Bank of America Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
April 18, 2022

There are 8 speakers on the call.

Operator

Day, everyone, and welcome to today's Bank of America Earnings Announcement. At this time, all participants are in a listen only mode. Later, you will have an opportunity to ask questions during the question and answer session. Please note this call may be recorded. It is now my pleasure to turn today's program over to Lee McIntyre.

Speaker 1

Good morning. Thank you, Catherine. Welcome. I hope everybody had a nice weekend and thank you for joining the call to review the Q1 results. I trust everybody had a chance to review our earnings release documents.

Speaker 1

As always, they're available, including the earnings presentation that We'll be referring to during this call on our Investor Relations section of the bankofamerica.com website. I'm going to first turn the call over to our CEO, Brian Moynihan for some opening comments and then ask Alastair Statements and refer to non GAAP financial measures during the call. These forward looking statements are based on management's current expectations and the assumptions that are subject to risks and uncertainties. Factors that may cause actual results to materially differ from expectations are In our earnings materials and our SEC filings that are available on the website. Information about non GAAP financial measures, including reconciliations to U.

Speaker 1

S. GAAP can also be found in the earnings materials that are available on the website. So with that, take it away, Brian. Thank you, Lee, and good morning to all of you and thank you for joining us. As we open our earnings call this quarter, We want to acknowledge that there's a the humanitarian crisis continue to take place in Ukraine and remain watchful in providing assistance from our company to the Ukrainian citizens Before we get into some discussion on the current outlook and activity, I want to step back and focus on the big picture about Bank of America In a quarter that had a lot of variables show up, we delivered responsible growth again.

Speaker 1

We reported $7,100,000,000 in net income or $0.80 We grew revenue, we reduced costs and we delivered our 3rd straight quarter of operating leverage coming out of the pandemic. Net interest income grew 13% and is expected to grow significantly from here. We saw strong loan growth. We grew deposits. We saw strong investment flows.

Speaker 1

We made trading profits every day during the quarter. We grew pre tax pre provision income by 8%. We had a return on tangible common equity of 15.5%. All this came in that quarter that saw geopolitical conflict, rising interest rates, the pandemic, rising inflation I want to thank our team for delivering on a responsive growth once again. So if you look at the statistics on Slide 2, You can see some of those highlights.

Speaker 1

You can see the organic growth engine that our company is delivering once again. In our banking business, you can see the strong loan and deposit growth. We grew and expanded customer relationships across every business. In fact, we grew net new checking accounts by more than 220,000 this quarter alone. We opened new financial centers and we renovated many others.

Speaker 1

We added more digital capabilities across 50% in digital sales. In our Wealth Management businesses, you can see over $160,000,000,000 of client flows over the year and more than $4,000,000,000,000 in client balances, including Merrill Edge. We saw both strong investment flow performance in addition to banking flows. Over the past year, we brought on a significant number of net new households, 24,000 in Merrill and another 2,000 in the Private Bank. Across the combination of our consumer and wealth businesses, we saw more than $90,000,000,000 We now have managed client balances, including deposits loan investments of more than $5,000,000,000,000 with us.

Speaker 1

In Global Markets, Jim Demar and his team had a solid quarter of sales and trading results, which included a record quarter for equities. Despite the market turmoil, we had 0 days of trading losses. While the investment banking fee line was down from the record quarters of the past year, Matthew Koehler and his team produced solid results With a strong forward pipeline and we gained market share in several areas, including moving to number 2 in the mid cap investment banking. From a broader enterprise perspective, part of managing cost well comes from the drive we have in the company to provide enhanced digital capabilities to our customers, which in turn drives adoption for the digital engagement and lower costs. If you look at Slide 23 and beyond, you can see we are now selling more digitally than we are in person.

Speaker 1

It takes both to be successful. What makes them even more impressive is all the financial centers are now open and back to operating at their usual grade capacity. So adding the digital capacity clearly increases our total production capabilities. You can also see our digital sales are now twice the pre pandemic level just 3 years ago. Even more impressive, look at Zelle and Erica volumes up more than 4 times in pre pandemic levels.

Speaker 1

We're now More outgoing Zelle transactions and checks. In our CashPro mobile app with our commercial clients, we see many $5,000,000,000 usage days. A lot more stats in the slides showing strong digital growth. I commend them to you to see how a high touch, high-tech, innovative company drives organic growth. This quarter, our resilience was tested.

Speaker 1

Once again, we maintained a focus on what we can control and grew responsibly and earned our way through the turmoil. So if we talk to you during the quarter, many of you expressed questions about the impact of the macro environment and changes in our company. The lingering impact of the pandemic on supply chains and business opportunities, inflation and Fed reduction of monetary accommodations, The impacts of the Russian Ukraine war, both on the first order effect and second order effects. We do remain mindful of all these. So could a slowdown in the economy happen?

Speaker 1

Perhaps. Right now, the size of the economy is bigger than pre pandemic levels. Consumer spending remains strong, unemployment is low and wages are rising. Company earnings are also generally strong. Credit is widely available and our customers' usage of their lines of credit is still low, They have capacity to borrow more.

Speaker 1

We are all focused on the ability of that to use their tools to reduce inflation. Yes. We all know that will take interest rates, rate hikes and a reduction in the balance sheet. We predict it will slow the economy from 3% growth in 2022 to a little below 2% in 2024 in 2023, excuse me. That is back to trend.

Speaker 1

So with interest rate hikes comes better NII. Could the Fed have to push harder to sell inflation perhaps? That is why we run stress test each quarter to look at scenarios to see what would happen in a highly inflationary environment. If rates are passed, are there implications to capital? Sure, it is hot summer this quarter.

Speaker 1

But in the context of the capital built, those impacts are manageable. The impact increases earnings also. And then over time, the bonds pull back to par. All that results in a rebuild of the capital quite quickly. But for some short period of time, that capital usage along customer uses might slow share repurchase at a bit, It will be temporary.

Speaker 1

What if we're wrong and things do get tougher? We already know what that looks like. In 2020, as we built We also built 90 basis points of capital during the economic shutdown period. Rates moved against this and earnings fell, So we have already proven resilient. We continue to focus on responsive growth and the things we control.

Speaker 1

If you go to Slide 3, I want to mention show some of the strength we see in our U. S. Consumer base. Bank of America consumers spent at the highest quarter one level, which is double digit percentage increase over the 2021 level that you can see in the upper left. From our card spend data, we have seen a strong recovery in travel, entertainment and restaurant spending.

Speaker 1

In the upper right, you can see that. By the way, even with fuel costs up 40% And more from last year. Fuel represents about 6% of overall debit and credit card spending And a lot less of overall spending, as cards you can see in the lower left is 21% of all spending. Importantly, despite March of last year, including the stimulus bonus, We saw the spending in the month of March 2022 on a comparable basis to 2021, 13% higher by dollar volume And we saw a 7.4% increase in the number of transactions. So both dollar volumes and numbers of transactions rose nicely.

Speaker 1

And as you would expect, The message by which people spend continues to shift away from cash and checks to be replaced with digital alternatives, and you can see that below. Our data shows continued growth in the average deposit balance across all customer levels, which suggests capacity for strong spending continue. On an aggregate basis, average deposit balances were up 47% from pre pandemic levels and 15% higher than 2021. And the momentum continued through quarter 1, particularly in the low balance accounts, which grew in February to March, continuing to streak since mid last year. Now a couple of examples, so you can see how this works.

Speaker 1

We looked at the pre pandemic customers who had $1,000 to $2,000 of clear balance Today, we have at that time, pre pandemic, they had an average balance of $1400 You take that same cohort of customers, the same customers in 2022 versus 2019 and they have an average cleared balance Now at $7,400 so an increase from $1400 to $7,400 If you go to the next Cohort up goes with $2,000 to $5,000 of cleared balances in the pre pandemic. Their average was $3,250 Now, the same customers today have an average credit balance of $12,500 What does that tell us? The consumers are sitting on lots of cash. Why is this true? Well, you know, high wage growth, high savings, limited by limited enabled spending.

