4% to 5% growth rate, and that's where it stands here early in 2024. You can see that On place Slide 29 in the appendix.

Speaker 2

That growth rate 4% to 5% is more consistent with the 2% GDP environment in a lower inflation environment. 2nd, the point we've made is that our consumer deposit balances at Bank of America Remained 30% higher than pre pandemic. We saw the deposit balance of consumer accounts move lower this quarter, but are now seeing more differentiation in behavior. In the lower average balance size accounts, the balances in there still remain at multiples of pre pandemic levels, nearly 3 years past the last stimulus. They are modestly declining.

Speaker 2

The deposit outflows you've seen in consumer have largely been driven by the higher balance accounts who move their excess balances into the markets to seek higher yields. We capture those with our leading wealth platform. 3rd, the consumers of Bank of America have had access to credit and are borrowing responsibly. The balance sheets are generally in good shape and well impacted by higher rates, remember many of them have fixed rate mortgages and remain employed, so they've shown great resilience. Let's move to discussion of full year 2023 earnings.

Speaker 2

We reported net income of $26,500,000,000 after tax, which $2,800,000,000 after tax for notable quarter 4 items. Adjusted for those items, adjusted net income was $29,300,000,000 after tax. Earnings per share worth $3.42 and that grew 7% over 2022. On that adjusted basis, we generated a 90 basis point return on assets and a 15% return on tangible common equity. The year 2023 was characterized by record organic customer activity, Record digital customer engagement levels and satisfaction scores.

Speaker 2

Strong but slowing NII during the course of the year, Strong sales and trading, up 7% year over year. Operating leverage reflected good expense discipline, solid asset quality In a strong capital and liquidity position. All of this was helped by the years of Bank of America's assiduous dedication to responsible growth. This helped us bring our headcount and expense down every quarter during 2023 in line with what we told you expect early this year early last year. Adjusted full year revenue grew 5% on a back of 9% NII improvement and strong asset management fees and sales and trading results.

Speaker 2

We achieved 170 basis points of operating leverage in 2023 as heightened quarterly expense levels were driven lower throughout the year Even as the investments in growth continued. Net charge offs moved higher through the year off the historic lows, But they still compare very favorably against historic averages. One last point worth noting is the level of deposits. If you think back as we ended 2022 and entered 2023, the great debate was how much the pandemic surge in deposits would dissipate. But looking today, we ended 2023 with $1,924,000,000,000 of deposits, only $7,000,000,000 less than we had at year end 'twenty two and 4% higher than the trough in May of this year.

Speaker 2

The total deposit the total average deposits 4th quarter remained 35% higher than they did in the quarter 4 of 2019. This has been tremendous works by our teams to drive our industry leading market share, actually Performing the industry across the 4 year period and again this year. While the economy appears to continue to normalize and rates continue to have some volatility, one thing that remains important is This client activity sticks to the ribs is what we want to spend a moment as I wrap up. On Slide 3, we highlight Some of the successes in organic activity and our results for the year. Bank of America team is a powerful engine that's fueling results across all our businesses.

Speaker 2

I would note a couple of examples to try and connect the importance to our financials. It's easy to use the consumer business as example. We added 600,000 net new checking accounts during the year 2023. The Q4 of 2023 represents the 20th straight Quarter of net addition of checking accounts. The quality is what drives the checking account balances.

Speaker 2

On average, 67% of the deposit balances have been with us for customers have been with us for more than 10 years. 92% of the consumer checking Our primary meaning they're the core client household account. 60% of our checking accounts use our debit card. The average four to transactions per account each year showing how engaged they are. They have traditionally opened savings accounts 20% to 25% of the time Within a few months of opening their checking accounts, thinking about those new accounts at opening those new checking accounts opened last year, bringing about $4,000 of balances, Then they deepen over the next subsequent months to 2 times that amount.

Speaker 2

New savings accounts come with those accounts starting with about $8,000 and doubling over time. From the total of new checking accounts we opened just in 2023, those customers have opened nearly 500,000 credit card accounts with us so far In 2023, historically, we've seen on average these customers more than doubled those card balances within a year. Those card accounts on average spend about $7,000 per year of which a portion will carry a balance. Now there's always additional opportunity to further serve our clients and to continue to meet them where they are. In addition to the industry leading digital platforms that we have, we have opened 50 new financial centers in 2023, more than half of those were in our expansion markets.

Speaker 2

We've expanded our presence during 2023 to 10 markets, including our latest opening in Omaha. In our Global Wealth Management team, we added more than 40,000 Net new relationships across Merrill and the Private Bank. Our advisors opened 150,000 new banking accounts for wealth management clients showing The completeness of the relationship approach. The average Merrill account is over $1,000,000 at opening. The average private bank account is multiples of that.

Speaker 2

As you can see on the slide, we now manage $5,400,000,000,000 of client balances across loans, deposit investments of our consumer clients, both consumer and GEO. We saw $84,000,000,000 of flows into those accounts last year. As we switch to Global Banking on the lower left hand side of the slide, We added clients to increase the number of products per relationship. Just like in consumer, we have seen good growth in customers seeking the benefits Of our physical and digital capabilities, but most importantly, our talent relationship managers who provide financing solutions, treasury services, strategic advice for clients with local and global needs. We added roughly 2,500 new commercial and business banking clients this year.

Speaker 2

That is more than twice what we added in 20 We look forward to continue to drive with those grow with those clients in 2024 and add even more. This capitalized on a multiyear build of our relationship management team in Banking businesses, especially in product expansion also, especially in the Global Transaction Services area and Mid Market Investment Banking. As we think about global markets, we continue to see strong performance from our team with 7% year over year revenue growth, the strongest we've had in many years. We see digital tools our customers have access to across the board helping us enable this activity at lower costs. Our normal digital banking slides are once again included for your referenced on Pages 21, 2426.

Speaker 2

In summary, this was a good quarter. We delivered our Q3 of expense We saw NII outperform what we expected when we talked to you on the last earnings call. We continue to manage well through the transition and the rate structure. We saw deposits grow this quarter And we look forward with a strong capital base, strong liquidity and growing loans and deposits to a great 2024. I want thank my teammates for what they did for us in 2023, and we all know we're off to a nice start for 2024.

