Bank of America Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 18, 2023

There are 8 speakers on the call.

Operator

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

Speaker 1

Thank you, Catherine. Good morning. Welcome and thank you for joining the call to review our 2nd quarter results. I I trust everyone has had a chance to review our earnings release documents. They're available on the Investor Relations section of the bankofamerica.

Speaker 1

Com website and include the earnings presentation that we'll be returning referring to during the call. I'm going to first turn the call over to our CEO, Brian Moynihan, for some opening comments before Alistair Barthwick, our CFO, discusses the details of the quarter. Before I do that, let me remind you that we may make forward looking statements and refer to non GAAP financial measures during the call. The forward looking statements are based on management's current expectations and assumptions that are subject to risks and uncertainties. Factors that may cause the actual results to materially differ from expectations are detailed in our earnings materials And SEC filings that are available on the website.

Speaker 1

Information about our non GAAP financial measures, including reconciliations to U. S. GAAP can also be found in our earnings materials that are available on the website. So with that, it's my pleasure to turn the call over to you, Brian. Thanks.

Speaker 2

Thanks, Lee, and good morning to all of you and thank you for joining us. I'm starting on Slide 2 of the earnings presentation. This morning, Bank of America reported one of the best quarters and one of the best first half of net income in the company's history. Our results this quarter once again include solid performance on things we control By delivering organic growth and operating leverage. We did that in an economy that remains healthy that had a slowing rate of growth.

Speaker 2

It was also a quarter that included volatility From the debate about the debt ceiling, continuation of Central Bank monetary tightening action and a slowing in consumer spending and a slowing inflation. As you look at it now, our customer spending pattern is now more consistent with the pre pandemic lower growth, lower inflation economy. Before Alistair Thanks for the details. Let me summarize Bank of America's quarter 2 performance. On Slide 2, you can see the highlights.

Speaker 2

We earned $7,400,000,000 after tax and grew earnings per share 21% over the Q2 of 2022. All business segments performed well, and I want to thank All my teammates for doing so. We grew clients and accounts organically and at a strong pace. We delivered our 8th straight quarter of operating leverage, Led by 11% year over year revenue growth. We further strengthened our balance sheet, improving our common equity Tier 1 ratio More than 110 basis points year over year to 11.6 percent.

Speaker 2

And we have $867,000,000,000 in global liquidity sources. We also produced strong returns for our shareholders with a return on tangible common equity of 15.5%, continuing the streak of many quarters at that level or above. Well, our business performed well this quarter. I would particularly highlight our global markets and sales and trading team and our investment banking teams. Both have appeared to outperform their industry peers.

Speaker 2

Investments made over the past couple of years in global markets capabilities under Jimmy Demar's leadership as well as Matthew Coder's leadership in the Global Corporate Investment Banking area allows us to prove our market shares for both of these people. I'd also note the strong contribution by our middle market clients to that And our teammates there led by Wendy Stewart. I'd also like to touch a few additional points before turning the call over to Alistair. These points will help illustrate continued investment in the franchise and work we do to drive growth. Let's start with the organic growth slide on Page 3.

Speaker 2

On that page, we highlight some of the important elements of organic growth. You can see evidence in every business segment as you look The page. In consumer, in quarter 2, we opened 157,000 net new checking accounts. Consumers now had 18 straight quarters of positive net new checking account growth. Now these are core primary checking accounts across the board allowing tremendous deposit franchise to continue to prosper and take market share.

Speaker 2

While the progress you made appear each meal, over the last 3 years, we've grown our Core customers and consumer checking account customers from $33,000,000 to $36,000,000 We opened another $1,000,000 plus Credit card accounts this quarter have 10% more investment accounts this year than we did last year in the consumer business. Consumer investment business balances Reached a new high of $387,000,000,000 aided by a 30% increase in new fund consumer investment And frankly, moving our money from our depositors into the market as they've done so. In Global Wealth, we added 12,000 net new relationships to Maryland Private Bank, And our advisors opened more than 36,000 new banking relationships in the quarter, showing a strong differentiation in our model of fulfilling both investment and banking needs for clients. In the past 90 days, we added 190 experienced advisors to our sales force in addition to digital capabilities to help us In Global Banking, we added clients to increase number of solutions per relationship. Over the past 3 years, we've added net New relationship managers and increased our client facing headcount by nearly 10%.

Speaker 2

We've also improved our tools for prospect calling through investments technology and it's benefiting our ability to add customers to improve our solutions for existing clients. Year to date, we've added about 1,000 new commercial Business Banking clients across the United States, which is the same number we added in the full year of last year. Again, operationalizing that ability to do this at scale Our speed of onboarding these clients. In our global markets area, we saw 1 of the highest second quarters for sales and trading in our history. It's another quarter of good organic growth.

Speaker 2

To achieve that growth while managing our expense trajectory, which Alistair is going to cover, requires efficiency progress from digital and other applied technology across all our units. Digital superiority is key to our operating dynamics. First, it produces a great customer experience resulting in strong customer retention and strong customer scores. 2nd, it ensures our as lead transactional bank for our customers, whether they're consumers, companies or investors. 3rd, it preserves a strong deposit balance as a good price and due to the core nature of And last but importantly at least, efficiency.

Speaker 2

So how we're doing on digital progress, you can see that on Slide 4, first with the consumer. In consumer, we now have 46,000,000 active users that are digitally engaged with our digital platform Logging over 1,000,000,000 times a month. And even with this scale, the stage of maturity logins is up double digits from last year. Customer uses of Erica continues to be the expectations. This was an early application of natural language processing and artificial intelligence That we build in our company and continues to learn about it with additional use.

Speaker 2

Interactions with Erica rose 35% in just the past year Now it's crossed over $1,500,000,000 client interactions in the 1st 5 years of introduction. There's a lot of questions about artificial intelligence out there, but one can't cluage Together a series of systems, we have to build a system in this highly regulated, highly customer focused business and Erica is one such application see its impact. Likewise, Zelle hasn't slowed down either. The number of people using Zelle grew 19% this past year. Remember, these aren't new functionalities at this point.

Speaker 2

They've been around for years, but they continue to grow very strong growth rates showing customer desire and acceptance of the activities. You can see the digital sales continue to grow. We continue to have both great high-tech and high touch options. As part of that, we've added 310 new financial centers since 20 19. And by the end of this year, we have refurbished every one of our existing centers in our company.