Speaker 1

What it means is a long tail to consumer spend growth. And in April through the 1st 2 weeks, spending is growing even faster at 18% over April 2021. Another economic sign posted the continuation of loan growth. A year ago, we highlighted the green shoots of our loan growth. We then delivered growth in quarter 2 and quarter 3 and quarter 4 despite PPP runoff and the changing To convey where we are today, we focus on ending loans to give you a progression through the quarter.

Speaker 1

If you go to slide 4, You can see the highlights of that growth in the upper left of the slide. I would remind you that in quarter 4, we highlighted to you that of the $55,000,000,000 of growth in that single quarter, dollars 16,000,000,000 was global markets. We did not expect that to hold true for Q1 of 2022. So as we thought, global markets did come down $5,000,000,000 this quarter. Despite that, overall commercial loans grew $13,000,000,000 from quarter 4, excluding PPP.

Speaker 1

That means commercial loans, Excluding global markets grew $17,000,000,000 Every single customer group, global banking, large corporate middle market, business banking grew as well as commercial loans and wealth management. That improvement came from both new loans as well as improving utilization rates from existing clients. You can see in the top chart, loans have moved back above our pre pandemic levels on the right hand side of the slide, and you can see it being led by commercial. Consumer loans continue to grow late quarter as well. This is despite typical seasonality and despite the continued suppressed credit card balances you can see in the lower left.

Speaker 1

Mortgage loans grew $4,000,000,000 originations remained at high levels and paydowns declined. Card loans declined $2,000,000,000 from quarter 4, Driven by the transfer of $1,600,000,000 attendee card loan portfolio to the held for sale category. Absent that transfer, card loans would decline very modestly, whereas the previous quarter 1 quarters, they've declined several 1,000,000,000. On Slide 5, we provide data around consumer Clients' leverage and asset quality as compared to pre pandemic periods, which further supports our belief that consumer remains in a good shape. On the upper left, we looked at our customers that have both a credit card and a deposit account with us.

Speaker 1

As you will note, the average card balance of our credit card customers The HAD deposit relationships are still 8% lower than they were pre pandemic. They continue to pay down their balances on a monthly basis at a higher rate than pre pandemic. And as you know, delinquency rates are significantly lower. Further, as you can see to my earlier point, these borrowing customers have built Significant additional savings on average deposit balances are up 39%. So a lot of strength or dry powder as a scull.

Speaker 1

So what if we went to the more Modest FICO, more modest amount of low FICO customers we have at BSE. Looking at that small subset of our base, you see a similar trend, even stronger on cash balances And you see in the bottom charts, we believe this is not just a phenomenon of BSE as industry data points around debt service levels are hovering near historic lows and Household deposit and cash levels are $3,000,000,000 higher than we entered the crisis. Now, a word on Russia. This is not an area of material direct exposure for Bank of America. More than a decade ago, we've reduced our exposure in Russia And it's resulted in having 90% less before the most recent crisis.

Speaker 1

Our current very limited activities in Russia are focused on compliance with all sanctions and other legal and regulatory Our lending and counterparty exposure to companies based in Russia totals approximately $700,000,000 and is limited to 9 Russian based borrowers is largely comprised of top tier commodity exporters with a history of strong cash flows and continue to make payments. Prior to the Ukrainian invasion, these exposures were mostly investment grade. We report all of them and our reserve were criticized. Our quarter 1 allowance includes increased reserves for this direct exposure. And I just note that even with addition of these loans to reserve or criticize, We still declined $1,700,000,000 in this category during the Q1.

Speaker 1

We continue our daily monitoring of sanctions and interest payments, which might impact these loans. We also evaluate our portfolios and continue to do so considering second order impacts of this crisis. Currently, we believe this to be modest and reflect our international strategy to focus on large multinational clients that have geographically diverse operations. Our quarter 1 allowance for credit loss reflects all of these things as well. On Russian counterparty risk, Our teams have done a tremendous job of mining down our exposures.

Speaker 1

At the end of the quarter, we have de minimis, meaning less than $20,000,000 counterparty exposures with a single Russian based counterparty and very limited impacts from quarter in any of those impacts are in our trading results for this quarter. The responsible growth has served us well here. And if you might note, after the 2014 Crimea conflict, we intentionally reduced our And Russia has not been our top 20 country risk exposure table since 2015. A few comments on NII. On NII, remember the rate increases came late in the quarter and had little Q1 2022 NII impact.

Speaker 1

And there were 2 fewer days of interest in the quarter And decreased PPP fees hurt NII growth, yet we still grew NII by $200,000,000 in line with our guidance we gave you last quarter. Given the forward curve expectation for higher interest rates and our expectations of further loan growth, We expect significant NII improvements through the next several quarters. Alistair will expand on this point for you. We have more than $2,000,000,000,000 of deposits And $1,400,000,000,000 of those are with our consumer wealth management clients with more than 40% of those in low to no interest checking. That is a franchise that is a rival.

Speaker 1

We will benefit as the rates move off the 04s, allowing us to burn more money on those checking deposits. Deposits, I know some several of you are wondering if deposits continue to grow as rates begin to rise. So we went back and looked at the last rate rising cycle In the last decade, we pinpointed that peak rate paid to customers during the quarter reflective of this peak Fed tightening. We then went back and looked at the 12 months preceding growth rate in deposits. And in fact, during that 12 months preceding that peak, deposits grew 5%, driven by organic growth engine, our market share gains and overall economic growth.

Speaker 1

If you go to Page Slide 6, you can see the comment that we're going to talk about capital. Just to start off, our capital remains strong with 10.4 percent CET1 ratio well above our 9.5% minimum requirement. As you can see, dollars 7,000,000,000 of earnings, net of preferred dividends generate 41 basis points of capital. As you Look on the right hand side of the page, you can see the 14 basis points of that capital was used to support our customers' growth. That's a good thing.

Speaker 1

We also returned $4,000,000,000 to shareholders in common dividends and share repurchase. We represent about 27 basis points of use. The spike in treasury and mortgage backed securities rates caused the fair value of our AFS debt securities decrease and lowered our CET1 by 21 basis points. That's the part that goes through the calculation of capital. While one wouldn't expect this impact every quarter, we're well positioned As you recall, we invested much of our securities books and held the maturity due to our huge excess and stable deposit base.

Speaker 1

We have $2,000,000,000,000 deposits and less than $1,000,000,000,000 in loans. In addition to be cautious, we hedge a large portion of securities in the AFS portfolio I remind you as the securities mature, the AOCI reverses And the higher rates result in higher NI over a relatively short period of time. That should result in higher earnings that will benefit CET1 ratios on an ongoing basis and more than The last thing I would note is our balance sheet growth to support our customer means our GSIB buffer We'll probably move higher by 50 basis points beginning in 2024, I. E. To 10% regulatory minimums.

Speaker 1

Well, this is nearly 2 years away. We continue to move towards it. Given this new hire minimum over the next couple of years, we look to gradually move to target CET1 range of 10.75% towards 11%. Importantly, while we grow into this range, we'll be able to support our clients, Thank you, Brian. And I'll start with the summary income statement on Slide 7, where you can see our comparisons illustrating 3% year over year operating leverage Produced by growing revenue and managing our costs well.

Speaker 1

That was nearly enough to overcome the change in provision expense, driven by the $2,700,000,000 reserve release in the year ago period compared to $400,000,000 released this quarter. On asset quality more broadly, we continue to see very strong metrics. Net charge offs remained low And in fact, they're down more than 50% in just the past year. Consumer early and late stage Delinquencies are still below 2019 levels and reservable criticized move lower again in Q1. Looking ahead, we continue to feel good about the asset quality results of our consumer and commercial businesses near term, given our customers' high liquidity, Low unemployment and rising wages.