Speaker 2

With that, I'll turn it over to Alastair.

Speaker 4

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 Q4, as Brian noted, we reported $3,100,000,000 in net income or $0.35 per diluted share. That GAAP net income number included 2 notable items. First, we recorded $2,100,000,000 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.

Speaker 4

2nd, on November 15, 2023, Bloomberg announced that they would discontinue publishing the Bloomberg Short Term Bank Yield Index rate after November 15, 2024, and many commercial loans in the As noted in an 8 ks we filed earlier this week, We came to a conclusion in early January that Bisbee cessation would not get the same accounting treatment allowed under LIBOR cessation And therefore, cash flow hedges of Bisbee indexed products related to Bisbee cash flows forecast to occur after November 15, 2024 We need to be moved out of OCI and into earnings in the Q4 'twenty three financials. So as a result of the accounting interpretation, we recorded a negative pre tax impact to our market making revenue of approximately 1,600,000,000 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 20252026 after Bisbee ceases This is in November of 2024. The accounting lowered CET1 by 8 basis points during the quarter, and we will recapture that in the next Adjusted for the FDIC assessment and the businessization related impact, Q4 net income was $5,900,000,000 or $0.70 per share.

Speaker 4

On Slide 5, we show the highlights of the quarter and we reported revenue of $22,100,000,000 on an FTE basis. And excluding the business cessation impact, adjusted revenue was $23,700,000,000 and declined 4% driven by net interest 4th quarter revenue is a tough year over year comparison as NII peaked in the Q4 of 2022 at 14,800,000,000 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 $17,700,000,000 included the $2,100,000,000 FDIC charge. So excluding that charge, adjusted expense was $15,600,000,000 and consistent with our prior guidance.

Speaker 4

That allowed us to invest for growth as well as use good expense discipline to eliminate work And on an adjusted basis, this then is the Q3 of sequential expense decline this year. Provision expense for the quarter was $1,100,000,000 that consisted of $1,200,000,000 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 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 $3,200,000,000,000 of total assets, up $27,000,000,000 from the 3rd quarter. I'd highlight here both the $39,000,000,000 growth in deposits and a decline in cash on balance And $100,000,000,000 increase in available for sale securities reflecting short term investment of liquidity from all of these activities.

Speaker 4

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 remains strong with 897 $1,000,000,000 of global excess liquidity sources that was up $38,000,000,000 from the Q3 of 2023 and it remained 3 $1,000,000,000 above our pre pandemic level in the Q4 of 2019. Shareholders' equity increased $5,000,000,000 from the 3rd quarter as earnings and AOCI improvement were only partially offset by capital distributed to shareholders. The AOCI $4,000,000,000 reflecting both the previously mentioned Bisbee related reclassification into 4th quarter earnings and other AOCI improvements.

Speaker 4

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 $1,900,000,000 in common dividends and we bought back $800,000,000 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 $195,000,000,000 from September 30, While the CET1 ratio declined 9 basis points to 11.8 and remains well above our current 10% requirement as of January 1, 24. We also remain well positioned against the proposed capital rules as our current CET1 level matches our 10 $18,000,000,000 on loan growth and growth in global markets RWA and our supplemental leverage ratio was 6.1% First is the minimum requirement of 5%, which leaves plenty of capacity for balance sheet growth and our TLAC ratio remains comfortably above requirements.

Speaker 4

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 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 investment 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 growth in Global Banking and Wealth Management and declines in consumer.

Speaker 4

Relative percent driven by the net new checking accounts added that Brian noted earlier. On a more recent performance basis, Deposits grew $29,000,000,000 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 $21,000,000,000 This linked quarter decline slowed from the 3rd quarter change. And in total, we have $959,000,000,000 in high quality consumer deposits, which remains $239,000,000,000 above 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 remain concentrated in CDs and consumer investment deposits, which together only represent 15% of the consumer deposits.

Speaker 4

Turning to Wealth Management, balances on an end of period basis improved modestly and we continue to experience a slowing in the trend of clients moving money Lower yielding sweep accounts into higher yielding preferred deposits and off balance sheet. Our sweep balances were down 4,000,000,000 And we're replaced by new account generation and deepening. Global Banking deposits grew $23,000,000,000 moving nicely above So generally transactional deposits of our commercial customers, they're the ones they use to manage their cash flows and non interest bearing deposits were about 33% of 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 $900,000,000,000 which is well above the $500,000,000,000 we had pre pandemic. You can see that in the upper left of Slide 9, which is where we've used in showing you how we think about managing excess liquidity. We continue to have a balanced mix of cash available for sales securities and held to maturity securities.

Speaker 4

And this quarter, the combination of the cash and the AFS securities now represent 51 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 note 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 $600,000,000,000 this quarter. It's now down $89,000,000,000 from its peak and it consists of about $2,000,000,000 in treasuries and about $465,000,000,000 in mortgage backed securities along with a few 1,000,000,000 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.

Speaker 4

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 Q4, we experienced an improvement of more than $30,000,000,000 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 On an FTE basis, we reported $14,100,000,000 in NII, which was modestly better than we told you to expect last Quarter driven by modestly battered deposit growth. The $14,100,000,000 was a decline of $400,000,000 from the 3rd quarter driven by the unfavorable impacts of deposits and related pricing and lower global markets NII, partially offset by higher rates benefiting asset yields.

Speaker 4

And as we look forward, given that we've got one less day of interest in the Q1 and that's worth about $125,000,000 to 150,000,000 And given the rate curve shift, we believe the Q1 will be somewhere between $100,000,000 $200,000,000 lower than the Q4. It could move a touch Lower in Q2 and then we believe it should begin to grow sequentially in the second half of twenty twenty four. 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.

Speaker 4

And the forward curve today has 6 cuts compared to last quarter when we had 3 cuts in the 2020 4 curve. So It's bouncing around a little and shifted in the past quarter. Forwardview 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 twenty twenty four. 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.