Speaker 2

We plan on opening 50 more Center is a year for the next few years, which includes an expansion in 9 new markets we announced a few years ago a few weeks ago, excuse me. Our entrance to these markets is enhanced by digital and leads to strong success. Just to give you a point of reference, for all the expansion markets over the last Several years for branches opened a year or more in those expansion markets, our average deposit balances per those branch are at 160,000,000 Dollars in each branch.

Speaker 3

If you

Speaker 2

go to the Wealth Management Digital on Slide 5, you can see that they continue to be the most digitally engaged clients in our company. Our advisors have led the way in driving a personal driven advice model supplemented by our digital tools. You can see the client adoption rate of 82% in Maryland 92% in the private bank, 78% have embraced digital delivery as a tool of service, Eric and Zelle also continue expanding these client sets. A new program we announced just a few quarters ago has generated 20,000 digital leads to the 7,000 advisors. It's called Advisor Match, matching our clients with advisors of their On Slide 6, you can see the digital engagement in the global banking area.

Speaker 2

Corporate treasury teams and our clients appreciate the ease of doing business with us digitally. Cash Pro App sign ins are up nearly 60% from last year, where the value of payments through Cash Pro App are up 20%. As you can see, every line of business is delivering strong organic growth. Investments made in technology have enabled us to grow Industry lead positions and digital tools while enabling our clients to do great things and making us more efficient. This provides for a very satisfied stable customer in client base with Bank of America's primary provider.

Speaker 2

And by doing with the digital application, that also produces operating leverage. On Slide 7, you can see our streak of operating leverage continued in the Q2 of 2023. We're now back at 8 quarters in a row. The chart on slide 7 covers 8.5 years or 34 quarters. And all but 8 of those quarters, and you can see those identified, 6 of which were in the heart of the pandemic, we've achieved operating leverage.

Speaker 2

Operating leverage is that simple task of growing revenue at a better growth rate and expense. As I said, Alistair going to discuss with you our good and declining expansion trajectory, which sets us up to continue to provide operating leverage even with a shift in the economy. In sum, in the quarter, we delivered earnings at 19% higher and a 15% return on tangible common equity. That was driven by continued strong organic growth And operating leverage in a volatile economic environment. Alice is going to talk to you about a bit more strength we see ahead in our net interest income for the balance of the year.

Speaker 2

That provides a better start as we think about 2024. You're going to hear our expectations for the quarterly decline in expenses in the following quarters For the rest of 'twenty three, even as we keep investing. And you hear about the resilience of credit and the strong trajectory of capital. This all positions us well to continue Both our streaks of organic growth and operating leverage. With that, let me turn it over to Alistair.

Speaker 3

Thank you, Brian. And on Slide 8, We list the more detailed highlights of the quarter and then Slide 9 presents a summary income statement. So I'm going to refer to both of those. For the quarter, we generated $7,400,000,000 in net income and that resulted in $0.88 per diluted share. Our year over year revenue growth of 11 was led by a 14% improvement in net interest income, coupled with a strong 10% increase in sales and trading results ex DVA.

Speaker 3

Revenue was strong and it included a few headwinds and I thought I'd go through those headwinds first. We had lower service charges from both higher Earnings credit rates on deposits for commercial clients and the policy changes we announced in late 2021 to lower Our insufficient funding overdraft fees for our consumer customers. The good news on the consumer piece is year over year comparisons get a bit easier starting next quarter As the Q3 of 'twenty two reflects the full Q1 of these changes. 2nd, we had lower asset management and brokerage fees as a result The lower equity and fixed income market levels and market uncertainty that impacted transactional volumes compared to a year ago quarter. 3rd, we had a net DVA loss of $102,000,000 this quarter compared to a gain in DVA of $158,000,000 in the Q2 a year ago, we also recorded roughly $200,000,000 in securities losses as we closed out some available for sale And we put the proceeds in cash.

Speaker 3

Lastly, and just as a reminder, our tax rate Benefits from ESG Investments and those are somewhat offset by operating losses on the ESG Investments, We show up in other income. So this quarter, our tax rate is a little bit lower and the operating losses are a little bit Higher from volume of these deals. So you have to be careful in analyzing the lower tax rate without considering the operating losses. And that in turn often offsets what would have been higher revenue elsewhere. Our tax rate for the full year is expected to benefit by 15% as a result of the ESG Investment Tax Credit Deals.

Speaker 3

And absent these credits, our effective tax rate would still be roughly 25%, And we continue to expect a tax rate of 10% to 11% for the rest of 2023. Expense for the quarter of $16,000,000,000 included roughly $276,000,000 in litigation expense, Which was pushed higher this quarter by the agreements announced last week with the OCC and the CFPB on consumer matters. Asset quality remains solid and provision expense for the quarter was $1,100,000,000 consisting of $869,000,000 in net charge offs $256,000,000 in reserve build. The provision expense reflects the continued trend in charge offs toward pre pandemic levels And it's still below historical levels. The charge off rate was 33 basis points and that's only 1 basis point higher than Q1 and still remains well below the 39 basis points that we last saw in Q4 of 2019, and remember 2019 was a multi decade low.

Speaker 3

I'd also use Slide 9 just to highlight returns and you can see we generated 15.5% return on tangible common equity And 94 basis points return on assets. Let's turn to the balance sheet starting with Slide 10, and you can see our balance sheet ended $3,100,000,000,000 declining $72,000,000,000 from the Q1. A $33,000,000,000 or 1.7 percent reduction in deposits Closely matched, a $41,000,000,000 decline in securities balances, through pay downs from the hold to maturity And sales of available for sale securities. Securities are now down $177,000,000,000 from a quarter to 'twenty two. Cash levels remained high at $374,000,000,000 and loans grew $5,000,000,000 As Brian noted, our liquidity remains Strong with $867,000,000,000 of liquidity, up modestly from the Q1 of 'twenty three and still remains nearly 300,000,000,000 Above our pre pandemic Q4 2019 level.

Speaker 3

Shareholders' equity increased $3,000,000,000 from the Q1 As earnings were only partially offset by capital distributed to shareholders, AOCI decreased by $2,000,000,000 driven by derivatives valuation And AFS securities values were little changed. So there's little change in the AOCI component that impacts regulatory capital. Tangible book value is up 10% per share year over year. During the quarter, we also paid out $1,800,000,000 in common dividends And we bought back 550,000,000 in shares to offset our employee awards. And last week, we announced the intent to increase our dividend By 9% beginning in the Q3.