Speaker 1

We produced good returns again this quarter with an ROTCE of nearly 16%, And we delivered $4,400,000,000 of capital back to shareholders, driving average shares lower by 6% year over year. Looking forward and with continued expectations of growing NII, combined with strong expense control, We expect to drive operating leverage and see our efficiency ratio work back towards 60%. Let's turn to Slide 8 and the balance sheet. And you can see during the quarter, our balance sheet grew $69,000,000,000 to a little more than 3,200,000,000,000 This reflected $14,000,000,000 of growth in loans and the growth of our global markets balance sheet as customers increase their activity with us. A decline in cash this quarter was associated with that growth in global markets.

Speaker 1

Our liquidity portfolio was stable compared to year end and at $1,100,000,000,000 it represents roughly a third of the balance sheet. Shareholders' equity declined $3,400,000,000 from Q4 with a few different components I would note. Shareholders' equity benefited from net income after preferred dividends of $6,600,000,000 as well as issuance of $2,400,000,000 in preferred So that's $9,000,000,000 that flowed into equity in Q1. And we paid out $4,400,000,000 in common dividends AOCI declined as a result of the spike in loan rates that Brian referenced, And we saw the impact in 2 ways. First, we had a reduction from a change in the value of our AFS debt securities.

Speaker 1

That was $3,400,000,000 That's the piece that impacts CET1, as Brian noted. And second, rates also drove $5,200,000,000 decline in AOSI from derivatives that does not impact CET1. That reflects cash flow hedges against our variable rate ones, which provides some NII growth and protected CET1 at the same time. With regard to regulatory capital, since Brian already talked about CDT-one, I'd simply note that our supplemental leverage ratio stable at 5.4% versus the minimum requirement of 5% and still leaves us plenty of capacity for balance sheet growth. And our TLAC ratio remains comfortably above our requirements.

Speaker 1

Turning to Slide 9, we included the schedule on average loan balances. And in the interest of time, the only thing I would add to Brian's earlier comments And for your perspective, simply a reminder that PPP loans are down $19,000,000,000 year over year. There's just a few billion of those left. And excluding PPP, our total loans grew $89,000,000,000 or 10% compared to last year. Moving to deposits on Slide 10.

Speaker 1

First, let's look at year over year growth. And across the past 12 months, we saw solid growth across the client base as we deepened relationships and added net new accounts. Our year over year average deposits Are up $240,000,000,000 or 13%. Retail deposits with our Consumer and Wealth Management businesses Grew $190,000,000,000 and our retail deposits have now grown to more than $1,400,000,000,000 where we lead all competitors. Looking at linked quarter growth from Q4 and combining consumer and wealth management customer balances, Our retail deposits grew $53,000,000,000 in just the past 90 days.

Speaker 1

With our commercial clients, they're up nicely year over year, And we simply note the Q1 decline, which is entirely consistent with previous year's seasonal trends. Turn to Slide 11 and net interest income. On a GAAP non FTE basis, NII in Q1 was 11 point $6,000,000,000 and the FTE NII number was $11,700,000,000 So I'll focus on FTE. Where net interest income has now increased $1,400,000,000 from the Q1 last year. As Brian noted, that's 13% increase driven by deposits growth and our related investment of liquidity.

Speaker 1

NII was up $200,000,000 versus the 4th quarter as the benefits of lower premium amortization and loans growth More than offset the headwinds of 2 last days of interest accruals and lower PPP fees. So let's pause for a moment to discuss asset sensitivity because I want to make a couple of points as we begin Well, the Fed has signaled to be a significantly hike period. Remember, Asset sensitivity is our measure of NII for the next 12 months above an expected baseline of NII, given changes in interest rates and other assumptions. In an environment of sharply rising rates each quarter, the baseline of NII, Actual NII increases and therefore the future sensitivity declines. Now we typically disclose our asset And on that basis, asset sensitivity at March 31 was $5,400,000,000 of expected NII over the next 12 months, And 90% of that sensitivity is driven by short rates.

Speaker 1

That $5,400,000,000 is down from 6,500,000,000 At year end, largely because higher rates are now factored into and running through our actual Now you asked the question last quarter about the same sensitivity on a spot basis relative to our current curve. And given that the yield curve is projecting 125 basis points of rate hikes over the next three meetings, we thought it was appropriate to provide that disclosure. So in a 100 basis point shock to the current curve using spot rates, Our sensitivity to that kind of move would be $6,800,000,000 or $1,400,000,000 higher than on a forward basis. So assuming rising rates as reflected in today's forward curve and if we see continued loans growth, I would just reiterate what we said last quarter But we expect to see robust NII growth in 2022 compared to 2021. We're not going to provide numerical guidance for the full year because the changes in interest rates have proven quite volatile in The last 90 days, let alone a year.

Speaker 1

We do provide that asset sensitivity so that you can use it as guardrails to think about changes as you modify your own assumptions. I do, however, want to provide a nearer term expectation And say that if loans grow and rates in the forward curve materialize, we would expect to see NII in Q2 Increase by more than $650,000,000 over the Q1 level and then grow again significantly Okay. Let's turn to expenses, and we'll use Slide 12 for that discussion. Our Q1 expenses were $15,300,000,000 down a couple of $100,000,000 from the year ago period. I'll focus my remarks on the more recent comparison versus Q4, where we're up $600,000,000 And as expected and we conveyed to you last quarter, The Q1 increase was driven mostly by seasonality of payroll tax expense of roughly $400,000,000 We also experienced modestly higher wage We modestly increased our full year new tech initiative budget for the year to $3,600,000,000 And that's on top of That's on top of more than $35,000,000,000 that we put to work over the past 12 years to help us build Powerful, more secure and scalable technology platforms.

Speaker 1

This is the investment that's allowed us to maintain a leadership position in patents among our peers. We had 5 12 of them granted in 2021, and we're maintaining a similar pace this year. We think this is one of the things that's helping us to protect our moat around leadership positions in places that matter most to customers. In addition to modestly higher marketing costs this year, investments also include adding up to 100 new financial centers, and we also plan to renovate more than 800 more during the year. We will also continue our upward march on minimum hourly wage toward $25 by 20.25.

Speaker 1

So How do we pay for all that? Through continued work on operational excellence and digital engagement. And as we look to Q2, we expect our expenses to be down modestly from Q1 as much of the seasonal payroll tax expense abates Travel and client entertainment because it feels like we've got a lot of pent up demand for face to face meetings by our clients and our people. So let's turn to asset quality on Slide 13. And as you can see, asset quality of our customers remains very healthy.

Speaker 1

Net charge offs this quarter were better than our expectations once again and remained below $400,000,000 down 52% compared to Q1 2021. Provision expense was $13,000,000 in Q1 as reserve release of 3 $2,000,000 closely matched net charge offs in the quarter, and that reserve release was primarily in our consumer portfolios. On Slide 14, we highlight the credit quality metrics for both our consumer and commercial portfolios. And I'm happy to answer any questions later, but Russian lending exposure in reservable criticized, those levels still declined $1,700,000,000 from Q4. NPL saw a modest increase and that simply reflects a small amount of consumer real estate deferrals expiring with the expiration of the CARES Act.

Speaker 1

Turning to the business segments, one thing we'd ask you just to keep in mind for each of the businesses is Q1 includes the seasonal payroll tax expense, which has negatively impacted efficiency ratios or profit margins in Q1. Also, and as usual, Q1 of every year includes segment capital level evaluation. And you'll note we put additional capital against And as usual, we've tried to include business trends and digital stats for each segment. So let's start with Consumer Banking on Slide 15, where you can see the Consumer Bank earned nearly $3,000,000,000 That's 11% up over Q1 2021 as revenue growth more than offset the larger prior period reserve release. It's probably most easily identified by looking at pretax pre provision earnings, which grew 32% year over year.