Speaker 4

Turning to asset sensitivity and focusing on a forward yield curve basis, the +100 basis point parallel shift at December 31 was $3,500,000,000 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 The 100 basis point down scenario is 3,100,000,000 Let's turn to expense and we'll use Slide 11 for the discussion. And we reported $15,600,000,000 in adjusted expense this quarter, which This was in line with our projection from last quarter and down $199,000,000 from the 3rd quarter, driven by reductions in headcount earlier in the year and seasonally lower revenue related expense. These reductions outpaced the continued investments that we're making to drive growth. Our average headcount was down from 3rd quarter to 213,000 people. And that's good work after peaking at 218,000 last January.

Speaker 4

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 'twenty three adjusted expense of $15,600,000,000 is only $94,000,000 higher than the Q4 of 'twenty two. And just remember, We began 2023 with a $125,000,000 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 As we look forward to next quarter, we expect to see the more typical Q1 seasonal elevation In expense of $700,000,000 to $800,000,000 compared to Q4, so we believe expense will be around $16,400,000,000 in the Q1.

Speaker 4

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 $1,100,000,000 in the 4th quarter and it included an $88,000,000 reserve release due to a modestly improved macro 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 percent rate reported. Net charge offs of $1,200,000,000 increased $261,000,000 from And the net charge off ratio was 45 basis points, a 10 basis point increase from the 3rd quarter.

Speaker 4

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 3 things. First, $104,000,000 of the increase was driven by credit card losses, which continued 2nd, $65,000,000 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, dollars 76,000,000 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.

Speaker 4

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 $2,800,000,000 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.

Speaker 4

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 $105,000,000,000 over the past year to a record $424,000,000,000 Our full year flows were $49,000,000,000 as accounts grew 10% in the past 12 months. Loan growth was led by credit card and that broke above 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 $1,000,000,000 after adding 40 1,000 net new relationships in Merrill and the Private Bank this year. These results were down from last year as a 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.

Speaker 4

As Brian noted earlier, both Merrill and the Private Bank continued to see strong organic growth and produced Solid assets under management flows of $52,000,000,000 since the Q4 of 2022, which reflects a good mix of new client money as well as existing clients putting their money to 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 $2,500,000,000 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.

Speaker 4

Our Global Treasury Services business remained robust with strong business from existing clients as well as good new client generation. In addition, we continue 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 $1,100,000,000 in Q4. That grew 7% over the prior year despite a fee pool that was down 8%.

Speaker 4

And for the year, we held on to the number 3 In the component parts, we ended the year number 1 in Investment Grade, number 2 in Leveraged Finance, number 4 in Equity Capital Markets and number 4 in Mergers and Acquisition. The diversification of the revenue across products and regions reflects And a good example of that is our focus on the Equity Capital Markets Blocks business where we finished number 1 in the United States the first time since 1998. And in EMEA, we were also number 1 for Bloxx. Provision expense reflected a reserve release of $399,000,000 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.

Speaker 4

Switching to Global Markets on Slide 17. The team had another strong quarter with earnings growing 13% year over year to $736,000,000 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 $3,800,000,000 which is a new 4th quarter record for the firm. FIC was down 6% from a record quarter, while equities increased 12% compared to the Q4 of 2022.

Speaker 4

And the FICC revenues were down versus that record 4th 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 Finally, on Slide 18, all others shows a loss of $3,800,000,000 as the two notable items highlighted Earlier negatively impacted net income by $2,800,000,000 in that segment. Revenue adjusted for the 1,600,000,000 Bisbee cessation was flat year over year and expense adjusted for the $2,100,000,000 FDIC assessment was down a couple of 100,000,000 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 Q4 exceeded taxes on reported earnings because we had the 2 notable items that lowered results this quarter.

Speaker 4

For the full year, our tax rate was a little more than 6% and excluding the impacts of Bisbee 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 and A please.

Operator

We'll take our first question from Jim Mitchell of Seaport Global.

Speaker 5

Hey, good morning guys. Alistair, maybe on the NII trajectory that you're talking about sort of down a little bit in the first half and then start to stabilize in the And you're building in 6 cuts, but a lot of those cuts are coming starting in sort of 2Q and beyond. And given your asset sensitivity, Why would we expect NII to stabilize? Is that just sort of expected growth in deposits and loans? Just kind of help us think through Your assumptions on the NII for 2024?

Speaker 4

Yes. Well, I think, Jim, going back to last quarter, I don't think Our views have changed a great deal. So our guidance isn't changing much either in that regard. If anything, Q4 deposits were a little better than we So I think you see in the we sort of thought this quarter might be around $14,000,000,000 It was a little better than that. So that's obviously a good starting point.

Speaker 4

Now when we look forward off of that slightly higher number, if you think about Q1, I'm thinking about in terms The day count might be $150,000,000 let's say. So from where we are, that's going to get us to somewhere between $13,000,000 $9,000,000 $14,000,000 It's going to be in that kind of a range. Q2, we see going down just a little bit more. That's a little bit of deposit seasonality in Q1 and a little bit of just Catch up on rate paid and some rotation. But at that point, we see growing in the back half of the year and that's largely, yes, deposits growing.

Speaker 4

It's Loan is growing a little bit. It's some restriking of the securities that come off the balance sheet And it's restriking some of the loans that come off the balance sheet. So it's all of those things. You're right. When we got together last quarter, We thought there might be 3 rate cuts.

Speaker 4

Now it's up to 6. So that's obviously a that's a little harder, but deposit picture has been a little better. So no particular change at this point.

Speaker 5

Okay. That's fair. And maybe just as a follow-up, just on loan growth, What do you think we all see the card growth, but outside of that, it's been pretty muted. We're looking at rate cuts, maybe that's a little bit better for demand. How do you think what are you seeing on the commercial side in terms of demand?

Speaker 5

And What changes the dynamic?

Speaker 4

Well, I mean, you look back, if you look at our loan growth in the materials, it's been a pretty Slow loan growth environment. And I think what's going on underneath it is, obviously, you've got the economic activity. Offsetting that a little bit is lower revolver utilization. And you can sort of see why with rates being much higher, it's a little more So as corporate cash balances have come up and deposits have come up, that's just a natural headwind. That's beginning to fade.