Speaker 3

Turning to regulatory capital, our CET1 level improved to $190,000,000,000 from March 30 And the ratio of CET1 improved more than 20 basis points to 11.6%, once again adding to the buffer Over our 10.4% current requirement, while our risk weighted assets increased modestly in the quarter. Also noteworthy, on July 3, we initiated dialogue with the Fed to better understand our CCAR exam results, and we remain in discussions today with no news In the past 12 months, we've improved our CET1 ratio by more than 110 basis points, and we've done that while supporting clients for loan demand And returned $11,300,000,000 in dividends and share repurchases to shareholders. Our supplemental leverage ratio was 6% Versus our minimum requirement of 5% and that leaves us plenty of capacity for balance sheet growth. Finally, the TLAC ratio remains comfortably above our requirements. So let's now focus on loans by looking at average balances.

Speaker 3

You can see those on Slide 11. And there you can see average loans grew 3% year over year. Drivers of loan growth are much the same. Consumer credit card growth is strong and then commercial loans grew 4%. The credit card growth reflects increased marketing, enhanced offers and higher levels of accounts openings over time.

Speaker 3

And on commercial, we saw a little bit of Slow down this quarter, driven by higher pay downs from borrowers and weaker customer demand as opposed to any credit availability from us. We are still open for business for loans. While loan growth has slowed, it's generally remained still ahead of GDP And commercial client conversations remain solid as our clients seem to be waiting for some of the economic uncertainty to lift before borrowing further. Slide 12 shows the breakout of deposit trends. That's on a weekly ending basis across the last two quarters and it's the same chart that we provided last quarter.

Speaker 3

In the upper left, you see the trend of total deposits. We ended the 2nd quarter at $1,880,000,000,000 down 1.7 percent with several elements of our Seeming to find stability. Given the normal tax seasonality impacts on deposit balances In Q2 and the monetary policy actions, we believe this is a good result. I want to use the other three charts on the page to illustrate the different trends Across the last quarter and more specifically in each line of business. In Consumer, looking at the top right chart, you see the difference in the movement through the quarter between the balances of low to no interest checking accounts and the higher yielding non checking accounts.

Speaker 3

Here you can also see the low levels of our more rate sensitive balances in consumer investments and CD balances and they're both broken out here. In total, we've got still more than $1,000,000,000,000 in high quality consumer deposits, which remains $274,000,000,000 above In the second quarter, that decline in consumer deposits was driven by higher debt payments, higher spend And seasonal tax activity and some non checking balances that rotated from deposits into brokerage accounts. We did see some competitive pressure this quarter within about roughly $40,000,000,000 of CDs as some of The financial institutions pushed prices higher. And at this point, with deposits far exceeding our loans, We've not yet felt the need to chase deposits with rate. Broadly speaking, average deposit balances of our consumers remain at multiples of They're pre pandemic level, especially in the lower end of our customer base.

Speaker 3

Total rate paid on consumer deposits in the quarter Rose to 22 basis points and remains low relative to Fed funds, driven by the high mix of quality transactional accounts. Most of this quarter's 10 basis point rate increase remains concentrated in those CDs and consumer investment deposits and together those represent only 11% of our consumer deposits. Turning to Wealth Management. This business is also impacted by tax payments and normally shows the most relative rate movement because these clients tend to have the most Excess cash. The previous quarter's trend of clients moving money from lower yielding sweep accounts into higher yielding preferred deposits And moving off balance sheet onto other parts of the platform seemed to stabilize this quarter and our sweep balances were more modestly down at 72 At the bottom right, note the global banking deposit stability.

Speaker 3

We ended the 2nd quarter at $493,000,000,000 Down $3,000,000,000 from the Q1. We've now been in this $490,000,000,000 to $500,000,000,000 range for the past several quarters. And these are generally the transactional deposits of our commercial customers that they use to manage their cash flows. And while the overall balances have been stable, We've continued to see shift towards interest bearing as the Fed raised rates one more time during the quarter before pausing in June. Non interest bearing deposits were 40% of their deposits at the end of the quarter.

Speaker 3

Focusing for a moment on average deposits using Slide 13, I really only have one additional point to make. While you've seen the modest downtick in deposits for the past several quarters as the Fed has removed some accommodation, We just want to note that deposits remain 33% above the Q4 2019 pre pandemic period. And as you look at the page, Every segment relative to pre pandemic is up at least 15%. Consumer is up 40%, Consumer checking is up more than 50%. And as noted, Global Banking has been right around $500,000,000,000 for the past 5 quarters, And it remains 31% above pre pandemic.

Speaker 3

So let's move to Slide 14 and we'll continue the conversation that we began last quarter Around management of excess deposits above loans. In the top left, note the balances in the Q2 of each year since the pandemic began. The excess of deposits needed to fund loans increased from $500,000,000,000 pre pandemic to a peak of $1,100,000,000,000 in the fall of 2020 And as you can see, it remains high at the end of June at $826,000,000,000 In the top right, Note that the amount of cash and securities held has increased across time in line with the excess deposit trend. And you'll also note the mix shift over time. This excess of deposits over loans has been held in a balanced manner across the period shown With roughly 50% fixed longer dated held to maturity securities and the rest has been held in shorter dated Available for sale securities and cash.

Speaker 3

Cash and the shorter day to day FS securities combined was $516,000,000,000 at the end of the quarter And cash at $375,000,000,000 is more than twice what we held pre pandemic and you should expect to see that come down over time. We made these investments given the mix and transactional nature of our customers' deposits, particularly given the excess deposits built. Note also in the bottom left chart, Combined cash and securities yields continued to expand this quarter and remain meaningfully wider than the overall deposit rate paid. That's a result of 2 things. Securities book has seen a steady decline since the fall of 2021 when we stopped adding to it.

Speaker 3

With less loan funding needs, proceeds from security pay downs have been deployed into higher yielding cash. And through this action and the increased cash rates, the combined cash and security yield has risen further And faster than deposit rates. Deposits at the end of the quarter were paying 124 basis points, while our blend of cash and securities has increased 3 19 basis points. So over the past year, the deposit cost has risen by 118 basis points And the cash and securities yield has improved by 164 basis points. And as a reminder, this slide focuses on the banking book Because our global markets balance sheet has remained largely market funded.