Speaker 1

Revenue grew 9% on NII improvement And expense declined 4%, creating 13% operating leverage and the 4th consecutive quarter of operating leverage Notable customer activity highlights included our 228,000 net new checking accounts opened in Q1, which represents our 13th consecutive quarter of net new consumer checking account growth. Now this occurred as we began to implement our previously announced insufficient funds and overdraft policy changes, which lowered our service charges about $80,000,000 So during this time, we saw accounts grow and we saw expenses decline. We also grew investment accounts 7% And we saw those balances grow 10% from Q1 'twenty one to $350,000,000,000 and that included $20,000,000,000 of client flows. And once again, we opened nearly 1,000,000 credit cards in the quarter and grew average active card accounts and saw growth in combined credit and debit spend of 15%. Our continued investment in digital capabilities drove activity with our as we crossed 50% in digital sales this quarter and we continued investment in our financial centers, opening another 8 in the quarter.

Speaker 1

It's also worth noting that small business saw continued growth in loans, in deposits and in spending. Small business card spend I'd also draw your attention to Slide 22 in the appendix. We shared this with you previously, and it simply highlights the origination Moving to Slide 16. Wealth Management produced strong results earning 1,100,000,000 And that represented 28% year over year growth, driven by strong revenue improvement, good expense management and low credit costs. Bank of America continues to deliver wealth management at scale across a full range of our client segments and with the best advisors in the industry according to Barron's rankings.

Speaker 1

That coupled with our digital leadership is delivering a modern Merrill A modern private bank for clients to enterprise relationships and our clients and advisors have recognized the value in a holistic financial relationship that extends across investments, planning and banking. And that's what helped drive the $150,000,000,000 of clients balance flows You see here over the past 12 months, not only did we see strong investment flows of more than $70,000,000,000 but deposits grew $59,000,000,000 Up 18%, and we added $22,000,000,000 in loans over the same period, marking our 48th consecutive quarter of average loans growth in the business, just consistent and sustained performance from the team. Revenues grew 10% to a new record and were led by 25% growth in NII on the back of those solid deposit and loans increases, as well as a 9% improvement in asset management fees. Expenses increased 4%, driven by higher revenue related costs and resulted in over 600 basis points of operating leverage. And we generated nearly 7,000 net new households in Merrill and more than 800 in the Private Bank this quarter.

Speaker 1

Moving to Global Banking on Slide 17. The business momentum with our commercial clients remained strong in the Q1. The business earned $1,700,000,000 in Q1, Down $450,000,000 year over year, driven by the absence of a large prior period reserve release and lower Investment Banking revenue. Revenue improvement of 12% year over year reflected higher leasing related revenue and NII growth, partially offset by those lower investment bank increase. Net interest income grew on the back of strong loans and deposits growth.

Speaker 1

And the leasing revenue improvement included more ESG related investments, particularly in solar as well as the absence of weather related losses recorded last While the company's overall investment banking fees of $1,500,000,000 declined 35% year over year, We gained market share in some important areas and recorded a number 3 ranking in overall fees. And importantly, our investment banking pipeline remains quite healthy. Provision expense reflected a reserve build of $177,000,000 compared to a $1,200,000,000 release in the year ago period, And this quarter's provision includes results taken for Russia exposure and other considerations for loans growth, offset by continued improvement in asset quality metrics. Finally, we saw expense decline by 4%, driving strong operating leverage. Switching to Global Markets on Slide 18, and as we usually do, I will talk about the segment results excluding DVA.

Speaker 1

Q1 net income of $1,500,000,000 reflects a solid quarter of sales and trading revenue, and it includes a new record for equities. The business generated a 15% return in Q1, even with a 12% increase in the capital allocated to the Allocated to the business. Our investments in this business saw good results as our financing clients continue to increase their activities with our company. Focusing on year over year, sales and trading contributed $4,700,000,000 to revenue. Versus Q4, that was a 58% improvement, a little higher than typical seasonality.

Speaker 1

And versus Q1 21, we saw a decline of 8% as the prior year included higher commodities results due to weather related events. FICC declined 19%, while equities improved 9%. That FICC decline reflects the higher prior period commodities and a weaker credit trading environment, and it was partially offset by improved performance across our macro products, especially rates and foreign exchange. Strength in equities was driven by strong performance in derivatives. And year over year expense declined, reflecting the absence of costs Associated with the realignment of a liquidating business activity to the all other unit as well as some Q1 2021 accelerated costs for On Slide 19, we show all other, which reported a loss of $364,000,000 declining $620,000,000 from the year ago period.

Speaker 1

Revenue declined as a result of higher volume of deals, particularly solar, and therefore higher partnership losses on ESG Investments, and this is partially offset by the tax impact in this reporting unit. Expense increased as a result of costs now recorded here in this segment following the Q4 realignment of that liquidating business out of Global Markets. And as a reminder for the financial statement presentation in this release, the business segments are all taxed on a standard fully taxable equivalent basis. So in all other, we incorporate the impact of our ESG tax credits and any other unusual items. For the quarter, for the company, our effective tax rate was 10%, benefiting from ESG investment tax credits.

Speaker 1

And excluding the tax credits, the tax rate would have been roughly 24%. We expect our effective tax rate And with that, let's open it up please for Q and

Operator

We'll go first to Glenn Schorr with Evercore. Your line is open.

Speaker 2

Hi, thanks very much. And forgive me if this is a drop long, but I listened to all Your comments about the consumer, about spending, about no real stresses in credit, net charge off non performing All that sounds great. And in the past, I think higher rates were designed to pull leverage from the system and So I wanted to see if I could, A, get you to comment on your thoughts around today's environment versus history. And then also Specifically as what you did with the ins and outs in reserves and if you changed any macro scenarios as you bake in CECL reserves? Thanks for that and thanks for bearing with me.

Speaker 1

Thanks, Glenn. So you're right to pick up on the commentary because Brian's highlight strength of the consumer, which remains extraordinary. And at the same time, what we see on the asset quality side of commercial It's just continued steady improvement as the economy reopens. So that's what we're seeing. That's contemporaneous.

Speaker 1

Now you're asking a question about what does it look like in the future, and we're obviously aware of what the Fed is trying to engineer. So going through this, every quarter as we always do, we have an opportunity to think about how we look at our reserves. And this quarter, we took some of the upside out. We've got a little more weighting towards A baseline and a little more towards downside, so that's one thing we've done. 2nd thing we've done is we've upped Our forecast for inflation, so we see that playing through and those scenarios are a little more weighted towards inflationary.

Speaker 1

And third, we have adjusted GDP growth down largely based on blue chip consensus. So we, like you, are looking at 2 things. Number 1, we're looking at what we're seeing in the actual results. And number 2, we're thinking about how we balance that going forward with our scenarios. Glenn, I think just generally that has a task to bring inflation out of the system and Our GDP assumptions by Kansas and South Browning Platt and our team are for the economy to slowest growth rate This year to next year.

Speaker 1

The question of great debate is, is it soft landing, hard landing, etcetera. But I think what's unusual this time is how much cash is sitting in the consumer's If you are sitting here, we may start normalizing rates in the middle of the last decade, Late to mid of last decade, you wouldn't have seen the consumer balances sitting with those multiples I gave you early in the accounts and then having tremendous borrowing capacity left In terms on used credit lines and same on the commercial side, lines are bouncing along just above the low point. And so We continue to adjust our reserve levels to, as Alistair said, to factor in our base case includes Higher inflation through the rest of the year and into next year. Our seats of reserves set by that base case, which is a 40% weighting to adverse, Frankly, equal, maybe 40% of the actual reserves we have, because the rest are Judgmental and precision and things like that. So we're very strong in reserve and we're very mindful that I think it's Very different to think about the situation where the consumers' unemployment is already so low and the consumers are sitting with money.

Speaker 1

And I think that puts more attention on the Fed to how they architect a successful change and they know that. But on the other hand, it's a better place to start.