Speaker 4

So we kind of feel like the loan growth ought to be low single digits. Normally, we think about it as kind of GDP plus just a little bit of market share. So in a low GDP environment, that's sort of what we're expecting for loans this year. And we just need to see how the rate structure develops.

Speaker 5

Okay. All fair. Thanks.

Operator

We'll take our next question from Erika Najarian of UBS. Ms. Najarian, please check your mute switch. Your line is open.

Speaker 6

Hi, sorry, rookie move. I apologize for that. Alistair, if you could thank you for giving us More detail about how your NII trajectory is going to be for the rest of the year. I'm wondering if you could just us a little bit more color on what you're expecting for deposit repricing and perhaps for VIAV specifically, Perhaps the liability mix in the second half of the year. So if you expect deposit growth to come back, I think a big question that the market has is, Now what is the repricing power to the downside that these banks have as the Fed cuts rate?

Speaker 6

So I think that would be really Good color for the market to have.

Speaker 4

Yes. Okay.

Speaker 7

So first of all,

Speaker 4

If I go back over the trajectory of deposits through the course of 2023, we troughed At $18.45 and we ended at $19.25 So underneath that there's $80,000,000,000 of growth And deposits since May. So that obviously informs our perspective around how we think about deposit gathering at this stage. That feels to us like it's a supportive environment of our NII forecast. 2nd, Obviously, over the course of this year, there's been a move towards more interest bearing. And that actually helps us in the event that we start seeing Fed cuts Because that's obviously going to allow us to take those rates down.

Speaker 4

So look, we're going to see a little bit of rotation, I think, here in Q1 and Q2. I think we'll likely see a little bit of deposit pricing lag, but the last Fed hike at this point was July. So there's been an awful lot of time at this point for deposit pricing to shake out. We won't be immune from anything. We have to compete for deposits along with everyone else, but Combine all of those things and that's where we get our confidence.

Speaker 6

Got it. And just to clarify, How we should think about the full year, the $16,400,000,000 in 1Q 'twenty four expenses and a Quarterly decline from there, does that pretty much square with what you've said in the past for expenses of Up 1% to 2% year over year. And would that number include Investment Banking activity returns in force in 2024.

Speaker 2

Yes. So we if you think about it pre pandemic, we reached the point where we've taken expenses down a place where you said we'd kind of grow Yes, sort of half the rate of inflation, etcetera. So you're right, what we're thinking now is we're up $100,000,000 in the Q4 of last year's Q4. And if you think about that as and you look at the personnel side of it, it's up a little higher than non personnel, it's down a little lower. We got the rise in 1st quarter expenses and then we start going down each quarter again.

Speaker 2

So if you think about $100,000,000 to $200,000,000 of sort of inflationary growth Over the quarters this year, you get between $64,000,000 $64,500,000 And most of the Firms out that we look at are sort of in that range and we feel comfortable with that. But that sort of allows us the room to use our good operational Take out expenses and replace them with things like revenue related expenses that we've seen and we see that pattern reemerge now as we've gotten stability and past the pandemic and past the Great, great resignation and all the inflation that occurred in that in the 2021, 2022 timeframe. We now stabilized back to that ability to produce Sequential declines in quarters during the year, year over year growth of inflationary 1% to 2% levels, Nick, it's in that low-sixty fours.

Speaker 6

Thank you, Brian.

Operator

We'll take our next Question from John McDonald of Autonomous Research.

Speaker 8

Hi, Alistair, Brian. Alastair, I wanted to go back on the NII and maybe you could help us. It's so hard for us to square the NII outlook with the rate sensitivity Disclosure that you have in the slide with 100 basis point, you know, parallel shift down is $3,100,000,000 Maybe just Is there some caveats about how in the real world it doesn't play out like the disclosures? We've already seen rates come down on the long end Almost 100 basis points. So I guess it's just where is that $3,100,000,000 headwind in your number because it's very impressive obviously to be able to kind of keep it flat despite that using the forward curve.

Speaker 8

Thanks.

Speaker 4

Yes. Well, I mean, I think that the main thing is number 1, it obviously assumes a parallel shift instantly.

Speaker 9

Lee.

Speaker 4

So the rate cuts that are in the forward projections, the earliest one comes March, for example. So you're not going to see a full year's worth of rate cuts all in the space of the So, John, I think the way to start would be just use what we've disclosed, which is that 31. You can see what we say in terms of how much of that is the short end. And then I just take that number and use that as the beginning point. And just keep in mind, we still see some deposit growth, some loan growth and some securities and loan repricing that offsets all that.

Speaker 8

Okay. Okay. That's helpful. And then maybe just on top of that trading NII or the global markets NII, Is that likely to be a headwind or a tailwind in 2024 versus 2023? Is that do you have any visibility on that?

Speaker 4

Yes. Well, look, if you look at global markets, In any given quarter, it moves around just based on the customer behavior. But over the long arc, if you look over the course of the past 2 or 3 years, it's liability sensitive. So I'd expect if you see rate cuts that will benefit Global Markets NII just a little bit. And you can almost like if you think about Retracing the steps of what they've conceded in NII, you'd sort of expect to get that back over time.

Speaker 8

Okay. So maybe that could grow a bit.

Speaker 2

John, this quarter was a drop 3rd quarter, 4th quarter, A pretty good amount. And so and that's partly due to the Q4 being lower activity, just lower inventory carry and things like that. That reversed itself and We're off to a good start so far in the Q1 here and the balance sheet moves back up. So there's a little bit of quarter to quarter linkage 3rd to 4th quarter typically.

Speaker 3

Okay, got it. Thanks guys.

Operator

We'll take our next question from Mike Mayo of Wells Fargo.

Speaker 7

Hi. Just another follow-up on NII. I guess, if you take The Fed dot plot, maybe there's just 3 rate cuts. If you take that instead of the 6, What would how would you thinking about NII change?

Speaker 4

Well, I think if we got the 3 rather than the 6, Mike, we'd do modestly better. I think, let me put it this way, if we hadn't seen the 3 more since last quarter, we might have a higher guide. But because we've come off of the base with better deposit gathering in Q4, so we're starting in a better place. So those two things have sort of even themselves out. Obviously, if it pushes out later, that's a good thing for us.