Speaker 3

Finally, one very last One last very important point that I want to make is on the improved NII of our banking book. The NII excluding global markets, which we disclose each quarter, troughed in the Q3 of 20 $29,100,000,000 and that compares to $14,000,000,000 in the Q2 of 2023, so almost $5,000,000,000 higher on a quarter Basis $20,000,000,000 per year. That's led to a stronger capital position even as we returned capital to shareholders And supplied capital to our customers in the form of loans and other financing capital. And then more specifically on the hold to maturity book, The balance of that portfolio declined again $10,000,000,000 from the Q1. It's down $69,000,000,000 since we stopped adding to the book in Q3 of 2021, the market valuation on our hold to maturity book, which is in a negative position, worsened $7,000,000,000 since March 31, 2023, driven by a 54 basis point increase in mortgage rates.

Speaker 3

The OCI impact From the valuation of our hedged AFS book modestly improved this quarter. Let's turn to Slide 15 and we can focus on net interest income. On a GAAP or non FTE basis, NII in the second It was $14,200,000,000 and the fully tax equivalent NII number was $14,300,000,000 So I'm going to focus on that fully tax equivalent. Here NII increased $1,700,000,000 from the Q2 of 2022 or 14%, While our net interest yield improved 20 basis points to 2.06%. This improvement has been driven by rates, Which includes securities premium amortization, partially offset by global markets activity and $137,000,000,000 of lower average Deposit balances.

Speaker 3

Average loan growth during the period of $32,000,000,000 also aided the year over year NII improvement. Turning to a linked quarter discussion. NII of $14,300,000,000 is down $289,000,000 or 2% from the Q1, And that's driven primarily by the continued impact of lower deposit balances and mix shift into interest bearing, Partially offset by one additional day of interest in the period, global markets NII increased during the quarter. The net interest yield fell 14 basis points in the quarter, driven by a larger average balance sheet Due to the cash positioning we chose and some higher funding costs, this quarter's compression we believe was just a little anomalous Driven by our decision late Q1 to position the balance sheet around higher cash levels. Turning to asset sensitivity and focusing on a forward yield curve basis.

Speaker 3

The +100basispointparallel June 30 was unchanged from March 31, 23, at $3,300,000,000 of expected NII over the next 12 months from our banking book And that assumes no expected change in balance sheet levels or mix relative to our baseline forecast. And 95% of the sensitivity remains driven by short 100 basis point down rate scenario was unchanged at negative 3,600,000,000 Let me give you a few thoughts on NII as we look forward. We still believe NII for the full year will be a little above $57,000,000,000 which would be up more than 8% from full year 2022. And this could include 3rd quarter at Approximately the same level as second quarter, so think 14.2%, 14.3%. And then 4th quarter, Somewhere around $14,000,000,000 That's a slightly better viewpoint than we had last quarter for the 3rd Q4 With a little more stability closer to the Q2 level and therefore provides a better start point for 2024.

Speaker 3

So let's talk through the caveats around our NII comments. First, it assumes that interest rates in the forward curve materialize And an expectation of modest loan growth driven by credit card. On deposits, we're expecting modestly lower balances led by And we expect continued modest deposit mix shifts from Global Banking deposits into interest bearing. The past few months have provided us a little more positive outlook around NII, given the apparent stabilization of some elements of deposits as well as better pricing. And now we'll see how the rest of the year plays out.

Speaker 3

Okay, let's turn to expense and we'll use Slide 16 for that discussion. 2nd quarter expenses were $16,000,000,000 that was down $200,000,000 from the Q1. And as I mentioned, the 2nd quarter included $276,000,000 of litigation expense. In addition, we also saw a little higher revenue related expense driven by our sales and trading results. Those higher costs were more than offset by the absence of the Q1 seasonal elevation of payroll taxes and savings from a reduction in overall full time Now excluding the 2,500 or so summer interns that we welcomed into our Over the summer months, our full time headcount was down roughly 4,000 from the Q1 start point 213,000.

Speaker 3

That's some good work after peaking at 218,000 in January. Our summer interns will leave us in the Q3 and hopefully many will return as full time associates next summer. And at the same time in Q3, we welcome back About 2,600 new full time hires as college grads, many of whom interned with us last summer. And that's a very diverse Class of associates who are excited to join the company. As we look forward to next quarter, we would expect the 3rd quarter expense to more fully benefit from the 2nd quarter reduction, even as we remain in a mode of modest hiring for client facing positions.

Speaker 3

Additionally, The proposed notice of special assessment from the FDIC to recover losses from the failures of Silicon Valley and Signature Banks Could add $1,900,000,000 expense for us, dollars 1,500,000,000 after tax, and we just remain unsure at this point of timing to record that expense. Let's now move to credit and we'll turn to Slide 17. Net charge offs of $869,000,000 increased $2,000,000 from the Q1 and the increase was driven by credit card losses as higher late stage delinquencies flowed through to charge offs. For context, the credit card net charge off rate was 2.6% in Q2 and remains well below the 3.03% pre pandemic rate In the Q4 of 2019, provision expense was $1,100,000,000 in Q2 and that included a $256,000,000 Further reserve build, that's driven by loan growth, particularly in credit card and it reflects a macro Economic outlook that on a weighted basis continues to include an unemployment rate that rises to north of 5% in 2024. On Slide 18, we highlight the credit quality metrics for both our consumer and commercial portfolios.

Speaker 3

On consumer, We note we continue to see asset quality metrics come off the bottom and they remain below historical averages. Overall commercial net charge offs were flat from Q1. And within commercial, we saw a decrease in C and I losses That was offset by an increase in charge offs related to commercial real estate office exposures. As a reminder, Commercial real estate office credit exposure represents less than 2% of our total loans. And this is an area where we've been quite intentional around our client selection, Portfolio concentration and deal structure over many years.

Speaker 3

And as a result, we've seen NPLs and realized losses that are quite low for this In the Q2, we experienced $70,000,000 in charge offs on office exposure to write down a handful of properties Where the LTV has deteriorated. Our charge offs on office exposures were $15,000,000 in the first quarter. We pulled forward some of the office portfolio stats provided last quarter in a slide in our appendix for you. We continue to believe that the portfolio is well positioned and adequately reserved against the current conditions. Moving to the various lines of business and their results, starting on Slide 19 with Consumer Banking.