Speaker 2

I appreciate all that. One little tiny follow-up is in Global Banking, I noticed $2,000,000,000 more allocated capital. Deal activity is down, but you mentioned pipelines are good. So maybe you could just talk about just what's going on there? Thank you.

Speaker 1

Well, we don't have a great deal to add there. Obviously, we're coming off of record quarters last year. And we're just operating in the market conditions That were given. The volatility has obviously been hardest felt in Equity Capital Markets and in high yield. And across the board, we'd say our pipelines look very strong.

Speaker 1

So I think when I asked Matthew, he said somewhere between strong and very strong. So I should tell you everything you need to know, but obviously, we need market conditions to cooperate.

Speaker 2

Perfect. Thanks so much.

Operator

Our next question comes from John McDonald with Autonomous Research. Your line is open.

Speaker 3

Hi, good morning. I was wondering if you could talk a little bit about expenses and operating leverage. Are you still thinking that Spences will be flattish this year in the $60,000,000,000 ballpark. Brian, Andy did mention expectations for the efficiency ratio as your

Speaker 1

And Alistair gave you some detail, but just simply put, John, we expect to be relatively flat for 2022 versus 2021. That's the guidance we gave you last quarter. We don't see anything different this quarter.

Speaker 3

Okay, that's helpful. And then, Alistair, maybe just a little more fleshing out about the capital and how you're managing the CET1. Obviously, you're generating already capital each quarter above what you're paying out the dividend. It seemed like 30 basis points this quarter and that probably gets better. The same time, it sounds like you may be going to manage up to around 11 over the next year.

Speaker 3

Maybe you could just give us some of the dynamics there and how that plays into the ability to do some buybacks

Speaker 1

2 prior years, I think the watch or fall that we laid out on Slide 6 is pretty constructive. First priority for us will remain just invest in growth. We'll support our clients. We'll let them get after the teams get after the loans to help our clients there. Secondly, we'll make the dividend payments, and then we'll have capital left over for share buyback as we have had in the past.

Speaker 1

And we'll make those decisions in the context of future rate environments and future capital requirements. I think Brian pointed out We're going to build capital over the course of the next couple of years by about 50 basis points. We've got 7 quarters, So it's a small amount every quarter that we'll be doing. And John, just you said operating leverage. I've got the team.

Speaker 1

We have 3 straight quarters of operating leverage. PPNR growth was strong. That's different than what we've seen out there generally. But remember, during the as the rates rose in the pre pandemic setting and Glenn's question about soft landing, hard landing inherently The simple fact is we had 20 straight quarters operating leverage and we're starting to see that come through. And if you look at the consumer efficiency From the Q1 last year, this quarter, you point in efficiency ratio, this has all come through NII and it all falls to the bottom line.

Speaker 1

And therefore, you end up with a Yes, fairly significant impact in those businesses, which are obviously highly sensitive growth in NII.

Speaker 3

Got it. That's helpful. Thanks very much.

Operator

Our next question comes from Mike Mayo with Wells Fargo

Speaker 1

Brian and Alistair, I wonder if you can just make a distinction between the economic, Regulatory and accounting outlook. So from the economic standpoint, you're mark to market your Assets and your securities you saw swing to AOCI, but you don't mark to market that $1,400,000,000 of deposits. From a regulatory standpoint, AOCI causes you to slow buybacks, I believe you said. But from an accounting or earnings standpoint, Maybe you win in the end, maybe you don't. So I know you're not giving specific guidance for NII, but just At a basic level, is your guys' earnings outlook better because of the NII and the higher payment rates Better efficiency or is it worse because you have less buybacks, maybe more provisions due to the potential for a recession?

Speaker 1

Mike, those are all the pieces. But simply put, I think Alistair said, and now I pick up next quarter. So you pick up the $200,000,000 this quarter, you put that in the bank, then you pick up another $600,000,000 plus next quarter and then it grows from there So yes, that's tremendous operating leverage. And as we just said to John, expenses are flat. So that flows through the bottom line.

Speaker 1

All the different vagaries have Not only regulatory accounting versus GAAP accounting, but also what caps the comps in the capital ratio calculation versus not. At the end of the day, You said $1,400,000,000,000 it's $2,000,000,000,000 of deposits $1,400,000,000,000 just on the consumer for people side of the business. And Even on the business side, we only have operational deposits. And so at the end of the day, those are very long deposits. We extract the value through investing And that's why we put it in held to maturity.

Speaker 1

And the cash flow of that head to maturity portfolio is $20 odd,000,000,000 a quarter even in rate environment changes. So Whatever hit we had to CET1, the growth in NII and the growth in earnings power covers up Inside of the year, and so we feel very good about that. So a rate environment where we come off the 04s makes us a lot more money. You know that. We know that.

Speaker 1

Can you elaborate a little bit more on what you mean by operational deposits? I know you've talked about that and the linkages, and I guess that's the reason why you would expect deposits to be more sticky. But Can you elaborate a little bit more? You mentioned that Zelle and Erica volumes are 4 times higher than pre pandemic. So I guess you have a little bit more lock in, but if On the consumer side, people, meaning wealth management consumers and general consumers, of the $1,400,000,000 Yes, we're 40% or more in checking accounts and that's the money people have in motion in a given day.

Speaker 1

And what The big volume of this comes from, frankly, 35,000,000 checking holders, which is a new record for us. And so that's important and all the Feature functionality helps them. Our retention for our preferred customer base in the consumer segment, which represents 70% or 80% of all deposits, It's 99 point something. And so those customers stay with us a long time. When I meant operational counts on the commercial side, we all the cash is Business banking customers, which are under $50,000,000 revenue companies or even middle market, this money is coming in and out every day.

Speaker 1

And so it's very It doesn't disappear from the scene. And if you look at our GTS revenue, you can see the Global Transaction Services revenue on the page on Gold Banking, you'll see it's grown nicely year over year and that's due to the stability of that deposit base and what we see. So it's not going to move away from the balance sheet. That's the point I said about in the rate rising cycle, last rate rising cycle, as Money supply shrank. At the end of the day, we grew deposits 5%.

Speaker 1

And so we'll see what happens because it's different, but we feel pretty confident. Mike, the only other thing I'd add is, when Brian talks about operating, it's one of the reasons we highlight that 92%, 93% of our consumer accounts are primary. And we've had 99% plus retention rate on those accounts. So These are sticky deposits. That's what we're just trying to make sure everyone understands.

Speaker 1

All right. Thank you.

Operator

We'll go next to Betsy Graseck with Morgan Stanley. Your line is open.

Speaker 4

Hey, thanks. Good morning. Two questions. One on expenses. I know you mentioned this year that you're still anticipating relatively flat and that you would deal with inflation pressures, etcetera from some of the opportunities you have to get more efficient.

Speaker 4

Can you give us a sense as to How long you think you can stay flat for? Like is that going to be into 2023 as well? And can you unpack some of the things you're doing to get more efficient? I know you did a ton of efficiency Pre COVID, so what's last? Thanks.

Speaker 1

So Betsy, remember, coming into the pandemic, we had hit Point where we brought expenses down and said we now we're an operating leverage company, so we'll get revenue growth faster and expense growth, but We'd start to grow modestly. Then the pandemic had a lot of expenses coming in now. And so when we say flat year over year, Yes, basically meaning 23 versus 22, in that $59,000,000,000 to $60,000,000,000 range. Our view is that our goal is to keep that Down to a modest expense growth, if any, and as we move to 2024, etcetera. But we are Fighting all this discussion you had, but the key is to have the revenue grow much faster and that's what we expect to see as NII kicks back up and the efficiency ratios, As Mike or John referenced, how to kick back down pretty nicely.

Speaker 4

Got it. And then the other question is just Further rate backups, obviously, 10 years already at 2.8, it's up 50 bps from March 31. So if it goes to like 3.3, we get the same kind of hit as this past quarter. Can you just give us a sense as to how you're dealing with that rate back up? Is there anything you would do differently?