Speaker 7

Brian Alister, you always talk about the information advantage you By just being in

Speaker 4

the flow of so much of the U.

Speaker 7

S. Economy, what do you think? I mean is this just and not rely and I know you like relying on your research group Brian and what their economic forecast is, but what do you guys think as far as Are you going to do a recession in the second half this year? Does the Fed need to cut 6 times? Are you seeing that where are you seeing the most softness, I guess, is the question?

Speaker 2

So I think our research team has rate cuts in next year and has a soft landing as you referenced, Mike. So that's As you see the customers today, as I said earlier, the year to year spending growth in the Q4 versus last year's Q4 In the Q1 so far versus the 1st part of last year, there's a 4% to 5% rate in movement of money and that was $4,000,000,000,000 plus out of the consumer accounts and Bank of America and the economy, that 4% to 5% It's similar to what it was in 2017, 2018, 2019 when the Fed rose, took rates up, inflation was under control and economy is growing at 2%, 1.5%, 2%, 2.5%. And so the spending level should sustain that economy, albeit our core prediction is it's slowing down from a Higher growth rate in the Q3, 4.5%, 5% whatever it was down to 1% or something like that in the 1st couple of quarters next year. But we see Consumer activity indicating that they're still in the game, they're still spending money, where they spend is a little different more in services and going out in Restaurants and experiences and less on goods at retail, they're employed.

Speaker 2

If you look at the estimates by Any of you, any of your economists, the unemployment rate projected is really a modest deterioration from here and most of them in the core base case. Our reserves said at almost a 5% unemployment rate by the end of this year to give you a sense. So that's good news. They're using their credit responsibly, much is made of Higher credit card balances, but on the size of the economy and the size people forgetting that the economy is a lot bigger than it was in 2019 because of the Inflation, everything and as a percentage, we don't see any stress there. We see a normalization of that credit.

Speaker 2

So they're working, they're getting paid, they have balances in their accounts, they have access to credit, They've locked in good rates on our mortgages, and they're employed. It's we feel it's good. So we think the soft landing is a core thesis and our internal data supports what our Research teams, they said they get they see it also through our institute.

Speaker 7

And then just as far as controlling what you can control in terms of expenses and head cap, tech investments and maybe throw an AI as part of that, What sort of extra efficiencies can you achieve through AI tech and other initiatives? You squeezed a lot out over the last decade plus. What's

Speaker 2

There's always more to go. So I think we've got lined up. If you take what we're doing this year and next year, Being 24, 25 and enrolled in 26, it's a couple of $1,000,000,000 plus, which helps us to the dynamic Eric was talking about avoiding Growth in expenses keeping below inflation because you think of us as rolling that expense taken out back into good things. This year will be I think $3,800,000,000 on technology initiatives. That's up from $21,000,000 to $22,000,000 by $500,000,000 or more and then sort of flattish $22,000,000 to $23,000,000 They're being applied in different ways.

Speaker 2

We added relationship managers across the board. We keep open in the branches. We're largely through the rehab of the branches that we're keeping and these are all spending to grow and that's what you're seeing. So net new checking account 600,000 for the year, That's 20 straight quarters net checking account growth, all good core accounts flows into the asset management business of $80,000,000,000 or more In our Merrill Edge program, the advertising has driven the business. We have 10% more customers and those customers, which is 300,000 to 400,000 customers added in the last 12 months, those Customers bring an average opening balance of $80,000 to $100,000 to give you a sense.

Speaker 2

They're not small accounts. That's good. So we're just investing, but There's a 1,000 levers. None of them are simple. But even this year, when we said we got to get the headcount growth back in In Alliance, after the great resignation in 'twenty two, when we had to hire FAST, we went from 218,000 people in January down to 212,900 at the end of the year.

Speaker 2

And In that, we're rolling over teammates from one business to another business where we need help and retraining people and reskilling people. And as AI comes in and to extent that we can deploy it wisely, it will allow us to redeploy people. And even with our very low turnover rate, which is 7% for year 23% and actually down from 12% in the year 2022 and I think 6% in the Q4. We still can manage headcount down just by not hiring people Because that gives an opportunity to hire 15,000 people this year. So we hire we can always hire a little less if we see the efficiencies coming through

Operator

Our next question is from Matt O'Connor of Deutsche Bank.

Speaker 9

Hi. Just thoughts on Capital allocation from here. Brian, I think there was some and sorry if I missed it in the beginning, but I think there was some media coverage About you guys, are you talking about leading into markets with capital? I don't know if there's any way to kind of size that? And then just broadly speaking, like How you allocate capital from here, buyback levels and all that stuff?

Speaker 9

Thanks.

Speaker 2

Yes. I'm not sure of the media report, but at the end of the day, Jim DeMar and team have done a great job deploying capital and growing market share in the sales and trading business. So they're up 7% Year over year in revenue, FICC was up 11% for the year. Equity was down a little bit of down 1% or so. And that's they've done a great job, dollars 17,600,000,000 of revenue, highest by a lot over the last few years.

Speaker 2

And think about it in the 2019 timeframe, We are $13,000,000,000 in revenues. They fundamentally moved up. That was deploying more balance sheet. You got a little bit more capital inherently, but not a lot. They're not taking a lot of risk.

Speaker 2

Made money every trading day in 'twenty three again, I think. And so they do a great job of serving the clients. So don't think there's a big capital, a massive amount of capital. They Get the capital they need. They have the balance sheet and the risk appetite they need, but we're continuing to Put money towards that business because they've proven to be successful.

Speaker 2

We gave them the balance sheet a few years ago and they were able to deploy. More broadly, We pay out the dividend. We then have a bunch of capital today. We meet the standards as best as Alistair said, we could divine from the rule and we'll see what the final rule looks like When it comes out, but right now the $194,000,000,000 of CET1 is the level of notional CET1. We have to meet The RWA inflation, I'm not saying it's a good rule.

Speaker 2

I'm just saying we make the math work. And so from now on, we can basically deploy capital to the dividend payment, a couple of $1,000,000,000 a quarter and then everything above that will go to support business growth if we have it, build a little bit of cushion we need to build over some period of time to meet these new rules If they come through and then share buybacks, which we bought $800,000,000 or so last quarter and you'd expect that to keep ticking up.