Speaker 3

For the quarter, Consumer earned $2,900,000,000 on good organic revenue growth and delivered its 9th consecutive quarter of strong operating leverage, We continue to invest in our future. Note that top line revenue grew 15%, while expense rose 10%. These segment results include the bulk Of the impact of the costs of the regulatory agreements from last week. Our reported earnings were strong in both periods at $2,900,000,000 It understates the success of the business Because the prior year included reserve leases, while we built reserves this quarter for card growth. PPNR grew 21% year over year even with the added cost of the agreements.

Speaker 3

And the revenue growth overcame a decline in service charges That I noted earlier. Much of this success is driven by the pace of organic growth of checking and cardigans As well as investment accounts and balances, as Brian noted earlier. In addition to the litigation noted, Expense reflects the continued business investments for growth. And as you think about this business, remember, much of the company's minimum wage hikes And the mid year increased salary and wage moves in 2022 impact consumer banking the most and that therefore impacts the year over year comparisons. Moving to Wealth Management on Slide 20, we produced good results earning a little less than $1,000,000,000 These results were down from last year as asset management and brokerage fees felt the negative impact of lower equity, Lower fixed income markets and some market uncertainty impacting transactional volume.

Speaker 3

Those fees were complemented by the revenue from a sizable banking business That remains an advantage for us. As Brian noted earlier, both Merrill and the Private Bank continue to see strong organic growth And produced solid client flows of $83,000,000,000 since the Q2 'twenty two. Our assets under management flows $14,000,000,000 reflect a good mix of new client money as well as existing clients putting money to work. Expenses reflect lower revenue related And also reflect continued investments in the business as we add financial advisors. Slide 21, you see the Global Banking results.

Speaker 3

And this business produced very strong results with earnings of $2,700,000,000 Driven by 29% growth in revenue to $6,500,000,000 coupled with good expense management, this business produced Strong operating leverage. Our Global Transaction Services business has been robust. We've also seen a higher volume of solar and wind investment This quarter and our Investment Banking business is performing well in a sluggish environment. Year over year revenue growth also benefited from the absence Mark's taken on leverage loans in the prior year period. Saw modest loan growth on average year over year and linked quarter, The utilization rates declined and more generally, we saw lower levels of demand.

Speaker 3

As we noted earlier, the deposit flows Stabilized in the $490,000,000,000 to $500,000,000,000 range over the past several quarters, reflecting the benefits of our strong client relationships. The company's overall investment banking fees were $1,200,000,000 in the 2nd quarter, growing 7% over the prior year And 4% linked quarter, a good performance in a sluggish environment that saw fee pools down 20% year over year. Provision expense declined year over year as we built more reserve in the prior year. Expense was held relatively flat year over year Even as we drove strategic investments in the business, including relationship management hiring and technology costs, And additionally, comparisons benefit from the absence of elevated expense for some regulatory matters in the Q2 of 2022. Switching to Global Markets on Slide 22.

Speaker 3

The team had another strong quarter with earnings growing to 1,200,000,000 Driven by revenue growth of 14%, and I'm referring to results excluding DVAs we normally do. The continued themes of inflation, geopolitical tensions and central banks changing monetary policies around the globe, Along with this quarter's debt ceiling concerns continued to impact both the bond and equity markets. And as a result, it a quarter where we saw strong performance in both our macro and micro trading businesses. The investments made in the business over the past 2 years continued to produce Favorable results. Year over year revenue growth benefited from strong sales and trading results and the absence of marks on leveraged finance positions last year.

Speaker 3

Focusing on sales and trading, ex PVA revenue improved 10% year over year to 4,400,000,000 FICC improved 18%, while equities was down 2% compared to the Q2 of 2022. Year over year expense increased 8%, primarily driven by investments in the business and revenue related costs, Partially offset by the absence of regulatory matters in the Q2 of 2022. Finally, on Slide 23, all other shows A loss of $182,000,000 revenue included $197,000,000 of losses on security sales and increased volume of Solar and wind investment operating losses that create the tax credits for the company. As a result of the increased solar and wind tax deal volume And their associated related operating losses, our effective tax rate in the quarter was lower at 8%. But excluding ESG and any other discrete tax Our tax rate would have been 26%.

Speaker 3

So with that, let's stop there and we'll open it up for Q and A.

Operator

We'll take our first question today from Gerard Cassidy with RBC. Your line is open.

Speaker 4

Thank you. Good morning, Brian and

Speaker 2

good morning,

Speaker 4

Alistair. Brian,

Speaker 5

can you give

Speaker 4

us a view from your standpoint of the new proposal and I shouldn't say new, but the speech by Vice Chair Barr about the likelihood of capital ratios going up for large banks like your own. And then second, there was a report today Bloomberg debt, the capital requirements for holding residential mortgages may go up meaningfully. Any thoughts on that as well?

Speaker 2

I think broadly stated, I think as was said by many people that have held the position of the year as a capital in the industry is Efficient. And I think there's been a desire to finish up the Basel III. Those rules will come out, we think in a few weeks Like anything else, we'll deal with them. We have 11.6 percent CET1 ratio. Our requirements currently are 10.4.

Speaker 2

And so we got plenty of capital and it's built up. So I think from a global competitive standpoint, we've got to be careful here because the U. S. Industry is the best Industry in the world and actually does a lot of good for all the countries of the world, including the U. S.

Speaker 2

And frankly, The rules of the plight tend to be more favorable to those outside our country. And so we got to be careful to maintain a competitive parity. But at the end of the day, Gerard, We need to finish this and get this behind us and then the industry will adopt and move forward and but they've got to think through the downside of some of these rules and that they Pushed up outside the industry to non banks, half the asset classes across the board are non banks, including mortgage lending, which you referenced, half of it goes through non banks and those the resilience of those institutions It's interesting to watch through cycles. And then the second thing they have to worry about is competitiveness overall. But and then also just slowing down the economy.

Speaker 2

A 10% increase in our capital levels would disable us from making about $150,000,000,000 of loans at the margin. And you want our banks to Support the economy like we do. So I think all this has to be balanced out as they go to adopt these rules.

Speaker 4

Very good. And then as a follow-up, Alistair, You talked about the balance sheet. I think you said 100 basis point increase would lead to over $3,000,000,000 in net interest revenue growth over the 12 months and a 100 basis point decrease would lead to a decline of just over $3,000,000,000 in revenue. Can you share with us When do you think you might change or what would make you change that position to be liability sensitive? Would you rely on the forward curve or what's the outlook for the balance sheet management that you're looking at now?