Speaker 4

Would you move Any AFF to HTM or would you engage this new accounting rule that's been finalized In March 28, that enables you to do last layer hedging on HTM book. I mean, does any of that matter to you? And just give us a sense as to how much longer this rate backup is or would you change how you're dealing with it? Thanks.

Speaker 1

Yes. So the piece that will matter the most would be the AFS securities. And we've talked before about the fact that we have about $200,000,000,000 of treasuries there, and they're all swapped. They all swapped the floating precisely to insulate us. I think that's one of the reasons you see our AOCI is much smaller than many others.

Speaker 1

Yes. So It's just a question of managing around the $50,000,000,000 or so of securities that we have there that aren't swapped to floating. And I just note that, that number has come down a little bit month after month after month. I think it will keep coming down. We have some ability obviously to hedge that if we choose to.

Speaker 1

And so we'll manage our interest rate exposure as the environment develops from here.

Speaker 4

Okay, thanks.

Operator

We'll go now to Matt O'Connor with Deutsche Bank. Your line is open.

Speaker 1

Hi. I was hoping to get a little more detail on the net interest income trajectory in the back half of the year if we follow the forward curve. And I appreciate you don't want to give And obviously, a very positive story. So I want to dig in and maybe I'll start it with Next quarter is up more than $600,000,000 If you follow the forward curve, it seems like that quarter to quarter increase Could actually accelerate in the back half of the year. So maybe I'll leave it with that for you to run it.

Speaker 1

Yes. So look, I think we, broadly speaking, agree with you. We obviously don't control rates. So that's why we're always reluctant to give guidance over the course of the next 2 70 days, but we're very levered to rates going up from here. And we said In our remarks, we believe this second quarter will be up at least $650,000,000 in NII.

Speaker 1

And I think if you look at the forward curve, yes, you would expect to accelerate over the course of the year. And then we tried to give you the broad outlines around $5,400,000,000 versus forward, dollars 6,800,000,000 versus spot. It's obviously very meaningful, We're only prepared to look out over the course of the next 90 days because we feel like we've got pretty good confidence around that. And I think the other thing just to remind us, our next meeting is May. So you'll see like the Fed meetings and the hikes in the forward curve really do accelerate things in the back half of the year.

Speaker 1

And how do you think if we do get kind of the second 100 basis point rate increase that the market is anticipating, what does that Look like in terms of your rate sensitivity, and then just kind of squeezing the similar, At some point, do rate hikes not help net interest income or it helps adjust to a lesser extent? Thank you. Well, I think just the fact that you've got $5,400,000,000 compared to $6,800,000,000 tells you a little bit about successive rate hikes Become less valuable. But we're probably a long way from where they stop having value. So we expect, as Brian talked about, we're kind of at a rate floor when rates are at 0.

Speaker 1

And obviously, we'll get significant benefit over the course of the next 100 basis points. I'd like you would anticipate less from the following 100. But again, we're going to capture a lot of value because our strategy is based around operating accounts in commercial and primary accounts in consumer. Yes, the question always is, if the Fed is hiking rates because of inflation, if they can't Back under control and you got to look at the stuff out everybody focused on NII, but you got to look at what's going on in the economy generally. So that's why we have Significant reserves in case it's harder landing than people at the Fed would like to engineer.

Speaker 1

And that's why we the company with such balance, but generally, a higher sustained rate environment will help us earn a lot more money and you saw that Pick up as we picked up through 2016, 2017, 2018 and you'll see it happen again, you've already seen it happen. Just think last year Q1, this year Q1, we had $1,400,000,000 more NII per quarter. So that's it's already helped As loan and deposit growth are matched with some modest rate increases. Thank you very much.

Operator

Our next question comes from Erika Najarian with UBS. Your line is open.

Speaker 5

Hi, good morning. My first assumption is in the plus $6,800,000,000 in sensitivity for the first 100. And Given your focus on primary and operating accounts, contrast that with chunkier rate hikes, how should we

Speaker 1

So We normally take a look at our deposit betas over the course of history. And if you go back to the last 3 hikes, I call 2015 through 2019, On average, you can't it's obviously very different by account and minor business and Client, but on average, it's somewhere between 20% 25% for Bank of America. We'd hope to perform a little better in this cycle Based on the value we deliver to clients, particularly in things like digital, etcetera. But for now, I think that's a reasonable assumption. It's difficult to project out first 100 versus second 100.

Speaker 1

I mean, I would imagine for the first couple of 100, it's going to be pretty, I would hope pretty stable. But at some point, when we think deposit base as we drift higher, we'll obviously be able to give you guidance on that in the future

Speaker 5

Got it. And I just wanted to clarify something, Brian, that you said to Betsy. Did you say that you expect 2023 expenses to be between $59,000,000,000 $60,000,000,000 and then for modest growth to return in 24?

Speaker 1

No. We said 'twenty two is flat to 'twenty one and then we grow modestly then.

Speaker 5

Got it. Okay. Got it. And then the follow-up question there is, you mentioned your trajectory, your target for getting back to 60% 60% on the efficiency ratio. What kind of timeframe are you thinking in terms of when you can accomplish that

Speaker 1

I think that We make progress each quarter basically. We're running the $66,000,000 down year over year. I think if I gave you the specific I crossed over, I basically gave you an earnings projection for the rest of the quarter. So, Erica, I think if you look at the businesses, you're starting to see them Drop more online. Obviously, we always have such a huge wealth management business, which 27% pre tax margin, Which is industry leading, it was up 30% last quarter, will impact that because it's a bigger part of our business than Others, but you'll see relentless progress, but I can't give you the exact quarter.

Speaker 5

Got it. And just one last question on Capital, so today your current CET1 minimum is 9.5%. And the higher GSIB surcharge, when is that Is that effective by January 1, 2023? So therefore, your minimum goes up by 50 basis points. And Brian, what how are you thinking of buffers relative to your new minimums?

Speaker 5

I think one of your counterparts said that He was no longer thinking of buffers upon buffers as he thinks of capital management going forward.

Speaker 1

So Erica, our GSIB minimum Would increase effective January 1, 2024. So we've got 7 quarters to build towards that. Brian talked about operating and managing the company 75 to 100 basis points above our regulatory minimum. That's obviously exactly where we are right now. And so over the course of the next 7 quarters, we just expect to build that 50 basis points of capital.

Speaker 5

Got it. Thank you.

Operator

We'll go now to Ken Usdin with Jefferies. Your line is open.

Speaker 3

Hey, thanks. Good morning. Just wanted to look at the commercial side of loans. 4th quarter loan growth ex PPP was great at 10% and This quarter a little slower. Just wanted to ask you about just that end demand question.

Speaker 3

Any supply chain? Any changes in line utilization? And just what are you seeing out there on the commercial demand side? Thanks.

Speaker 1

Well, our clients are definitely seeing supply chain challenges. They're working through admirably. We're also seeing inflation and they're seeing labor and wage pressure. So That I think we all know. At the same time, the economy is returning more towards normal And our line utilization is returning more towards normal too.

Speaker 1

That's a part of what's driving our loans growth. So revolver utilization in commercial now is 31.7%. Pre pandemic, our normal was around 35. So that's about 3.3%. Figure that's like $15,000,000,000 to $20,000,000,000 of loans potential as the economy continues to heal and as Clients begin to take utilization back.

Speaker 1

So it's one of the reasons we're still comfortable with loans growth, and we see the same momentum that we have over the course of the past 12 months. In the small business area, our originations are strong and back past pre pandemic levels of quarterly originations. And you're seeing home equity come back up even though mortgage will fall off. I think pre pandemic, we did $3,000,000,000 So We have room on the consumer side and on the commercial side for further loan growth as people sort of normalize their behaviors and activities. And no worries.

Speaker 1

You all read about the car industry. The line uses of car, car auto dealers is real low. And just as Example, they can't keep enough inventory on the loss.