Speaker 9

Okay, that's helpful. And then you did mention that trading or markets is off to a good start so far this year, obviously just a handful of days, but Any color around that? And then kind of more broadly speaking, as we think about the overall wallet, like obviously banking is depressed, But how would you frame the market trading wallet? Do we use 2020 as a jumping off point and grow it by Some kind of long term trend or any way to kind of frame that in terms of the base case? Thank you.

Speaker 4

Yes. It's too early for us to predict what the quarter will look like. We'll get a much better feel for that 4, 5, 6 weeks from now. But I think you can use The 'twenty three numbers is a baseline starting point. And then for the Q1, I just applied sort of a typical kind of seasonality.

Speaker 4

Q1 tends to be a very good quarter for us, Q4 less so just with the client activity. And then I just recognize that we're starting from a Q4 record. So That's the only thing I would consider.

Speaker 9

Okay. Thank you very much.

Speaker 2

And then actually you had mentioned Investment Banking, Matthew and the team, you have Exceeded what we thought in the quarter and seemed to perform at better in the industry and actually we're up a little bit year over year, but there's a full pipeline and the question is Sort of when is the clarity and you're seeing some stuff get done and with stability in rates, you'd expect that to kick back up. We Typically, we're running about $1,500,000,000 before the added activity because of the rate following a pandemic a quarter. We're now $1,100,000,000 you expect it to move back in those We are actually been gaining share over the last few quarters as the market's gone down around as we held our Relative position grew it. So, I think Matthews and the team is in good shape and this middle market execution has added A lot of throughput to the team and is building up over time.

Operator

We'll take our next question from Glenn Schorr of of Evercore.

Speaker 10

Hello there. Good morning. First question is on the deposits. And I like the path that we've seen in terms of All the stimulus comps, all the deposits come in, you get some spending, you get some migration, you get some rich people buying treasuries, great. To see this $1,000,000,000 in the Q4 and hear your comments about 2024 for deposits is a little encouraging.

Speaker 10

We'd always want more, but it's a little encouraging. But my question is, to be 35% higher in 4Q 'nineteen Is what I would call a lot more growth than a normal period of time would be with the up and down. So Is that a good thing or is that a risk? And maybe the answer lies within how much of those excess deposits Are sitting in all these new accounts that you've opened versus just cash from sitting around and existing clients that Maybe waiting to be before I leave. I hope that question is clear.

Speaker 2

So Glenn, You're making me head deja vu because basically I think you would have asked this question in the Q1 of 'twenty three too on the theory that this was all going to run off. And so When we looked at it, we always said we had grown sort of in the period of the time the pandemic at sort of 4% or 5% a year in terms of deposit growth. If you strung that line out that we're still above that line, let's just say that. And now we're turning and growing. So as Alex said, we dropped in the middle of the year.

Speaker 2

So We've outgrown what our sort of implied growth rate would have been against size, So we feel good about that. It's all core. Now if you look at the online dynamics, think about the different clients we have. If you start with the wealth management clients Discreetly and gee, when those balances came down and are bouncing around $390,000,000 $390,000,000 $300,000,000,000 on a given day and they've been relatively stable now for, I don't, 5, 6 months, I think. If you look at the wholesale banking, what's happened is they came they shot up, came down after the pandemic and then they've been growing back and they're actually Stronger because just the activity is picked up in a stabilization of line usage as shows that The environment around their borrowing and cash is more consistent.

Speaker 2

So that's been good. And if you look at consumer, That's what we were saying earlier. If you think about consumer where you see, if you take the people had accounts for this, their balances and all their deposit accounts pre pandemic to now, If you look at people had in consumer, not in wealth management, you have $50,000 $100,000 $250,000 $1,000,000 in collective balances pre pandemic, They are down 20%. They move the money they're going to move. And so for wealth management and consumer, largely people who are going to move money out to get rate have done that.

Speaker 2

And is there is it still bouncing around a little bit in consumer? Yes, they're $950,000,000,000 more or less on a given day. But it's stabilized and been relatively consistent for the last year, 4, 6, 8 weeks, but that's got to settle in and then you grow out But that what that's really telling you is they kind of move the money they're going to move, mostly Because they did it and you don't get that money twice. So you moved a chunk in these higher end consumer balances. They moved 20% of their balances over and to get in money market funds, which we captured and other things.

Speaker 2

And They don't have to move again because that was accumulated balances that they had in a zero interest rate environment pre pandemic plus whatever Other things I got. So if you look at the Slide 8, you can see the deposit slides laid out by non interest bearing and interest bearing. But the key is that consumer with $700,000,000 going into the pandemic sits at $950,000,000 today. And if you look at the checking, it's still up $140,000,000,000 and that's kind of bouncing around. You can see It's moved down a little bit, but that's really the high people with high end checking balances that have moved it into the market.

Speaker 10

That's all good and more than I was looking for. I appreciate it. The quick follow-up on reserves now. As you mentioned, Tom

Speaker 2

Just one back to look at the consumer banking page. It's 47 basis points all in. And it was 6 4 or 6 quarters ago. And so and that's all driven by the CDs. We now have a lot of CDs and some of the high end money market pricing.

Speaker 2

But the point is, if it was going to be moved, it's Think about that, Dina. So the money that's moved has moved and we pay higher rates for very high balances and stuff like that, so especially Like the Merrill Edge platform, so a lot of that dynamic is for the system right now, for lack of better term.

Speaker 10

That was great. Good comment. I appreciate that. Quickly on reserves is, with a pretty solid economy, resilient U. S.

Speaker 10

Consumer, your NPLs are down, you have a lot of reserves. The question is, what are the signposts that you or we should be looking for to know when you've added enough, when we are stable enough point in time and you actually start

Speaker 4

I think we're getting pretty close now, because Things are beginning to stabilize. They're beginning to normalize. The whole this appeared to transition for the economy And it's a period of transition for our clients too. A lot of them are dealing with higher interest rates and they're just beginning to moderate and change their spending behaviors. So We've seen a trend over the course of the past few quarters.