Speaker 3

Well, Gerard, I don't think much has changed for us. We've talked about the fact that for us, it's this idea of balance that's key. And If you look at our disclosures around interest rate risk over the course of the past couple of years, you'll see it's more balanced, Both upside and downside, and it's a narrower corridor over time. So that we're trying to sustain NII at a higher level for longer. That's what we're trying to engineer.

Speaker 3

So I think going forward, there won't be a lot of change to our philosophy in that regard. We feel like we're in a pretty good position in terms of balance. We'll be tweaking at the margin, but what will largely drive things from here is just normalization of deposits and good old fashioned loan growth. Very good. Thank you.

Operator

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

Speaker 6

Good morning, Glenn. Good morning. So no one could take issue with 600 basis points of operating leverage.

Speaker 3

But I

Speaker 6

just always like doing a little gut check. Expenses up 5%. I heard all the reasons why a lot of investment, the FDIC charge is coming. But I just want to make sure, did anything change over the last like decade or so, you've been basically flat for life. Is expenses more of a relative gain relative to revenues?

Speaker 6

Or do you think you can keep expenses in and around the same area As

Speaker 7

you continue to invest. Thanks.

Speaker 2

So, Glenn, I think if Alistair gave you a trajectory, which if you look at it Q4 last year, the Q4 this year gets relatively flat year over year. And as revenues flatten out because the Interest rate movements flatten out. You'll see that as we decline in the quarters that will be strong. So as we think about it, As we think about the forward, we think about the ability to control headcount and have expenses continued to come down, but they're going to stay at a level that's relatively consistent where we are now over time. And the goal is then to grow revenue faster and expense.

Speaker 2

We've been doing it for many decades. You can see that in our data. And but the way we do it differs From 5 years ago to 10 years ago to last year and that the ability to move the branch Configuration around when we had 6,000 branches down to 4,000 or 3,900, 3,800 now is different from 3,800 to where it might end up. And so You should expect us to continue to engineer by applying massive amounts of technology. Erica saves a lot of transactional activity.

Speaker 2

Zelle saves a lot of transactional activity deposits by mobile phones, save a lot of activity, All that goes on and then what we're offsetting with that is from the decade that you talked about, we probably went from $2,500,000,000 of technology initiatives a year to 3 $800,000,000 And we have a lot more revenue it's compensated for thinking about in the Wealth Management business and that's those are things we fight all the time. So We expect to manage expenses in line with the revenue. As we got to 2019, we told you that we're going to have to start growing expenses at a Modest growth rate relative to the revenue growth rate. We'd outgrow the economy on revenue. Expenses grow a couple 100 basis points lower.

Speaker 2

We're kind of going to be back in that mode, frankly. It's just with inflation, they kicked up and now we flatten it back out and then we'll get back in sync as we move to 2024 and beyond.

Speaker 3

And Glenn, look, the only thing I would just add to what Brian just said, We put up 16.2% in the Q1. We were 16% -ish this quarter, obviously. Yes, we kind of feel like next quarter just with all the work that we've done around headcount and getting the firm in the place that we want now, We feel like we're well positioned to deliver $15,800,000 this quarter. If and when we keep going, we think we're going to be somewhere around $15,600,000 or so in Q4. So to Brian's point, number 1, we like the trajectory now.

Speaker 3

We've shaped the headcount over time to get to the place where we want to be. And that would compare I think Q4 last year was 15.5%. So when you talk about that sort of flattish idea in an inflationary environment, we feel like that's a Pretty good way to end this year and a pretty good way to set up for next year.

Speaker 6

Totally agree. Thanks for all that. I appreciate it.

Operator

We'll take our next question from Mike Mayo with Wells Fargo. Your line is open.

Speaker 2

Good morning, Mike.

Speaker 6

Hey, good morning. So I don't think consensus has you the positive outcome of the 3rd Q4. And I just want to make sure I heard you correctly, Brian, in your opening remark is you expect that 8 quarter of consecutive positive operating leverage to Continue. So you expect 9 quarters or 10 quarters or as long as you can? And on the one reason is just the NII headwinds, you It should be kind of flattish in the Q3, which and then down from the Q4.

Speaker 6

You said the commercial loan demand is a little bit less and utilization is less. On the other hand, you did just give some specific expense numbers. And maybe, I guess, So the specific question is how long do you expect those 8 quarters to last? Are we done with that? Do you expect that to go?

Speaker 6

And then to what degree To your digital efforts, your first three slides, 5, 4, 5 and 6, play a part in Sustaining this positive operating leverage, say, through 2024 2025, is that a goal or is that an expectation?

Speaker 2

Our goal is always to maintain it. And Mike, you point out that the toughest time was when you have sort of A twist in the interest rate environment and you could see that at the end of 'nineteen and then we got right back into it right after the environment stabilized. But I was thinking about a question you asked me a few years ago, Mike, was when NII is coming in, are you going to let it fall to the bottom line, are you going to spend it? And about 80 plus percent of it has fallen to the bottom line, Which shows you how we position the franchise from the Q2 of 'twenty one till now as we went through the interest rate Yes, the fast interest rate raising. So we gave you the specific as you said, the specific expense guidance by quarter.

Speaker 2

We'd expect that should produce operating leverage. It gets tougher And then it will get easier as we start to see the stabilization of deposits and loans and loan growth sort of routinely come through and the economy frankly shaking through whether we're going to have And so we feel good about what we've done. That's why I try to give that longer period of time so people have the context. It's very different environments how we Sometimes revenue fell and expense fell faster, sometimes revenue grew and expense grew, but slower in all the different ways. So, we We'll keep working at it.

Speaker 2

Mickey, leading indicator we like is we've been able to manage the headcount down as Alistair said earlier. And frankly, that is in the face of a turnover rate Year over year, which has dropped in half, which is good because then we're not training and hiring as many people and that then sets us up for the second half of the year because that The account benefit has not really come through the P and L and will offset some of the other inflation.

Speaker 6

And then as it relates to NI specifically, You said that the last few months, you're a little bit more confident given stabilization and pricing. I guess, We're not seeing that every bank, right? Some banks getting worse, some banks getting better. So what is it that gives you more confidence on the NII front and the deposit stabilization front.

Speaker 3

Well, I can't look, I can't speak to other banks, Mike, but Obviously, we know we're in a privileged and advantaged position relative to our client base. I just think it's interesting, you look at that Global Banking set of results over the course of the past year and a half in particular, That's extraordinary resilience. And look, Q2 is tax season. So look at the wealth management business, for example, deposits were down $9,000,000,000 but we know they paid tax payments of $14,000,000,000 $15,000,000,000 $16,000,000,000 last quarter. So There's beginning to be a little more stability.