Speaker 3

Yes. And one follow-up on the fee side. I know Investment Banking and Trading are going to be hard to forecast, Just any thoughts on some of the consumer related and brokers weighted fee areas? There's been some underlying Moving parts there, just can you talk about just the growth trajectory of some of those fee areas? And I guess we'll just We'll see what happens in the markets.

Speaker 1

Yes. Well, I think we're wise to do that. When it comes to the card side, I'd say flattish. We're managing to the total client relationship there. That remains something where we're focused on total value.

Speaker 1

So we'll see some growth there. We'll see it in balances. We'll see it in NII mostly, and we'll see it in deepening elsewhere. On the asset management side, mostly it will be around market levels. So we'll follow that, as you will closely, and a little bit of net new household growth and flows growth again this year.

Speaker 1

So that's how we're thinking about it. But I would say, across all, kind of flattish slightly maybe slightly up. The only one thing to bear in mind is just as a reminder on insufficient funds and overdraft. Just remember that those started to kick in, in February and the remainder will pass through in March. So that's probably like a sorry, May.

Speaker 1

And that's probably a $750,000,000 hit for the year, if you like, on total fees.

Speaker 3

Yes. Thanks, Elmer. Thanks, Alistair.

Operator

We'll go now to Steven Chubak with Wolfe Research. Your line is open.

Speaker 3

Hi, good morning. I wanted to ask a follow-up on the earlier discussion on the 60% efficiency ratio. If we look at what you achieved last cycle, your Your terminal efficiency trajected closer to the upward 50s once the Fed funds rate eclipsed 200 basis points. I want to get a sense whether there is credible case for delivering a better than 60% efficiency ratio this cycle or are there structural factors supporting a higher terminal efficiency in this coming cycle.

Speaker 1

Steven, the demand is going to be how big the wealth management business sits as a percentage of the total And just the dynamics of that business and that's always what constrained us even to the rest of the businesses. If I remember right, peak cycle, Yes, both global banking went well below 50, consumer went well below 50. And then between markets and wealth Management, now Wealth Management has done a great job of growing its loans and deposits, so that will help it. But that's always going to be the debate and you should be cheering for Strong wealth management revenues even if it means a little less efficiency ratio. Okay.

Speaker 1

We'll certainly be cheering for

Speaker 3

that, Brian. Maybe just for my follow-up On capital, I know we've spent a lot of time talking about AOCI volatility and the like. What I was hoping to get a better sense of, Given that RWA growth has actually been the biggest source of capital consumption over the last couple of quarters, it's up about 9% year on year. Given the pace of continued strong loan growth that's anticipated, what level of organic RWA growth should we be underwriting as we think about the capital algorithm going forward?

Speaker 1

Well, I think what you're looking to is some of the RWA growth has been coming from a pretty significant loans rebound, particularly in commercial. And I think you're looking at some of the investments we've made in our Global Markets business. Some of that's a little seasonal, so it pops up in Q1, and some of it is year over year. So going forward, I think our growth We have plenty of capital to support the growth that we expect in terms of RWAs. We manage that pretty closely.

Speaker 1

Again, the economy is Beginning to return now to something more normal after bouncing around a bunch. So this quarter, when you think about those risk weighted assets, 14 basis points. Brian has talked about a third, a third, a third for share repurchase dividend and growth, That's probably a fair starting point.

Speaker 3

That's great color. Thanks for taking my questions.

Operator

Our next question comes from Vivek Suneja with JPMorgan. Your line is open.

Speaker 6

Thanks for taking my questions. A couple, What do you I heard the commentary about deposit balances, Brian, from you that are still very high in the lower end customers. However, if we start to get a little more granular more very recently, are you starting to see Any drawdown with higher spending because of inflation? Any color on that? I know Quarter over quarter they are, but as we start to look forward to see how things are progressing, are we seeing that yet?

Speaker 1

It's actually the opposite of that. They grew faster from February to March and that's probably because of tax returns that they have. Basically, the broad way to think about it is beginning around May of last year, they grew sort of 1% not annualized, but 1 Per month pretty consistently 1% to 2%, higher at the lower end balances. Only in the month of November, I think we saw a slight downdraft in the lower balances and that picked back up in December. It grew January, February, March each month.

Speaker 1

It grew this quarter and the March month was the strongest. So we might we haven't seen the data for April yet, but it's growing very strong all the way up into the people who carried Pre pandemic, you have $10,000 to $20,000 in balances are still growing fairly strongly. So we're not seeing that deteriorate at all yet.

Speaker 6

Completely different question for you folks. Securities growth, didn't see that this quarter even if you ex out The mark to market stuff, what's your plan for that? Are you planning to grow securities balances? Should we be or what are you thinking at this point?

Speaker 1

It all comes down to deposits. We keep growing deposits. We got to put in the work. So Alison, give me more detail. You got to remember, what drives the size of our balance sheet is our right hand side, not our left.

Speaker 1

And so at $2,000,000,000 we grew $200,000,000,000 $180,000,000 1.90 $100,000,000,000 deposits last year Q1, this year Q1. So if we grow deposits, which you should be cheering for on the core basis we do, we will then grow Invest those deposits in a careful way. And Vivek, if you look at this quarter, we added $8,000,000,000 of deposits. We added And remember, if you go back over the course of the past couple of years, in the pandemic, we didn't see the loans growth. So in many ways, that's why we Some securities that was to replace loans that were coming off.

Speaker 1

That's not what we're seeing right now. Now we're seeing the loans growth. So our first use will always be for loans. And if we keep seeing the same kind of loans growth we're seeing right now, the securities may decline over time and they stay flat, we'll see, depends on deposits.

Speaker 6

How about in terms of liquid assets, what level should we think should we expect you would bring that down to? Because those have come down a little bit When you look at them quarter over quarter and they're also down some year over year, is there room for that to come down further? What sort of a run rate for that assuming Let's assume deposits were flat and didn't go down, didn't grow much through modestly. Where can that be drawn down to?

Speaker 1

Yes. So liquidity is down in the quarter. That's largely based on funding the global markets business with seasonal. If you look year over year at our liquidity numbers, you'll see our global liquidity sources at $1,100,000,000 They're up like a scooch from Q1 of last year. HQLA surplus is up.

Speaker 1

That's largely based on things like, again, Frank talks about our deposits of $2,000,000,000,000 We have we're probably more liquid now than we've Ever been. And we've got plenty, I think, as we continue to grow deposits in the future. I'd hope our liquidity just continues to stay where it is or go higher.

Speaker 6

Thank you.

Operator

And we'll take a follow-up Mike Mayo with Wells Fargo. Your line is open.

Speaker 1

Hi. I was a little disappointed about the question related Terminal efficiency, I get if you wait to just wealth management, but with all the technology investments, shouldn't your incremental Pre tax margins be greater on your new revenues? And if so, shouldn't your terminal efficiency business mix adjusted be better than it was before? For example, specifically, the pretax margin in 2021 was 38%. Where Should your pre tax margins be on new revenues that are generated ahead?

Speaker 1

The new revenues are We'll generate more margin profit, Mike. And the efficiency ratio, let's always see where we get to, but It will keep coming down and we are improving every all the way through until the pandemic and with operating leverage every quarter And I think it's not going back and checking it quarter by quarter, I think it improved every quarter, it leaves aside some seasonality. But yes, we will keep driving it down. Headcount, yes, this quarter was We're down another 100 people. It was down 4,000 last year.

Speaker 1

We are adding salespeople. We're opening new branches. We're investing in franchise. We've opened In the 7, 8, 10 markets and we have $30,000,000,000 of new deposits in those branches to give you a sense and there's only 100 Forty branches, you know our strategy, Mike. So it's always going to come down to balancing all that.