Speaker 4

It's pretty predictable around the consumer side. You can see that in our disclosures. I think it's Slide 12 and 13, but that's going to bounce around with of course the next couple of quarters now that we're back towards 2018, 2019 levels is going to settle in, we think in the first half of this year. And then on the commercial side, the asset quality remains Really in a very good position. We happened to have a couple of names that popped up this quarter.

Speaker 4

But to your point, we were pretty fully reserved against them. That wasn't a surprise to us. We've been Seeing those for the course of the past 6 months. So we think we're getting close there, Glenn, and obviously the closer we get to a soft landing, the better we're going to feel about that.

Speaker 2

As you think about it, when you said reserves, remember because under sea sold stuff, we've always got sort of the lifetime reserve methodology, which we're all still Getting clear now, we've operated under for a few years. But this quarter, we actually had commercial reserves come down to pay for the charge offs on the Specifically prior period reserved properties or loans and that happened. And so you saw some of that. Be careful on the consumer side because basically The pay as you go side, the consumer side is still building up to a nominal amount of charge offs consistent where it was in 2018, 2019. So if you look at card In 2018 2019, the charge off rate across the eight quarters range from a low at $290,000,000 and a high at $326,000,000 We're at $307,000,000 today, But we're $6,000,000,000 $8,000,000,000 higher balances, so you got to be careful the nominal amount to get that right.

Speaker 2

If you go look at it more broadly, Yes. And all the company, we're at a 45 basis points this quarter in the range in those 8 quarters of 34 to 43, but what's different is the CRE piece of that and the charge offs. So Yes, the reserve to loans and all the classic factors you look at are very strong. The reserve has set itself with basically Half the reserve is driven by the adverse case scenarios to give you a sense versus the base case and then some judgmental on top of that. And so as it It becomes clear that we're in a soft landing to Alistair's point.

Speaker 2

There's less allocation to those scenarios. We always will make some. But when you put all that together and wait it, it has unemployment pushing Up in the high 4s and you look at unemployment today, it's nowhere close to that and there's no prediction to get there in a base case. So that's what will start to Ease up on the general reserving, but remember on card, it's a bit of pay as you go. And we were running around 6% reserves were up to 7% against card now.

Speaker 2

So there might be a little bit coming back, but not that. I'd rather have the growth to sop that up down to 6

Operator

We'll take our next question from Ken Usdin of Jefferies.

Speaker 3

Hey, thanks. Good afternoon. Just a A clarification on that Bisbee $1,600,000,000 so I presume that that you start to get that back Mid quarter 4Q next year given the November 15, 2024 termination? And then does it just run out ratably? Just wondering how over what exact period of time you get that $1,600,000,000

Speaker 9

Yes. Okay.

Speaker 2

Hey, Ken, happy New Year. It's this year's 24, so

Speaker 4

Sorry, again, yes, you got it right. We'll get some of it back at the back end of 2024. So we'll get a little bit in the Q4. And then I'd say we get most of it back in 2025, most of the remainder back in 2016. That's the easiest way to

Speaker 3

Okay. So it's a little so is it straight line or is it a little bit front like I just want Is it just a straight line divided by or is it has a little bit of like a tail?

Speaker 4

No, it's got a little more in 2025 than 2026.

Speaker 3

Okay. Okay. I got it. Thank you. And just one question, could you just remind us the brokerage fees this quarter felt the impact, I think you said it, Of the soft averages from this quarter and so I think should we expect to see just from the market's bounce that we saw in the 4th quarter that To play well into the Q1 starting points from the management fees perspective?

Speaker 4

Yes, I think you should expect our global markets performance to continue right now. I mean, obviously, there's a pretty constructive environment for the markets business at this point. I don't think anything has changed there. There's a lot of client repositioning going on. So, yes, I think the Q4 is sort of the right number to start with.

Speaker 4

And then you just got to, I think, adjust for the fact that obviously you've got a step up in your activity in Q1. If you're I don't know if I misinterpreted, if you're talking about the wealth management, then those fees are obviously just going to work on the monthly lag based on where the markets go over time. So, obviously, the markets are elevated right now and that should pretend well for the future.

Speaker 3

That's what I was getting at. Yes, thank you. Right. Just confirming that we didn't see the benefit yet that comes further based on the averages and how that will play forward presuming the market hangs in there.

Speaker 4

Correct. That tends to be a lag by a month or so. So you'll see that in Q1.

Speaker 3

Okay, got it. Thank you.

Operator

We'll take our next question from Ryan Kenny of Morgan Stanley.

Speaker 11

Hi, thanks for taking my question. Just following up on a few questions ago on the commercial credit side. So the commercial net charge offs did roughly double sequentially. You mentioned that there were a few customers that popped up. Should we interpret that to mean that the pace of deterioration decelerates and it was just A one off or is there anything else going on under the hood there?

Speaker 4

Yes. So I don't think let me put it this way. I think it's too early to conclude that it's ending other than just a Momentary spike up, but if you look at that chart, essentially what's going on is 2 things. First, we've got a little bit of office And that's going to bounce around over the course of time. It just takes a while to resolve that portfolio.

Speaker 4

It's pretty small for us obviously. We feel like we're doing all the right things with it, but that was a little elevated this quarter relative to the prior 3. And then more broadly in commercial, there were a couple other things that This quarter, again, we were pretty fully reserved against them. So, we sort of saw those coming. Asset quality generally in commercial remains in a very, very good place outside of the office sector.

Speaker 4

And you can again see that in terms of look at our reservable criticized that This quarter, so I don't think there's any change there. The issue is just that we're starting with such small numbers in commercial that anything appears like a

Speaker 11

spike. Thanks. And just one more clarifying question on NII. So in this scenario with the 6 rate cuts, Can you help us understand how you expect the deposit mix to migrate? And specifically, would the migration from NIP to IP deposits No grinds will halt or is there any scenario where NIP deposits actually start growing again?

Speaker 4

Well, I think what we're trying to describe is a sense that we're getting towards the tail end of this now, partly because we're now 6 months away from the last time that the Fed raised rates. And then partly because if we do have rate cuts, It's going to start to disincent people moving out of non interest bearing. So That's what we're describing over the course of time. We got to see how that develops through the course of the year.