Speaker 3

And obviously, our focus has always been on transactional primary operating. And we may be seeing the benefit of that in some degree, but we show you on slide, I think it was Page 12 of the earnings deck, that's where it is. We showed that last quarter, we showed again next quarter, but it's just The Fed's engineering this across the board and we're just reacting to what we see from our customer base.

Speaker 6

Okay. Thank you.

Operator

We'll take our next question from Jim Mitchell with Seaport

Speaker 4

Maybe just a follow-up on deposit behavior. I Appreciate the comment that you have very low loan to deposit ratio, you don't have

Speaker 2

to chase rates. So it feels like betas can stay low. How do you

Speaker 4

think about how are you thinking about the mix going forward? We are seeing NIBs come down, CD demand is picking up. So how are you What are you seeing in your deposit base with respect to mix?

Speaker 2

I think, Jim, one of the things that As we think about deposits, we think about across each of the customer bases and that's what Page 12 shows you. We think about what do they have cash flows for. They have cash Transact and they have cash that's in excess of that. And what happens is depending on the customer segment that cash moves to the market, that excess cash moves to the market,

Speaker 3

but the transactional cash is all with us. That transactional

Speaker 2

cash far exceeds for us, Cash is all with us. That transactional cash far exceeds for us our loan balances. So we have excess transaction Kash, and a lot of it is low interest checking, no interest checking. Even if it's a money market, it's that sort of cushion that Yep, consumers and wealthy people, wealthy consumers and average consumers maintain to pay their bills and unexpected expenses. So that's what you've seen and that produces a Cost of deposits of $1,200,000 which is far different than we see other people have and that That's just happened.

Speaker 2

So now the question is how much moves and as Alistair said earlier, we're after tax time now where we have a big wealth management payout To the taxes, we also are past the point where people have way past the point of last stimulus payments where people will have to that money has been in And still is in their accounts to a large degree as we look at them and they're paying that down slowly. So the average balance in our checking accounts has gone from a high of 11,000 The 10,000, yes, 600, 500, something like that. So all that dynamic, but you got to go back and say, it's the mix of interest bearing and non interest bearing is a little bit of a misnomer because it's really what the customer uses the cash for and if they use it to transact and run their household, that's a very stable base and that's what this Data shows across time and it's fundamentally a lot higher than pre pandemic. So consumer $700,000,000,000 pre pandemic, dollars 1,000,000,000,000 now. Checking of that, if you look on the pages in the deposit descriptions, you'll see those numbers are at Page 13, I think it is.

Speaker 2

Those numbers will show you how much is stayed in checking. That's because we have more customers, but more importantly, the average consumer Yes, through inflation stuff has more money around and that provides great risk for the mill. Right. So do you

Speaker 4

feel like that mix shift is starting to slow and stabilize?

Speaker 2

That's what the data on Page 12 shows you. That's why we show you this level of detail in our customer bases or lines of business that many don't show you to Demonstrate that that difference is there for us and other people maybe there too. I just can't find it in their data. But if you look at that's why we show you page Well, actually see during the Q2, the week by week average balance movement and it's as Alistair said earlier, It's very stable in GWIM. It's very stable in Global Banking even in non interest bearing piece.

Speaker 2

Half of that is excess balance, half of it is Earnings credit rates through the GTS process and then so you got to be careful that. And then you look at the consumer and it's bouncing around the high 900 $80,000,000,000 to $1,000,000,000,000 depending on the thing and ended at $1,000,000,000,000 and that happens when payrolls happen, all that stuff, but that's hugely, Hugely advantaged pricing, 20 odd basis points in total for the consumer business. And you asked about CDs, we only have $40,000,000,000 of CDs. So Yes, we are when our customers are asking for CD rates, we give them to them, it's just not the core business. And then we have the investment side, We push those wealth management flows and the consumer investment flows are part of our deposits moving over to the market when there's excess cash.

Speaker 3

Right. All very helpful. Thanks a lot.

Operator

We'll go next to Chris Tauske with Oppenheimer. Your line is open.

Speaker 3

Yes. Good morning and thanks for taking the question. In the press release last week's settlement with BofA, CFDB Director, Chopra, alleged that You among other things opened customer accounts without consent. And I'm just wondering how is such a Possible in the post Wells Fargo era and can you compare and contrast what happened At your firm with what happened at Wells?

Speaker 2

Frankly, Chris, it's when we went all through the horizontal review by the OCC And all the practices and everything were changed then. And these small number of accounts that are part of this are from that Time period. It just did not the other agencies did anything and then the consumer bureau had to sit sitting around and kind of cleaned it up this quarter. So that was that one.

Speaker 3

The time period reflects which time period?

Speaker 2

It reflects up to the current time, but the accounts were from Yes, 16 and before, 17. Back when remember the control occurred, Curry did The 3 phase review of all their firms that they didn't find, you can go look at the data and then ultimately Next Controller testified in Congress and started the Obama administration after Wells and then led in the early part of the Trump administration With audit, yes, control auditing and you can go look if that was cleared up and we've made the changes in those processes at that time.

Operator

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

Speaker 5

Hi, good morning.

Speaker 3

Good morning, Betsy.

Speaker 5

Couple of questions. 1 on the operating leverage that I know you discussed earlier. I mean, in the past when you had the record number of Consecutive quarters of positive operating leverage. It seemed like it was being driven primarily a lot of inputs, but One of the big drivers was consolidation of branches and now it's an investment spend environment in branches. So I'm just wondering if there is if you would agree with that and if there's a different way that you're going to be delivering this Positive operating leverage as you're increasing investment spend in one of the core platforms of the company?

Speaker 2

Betsy, that's kind of what I said earlier. It's been gotten by different ways, different periods of time. But even in the last year, the numbers of branches, I think, dropped about 3,900 to 3,800 and change. And so even as we deployed new ones. And so you're consolidating branches in Mark, you've been in a long time with lots of branches.

Speaker 2

The ATM count continues to drift down. But importantly, if you go to the Digital pages and look at the activity levels by customers and you're speaking mostly to consumer business, but affects all customer bases. And you see things like Zelle transactions far exceeding checks. Remember that what that means is that we don't have to process a check on the back end of that. And so And you process it, push it through.