Speaker 1

But at the end of the day, we're saying expenses are flat this year and NII improvement is going to flow to the bottom line. That's a pretty strong impact efficiency, especially because it's going through the businesses, even the wealth management business. And then one other follow-up. I mean, I don't think there's a recession this year, but I've been wrong before and the stock market is telling us there Might be a pretty good chance of a recession. So Brian and Alistair, what do you think the chance of recession is in You have a lot more people, data, businesses, insight into the U.

Speaker 1

S. Economy and you need to have a percentage for that for your Provision for loan losses, so is this 50% chance, 20% chance? What do you think, Brian, kind of gut feel and Alistair, by the numbers? I think you're an acute critic of an Observer of Banks, Mike, but the reality is We have economists predict recessions and all the adages about them. And the reality is they always have a prediction for recession Yes, that runs around 10%, 20% according to economists talk to me.

Speaker 1

But let me flip to what you really said, which is we've weighted the adverse Scenario factor at a 40% factor in our baseline reserve setting that produced a formulaic reserve, which is around 40% of our total reserves. And so we have reserves on top of that that raises for tough times. So I'm not going to chat The box would be about soft landing, hard landing and all that stuff. But the reality is they've got to take the inflation out of the system. They know that they're raising rates to do that.

Speaker 1

But there's tensions against how easy or hard that's going to be, obviously pandemic war, but also this issue that the mass amount of stimulus is still out there being spent. So we're brace for every scenario. We model every scenario, but we don't I don't put a specific percentage. I just That's somebody else's job to do that, but our economists do not have a recession predicted. In terms of this year, it's around 3% growth.

Speaker 1

Next year, a little above 2%. And even though there may be some quarters in it that show modest growth, I think they're all positive, so I got it right. Understood. Thank you.

Operator

Our next question comes from Gerard Cassidy with RBC. Your line is open.

Speaker 7

Hi, Brian. Hi, Alistair.

Speaker 1

Good. How are you?

Speaker 7

Good. Thanks. Alistair, you guys are very well positioned, as you pointed out, Your balance sheet for rising interest rates, which seems very, very likely this year, obviously. And obviously, you guys are not a PT boat, But a battle cruise, battleship to turn the balance sheet into a position and when the Fed finally succeeds, let's say, in Hitting inflation, knocking it down, they stop raising rates, maybe even

Speaker 1

have to cut rates to

Speaker 7

get the economy going. When do you guys start thinking about after the Fed Succeeds at reducing inflation and you may have to reposition the balance sheet and not be as asset sensitive.

Speaker 1

We don't all, Gerard. Just to start, remember, we you know this as well as anybody having been around this industry for That's a number of years, let's just say. At the end of the day, the reason why we have securities investments is because we have $2,000,000,000,000 of deposits And $1,000,000,000,000 of loans. And so we got to do something with the money and the deposits are stable. They're core checking accounts.

Speaker 1

They're Your core operating cash for commercial customers, so we put it to work to extract the value for the shareholders. And so it's not that we lean The balance sheet, it's as we do all the work we do in the core franchise to grow the number of customers, 10% or 15% Since pre pandemic and core consumer checking customers to grow the commercial customer base, small business base, etcetera, That results in us having a balance sheet that is positioned yet to benefit rising rates because we have so much 0 cost deposits. And so, we don't sit there and say, let's move the balance sheet. What we do is we try to protect in a cautious way other risks. So we hedged A couple a year or so, year and a half ago, there were a lot of questions about, oh my gosh, you're investing and rates are low.

Speaker 1

And we told people you hedged it and now you're seeing the benefits of those hedges. That gave up NII from then till now to protect the capital and that's what we did. So We're always trying to manage extracting value deposits and then look to the other side and see the capital constraint question and the impact of capital, see other constraints on us. But it's really we and we only invest in treasuries and mortgage backed securities. We don't take any more credit risk in The treasury book for lack of better term because we take enough in the company.

Speaker 1

So I just don't we don't sit there and say let's move around. It's just how do we invest this. We may move a little shorter or longer than what we invest in. But frankly, we've swapped a lot of it to short just to protect ourselves so that we'd be able to redeploy at higher rates in the future.

Speaker 7

Very good. And then as a follow-up, on the GSIB buffer that you guys pointed out that will take effect, I think you said in 2024, the 50 basis point increase. Is there any strategies you can employ that Could actually reduce that buffer before we get there or is it really just retaining more earnings from your day to day operations?

Speaker 1

I think we're growing through it because it has ways it's calculated that are not sensitive To our size relative to the economy, stock price, all these kinds of things in it that move it around a little bit. But the reality is I wouldn't When we look at the core customer base, we wouldn't constrain core customer growth. We can always make efficiencies and move stuff around and we still believe it or not, as you The other category have loans which are not core to our franchise still left over frankly from 15, 17 years ago, whatever the heck it was Yes, that we can let run off and stuff like that or sell out and stuff. But the reality is that the GSIB buffer is growing because our customer franchise is getting bigger and a method of calculation Does not adjust for business success, size of the economy, stock market cap increase, all those things which I think You're in pretty good favor of Gerard. So we're going to have to retain 50 basis points more capital.

Speaker 1

So divide that 50 basis points by 7 Think about us pulling that through. The question of buffers to that number, You should expect us to operate close to that $10.75 just because frankly the number is getting so big that we've never had an issue The size of capital implied by that buffer to the minimum regulatory minimum. Agreed. And that capital Because of the earnings power, the franchise generated 15.5% return on tangible common equity this quarter and will continue to be strong based on NII improvement.

Operator

We'll take our final question from Chris

Speaker 7

Recognizing that the health maturity portfolio Doesn't get mark to market. I would think though on an kind of underlying core economic basis, It's never fun to have a large bond portfolio that's underwater. And just looking at your year end closures, it looks like the vast majority of that health and maturity portfolio is agencies with a more than 10 year maturity. And I guess, how do you look at the extension risk on that portfolio? Again, recognizing it's not marked, but Economically, is there any way to protect yourself in kind of a tail environment where rates go up A couple of 100 basis points like they did in 'eighty one or?

Speaker 1

So let me address that one. I think Brian's earlier answer got to the first We got to deliver for our shareholders in low rate environments and we have to deliver for them in high rate environments. Those mortgages protected us in a low rate environment. And now what protects us in a pricing rate environment is precisely the asset sensitivity we still have left in the company. And So when you look at that $1,400,000,000 of growth and now we're telling you, you should expect NII growth from here successively in each quarter.

Speaker 1

That's what protects us. It's that balance between capital, earnings and liquidity. Just the cash flow of the portfolio, even in a very low prepayment rate scenario, you got to remember, If people pay you principal and interest, people pass away and then people move irrespective of mortgage rates refinancing and those numbers, All that cash could be redeployed at the higher rate structure. So it turns a little faster than people think because everybody takes to 0 That's prepayment. You'll do prepayment, but the cash flow off of it is fairly significant.

Speaker 1

So we'll deploy that and walk back up the ladder. But And also remember, economically, if we don't market deposits, we won the great debates we've all had in proper accounting for banks. But at the end of the day, the deposits Yes. Growing economically at a much faster rate than the degradation on the mortgage backed securities portfolio.

Speaker 7

Okay. All right. Thank you.

Speaker 1

All right. I think that's all Thank you for joining us again this quarter. It was a strong quarter by the team and I want to thank the team for all the great work they've done. At the end of the day, as we told you last quarter and Few quarters before that, the organic growth machine at Bank of America is driving hard, growing its market share, growing its It's growing its loans and doing well in the market. We will accelerate the P and L from that growth with the higher rates as we told you, we'll continue to hold expenses in check, driving operating leverage and that will always be a focus to get the most efficient growth we can.

Speaker 1

The strong customer activity which we spoke about continues even in the 1st part of April here. And so that will end up driving it's good for our company and drive our earnings. Thank you. We look forward to talking to you next time.

Operator

This does conclude today's program. Thank you for your participation. You may disconnect at any time.

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Earnings Conference Call
Bank of America Q1 2022
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