Operator

Thanks. We'll take our final question from Gerard Cassidy of RBC.

Speaker 12

Hi, Brian. Hi, Alistair. You guys have obviously done a very good job in the consumer banking area with Digital Banking. And I frame them for you guys in this question. We hear a lot about AI and what it could do for the banking industry.

Speaker 12

And when you look out over the next 3 to 5 years and you invest in AI to improve efficiencies, could it have A similar impact what digital banking did for consumer banking pre iPhone to where we are today in your business? Or is it going to be more like blockchain There was a lot of discussion about the future of blockchain, but we don't hear much about that anymore. Do you guys have a view on what AI could be for your business over the next 3 to 5 years.

Speaker 2

I agree with you. I'm not sure that there's a relevant comparison to blockchain, but let's Just focused on AI. If you look at 'twenty one, you can see the digital movement. One of the things in the digital movement you see is Erica, in the lower left hand page Lower F10 chart on Page 21, Gerard. And you can see that in the Q4, the 170,000,000 interactions with Erica Where people effectively answered on question and there are 2,000,000 people from last year to this year using it on a base of 16,000,000 up to 18,000,000 people using it unique users.

Speaker 2

And that's just an example and that's AI in early stage. We built that starting 10 years ago. It operates on our data, use natural language Processing, we have to keep updating that for the way people use words that process, but I think 170,000,000 phone calls, Walks into branches, emails, etcetera, where that inquiry would have to go through another place and it's able to clients to do things and find them. So We think that there's vast promise for AI and we're deploying in places a lot of internal stuff. We've helped employees work better, work faster.

Speaker 2

We're doing it. We have it in our coding shop. There's coders using it to continue to improve their effectiveness and learning it. But it's still there's still the care that has to be taken on data and usage and models and accountability. It's all that stuff Still high, so we're using for things that are a little easier and we think it has great promise.

Speaker 2

It's just going to I'd say it's going to be more similar to digital. What the pace will be, it will be a little bit of how far it can go before you start to run into difficulties applying it effectively. But It plays off of the same thing that we've done in digital and Erika and other things. We brought Erika over to the commercial side now so that CashPro uses Erica to answer questions and we're seeing uses of that grow and you can see the customers can interface and be comfortable with it and that's good. So it will have tremendous help, as it's applied in more and more ways.

Speaker 2

We are still trying to hear and seeing if it really works, how much Benefit it generates, it can be controlled under the model outputs controlled and also the things. But we've had Algorithmic machine learning type models all over our company for years. And so the billions we've spent literally over the last 10 years on data, finally knows data Or you're getting the data in the right place, making sure it's dependable and the models operated at Eberunder that aren't these open autonomous natural language models, but are models Machine learning models, we've seen great promise. That's partly how we operate the company now, basically on a same dollar amount of expenses we had in 2015 or 2016, To give you a sense, so yes, it's been digitization, but it's also been using more of that. So it's got we have high hopes for it.

Speaker 2

We just have to make sure it does a great job for the customer.

Speaker 12

Very good. And then as a follow-up, we've been reading and seeing a lot of information about The private credit markets making inroads continue and we know the shadow banking industry has been around for a long time, our entire careers. What are you guys seeing today? Is it more competitive against the Apollos and Blackstones in lending? And then second, They're also, I'm assuming customers a year or so.

Speaker 12

How do you balance servicing them, but at the same time they could be a direct competitor in the lending markets?

Speaker 2

Well, that's all the issues that we got to balance on a given day. But and we can originate loans into their platforms and There are lots of things we can do. So we continue to work through that. I think to take it more broadly, my colleagues and I have made clear The strictures around our industry, the methodology operating and the openness and ability to operate outside has led to the mortgage business largely being done outside the industry In most other asset classes, for lack of better term, being outside the industry and the private lending is just another case of that. And I think We're very competitive.

Speaker 2

We do a great job and we have $500,000,000,000 of commercial loans outstanding. We have 100 of 1,000,000,000 of dollars of mid sized companies, Etcetera. So we think there's a way that we can do this with our clients and help them and help us. A lot of them are asking, can you help us Originate loans, I think it's still a question ahead of whether the policy of having more things going on in the bank industry is a good policy. Of course, we in the banking industry don't think it's a good policy, because the reality I think and one inherent part of your question was when these companies bounce around Because of economic stress or in their for them as an operator, the banking system has a workout methodology, Not a liquidation methodology or trading methodology and that served American Enterprise very well.

Speaker 2

And so I think we have to be fair and see how it affects the economy that way and those are issues that were true pre pandemic and have become more acute. So we feel we'll be competitive no matter what. Nothing scares us. We've got a great team and they do a great job. But it's endemic of the issue that if you keep pushing too much capital regulation, Stuff will find its way outside the system and that doesn't mean the risk has changed.

Speaker 2

It just means it moved from purview of the regulators and that's one of the points we make. But On the other hand, we are working with those enterprises to help us be a combined effective competitor.

Speaker 12

Very good, Brian. I appreciate it.

Operator

This does conclude our question and answer session. I'd be happy to return the call to Mr. Brian Monahan for closing comments.

Speaker 2

Happy New Year to everyone. Thank you for all the time today and on a very busy day with lots of us reporting. As we summarized, Q4 was a good quarter and Another strong year for our company driven by organic growth from all our customer segments. Our digital capabilities continue to grow. Our Deposits and loans grew and that's good news.

Speaker 2

Our NII continues to exceed what we tell you each quarter in terms of what we think is going to happen, which is good news. We gave you new guidance, which we plan to hit. Our capital markets activity remains good on both the investment banking side and the sales trading side. And importantly, to get the value of that revenue, we have to have good expense management. You saw us during the course of the year take headcount down from $218,000 to 212 $1900 You saw us take the expense down sequentially, sets us up good for next year.

Speaker 2

And with all that, our capital And asset quality remains strong as does our liquidity. So thank you and we look forward to talking to you next quarter.

Operator

This does conclude today's Bank of America earnings announcement. You may now disconnect your lines and everyone have a great day.

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Earnings Conference Call
Bank of America Q4 2023
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