Speaker 2

So all that continues to grow very quickly and continues to change the overall operating costs in our consumer business. Your cost of operating plus the cost of pays and deposits is still 130 odd basis points or whatever. It's Strong. If you go where the big moves are coming is what we're doing in the markets business, for example, in terms of deeper, deeper digitization. There was always equity trading was always Digitized, but the operational process behind that, the throughput of the amount of stuff that's going straight through.

Speaker 2

And then what's behind that also, on the wealth management's customer Getting their statements and statements not being delivered to customers' home, but delivered to economies, dollars 500,000,000 annual Benefit that's accumulated over time. And so if there were some magic thing you could pull, you'd pull it, but these are a whole bunch of Operational excellence ideas, it seems intramial to the general public, but it just is this constant improvement of the platform allows us to constantly manage people down. As a percentage of work done by people always comes down. And then now with artificial intelligence and enthusiasm, leave aside that's in the future. The way we've applied it so far has enabled us to do things like our business bankers are more efficient at calling because we use We use artificial intelligence and programs to tell them which prospects to go to, not to tell they know their clients and they run it, but which prospects they should approach first, They're more efficient or the advisor match, which has an intelligence base built into it to match a client to an advisor that's You saw the statistics about the numbers of leads, 20,000 leads.

Speaker 2

All this is adding efficiency. So yes, the brand system It's got it's come down a slope and that slope is starting to flatten out, but in that slope is a massive reinvestment in rehabs and a massive opening And then more and more deposits over top of that, which keeps that efficiency going.

Speaker 5

So your point on enthusiasm for AI, But in your comments, it sounds like there's more legs to that that you're anticipating going forward as well. Is that fair?

Speaker 2

Yes. Erica, we started working on probably 8 years ago now. It's a natural language processing A capability that could answer questions that we could make sure the answer was what we wanted to be and that ran on our proprietary systems. And so it's Algorithm anticipates the answer to the question, but it comes from our data and then looks in your account. But those 165,000,000 interactions the last quarter, all of them would have been an e mail, a text, a phone call, and they were all done through the customer entering it into Erica and getting an Sir, and then going on and started but that will just keep expanding to become a higher and higher functionality.

Speaker 2

It is a Start at a methodology, which these new programs are far in excess of that, but they're not tested on data. They hallucinate and all these wonderful things that you hear the experts talk about That have to be carefully controlled before you apply it, but Eric is using some of the same principles, but applied in a very controlled environment. And by the way, when we do it with our Drafting the CO credit offer memorandum or we do it with a business targeting that we talked about, all those are Yes. We applied it, but it's a very controlled setting. So it still has a lot more out there, frankly, as it gets understood better and how it works better and How can the attribution, accountability, those types of things have to build in, but Erica that was built in from the start.

Speaker 5

Okay, thanks. And then just one follow-up on the capital question. I know that you are reviewing the SCB with The Fed, but I'm just trying to understand what kind of expectations you have for buybacks as We look forward here realizing that there's some puts and takes with Basel III, but there's some benefits here with the SCB. Thanks.

Speaker 3

Yes. So we got the final stress capital buffer along with the rest of the industry in August. So we'll wait for that obviously. And then Betsy, I think we'll likely Have to wait for Basel III final clarity. That's still moving.

Speaker 3

It's a we don't have the proposed rule yet. Then we have to wait for the comment period, then we got to wait for the final rule. So there's a lot that needs to go on before we get full perspective. But I think Brian said it well. I mean, we've got plenty of capital.

Speaker 3

We've been buying back enough shares to offset the share dilution and we got flexibility to do a little bit more. So the other thing that you see over the course of the past year Is obviously stressed capital buffer last year, and we had to add 90 basis points. Well, we've added 110 over the course the past year and kept return of intangible common equity around 15.5% while buying back shares. So We've got the flexibility to do a little bit of everything. But I think we want to see what the final rules look like before we make too many decisions.

Speaker 5

Yes. All right. Thank you.

Operator

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

Speaker 6

Good morning, Tim. Hi, good morning. Just one question on credit to follow-up your comments. So it looks like The car normalization is progressing very gradually, 90 day past dues, but only kind of marginally. Just your points about the consumer having still plenty of cash, the economy holding up well, just your view on just ongoing normalization Card losses specifically and just anything else that we should be mindful of when we think about credit normalization?

Speaker 6

Thank you.

Speaker 3

Dan, I think you nailed it. That's sort of being you just watch our if you look at our charge offs, for example, that's mainly about loan growth A little bit about the rate picking up just a little bit, but it's still well below pandemic. You can see that. And Q4 2019 was a great Quarter 4 Asset Quality and Cards. So it gets back to this idea that the consumer is still in a pretty healthy place.

Speaker 3

You can see that in the unemployment statistics and you can see it in the way that they're just continuing to spend a little bit more money year over year. I feel like we've been pretty consistent. The consumer is pretty resilient. That remains the case. And we're benefiting it from right now And the card experience.

Speaker 6

Thanks. And sorry, just one more follow-up on the fee side. Can you help us understand The card, the deposit service charges, asset management kind of all been stable to slightly lower. Have the effects that you put through In terms of all the service charges changes and new rewards Card benefits and all that, are we close to getting that run rated? Any signals of stability in some of those areas?

Speaker 2

So as Alistair mentioned earlier, there has been a 10 year change in how we Work in the overdraft area in the biggest in another set of changes were made and fully implemented in the Q3 of last year. So, they're in the current run rate. It's just the year over year comparisons. This quarter picks up a little bit of pre final changes to post. So if you look at the FDIC data, I think we're down to $30 odd 1,000,000 a quarter or something like that in overdraft fees compared to others that are multiples of that.

Speaker 2

But We've worked it's all through the system. It's all done and all the changes required of under the recent announcements stuff had been made for a couple of years, so it's in the run rate, so to speak.

Speaker 6

All right. Thanks a lot. Got it.

Operator

We'll go next to Charles Peabody with Portales. Your line is open.

Speaker 7

Good morning. Question about your interest bearing deposits with the Fed and I'm looking at Page 8, your average balance sheet. And those balances were up quite considerably quarter over quarter and yet your deposit base was relatively flat. So I'm just Curious what the thinking behind that was, was it a desire to build liquidity? Was there an arbitrage opportunity for NII?

Speaker 7

What was why build the balances so aggressively?

Speaker 3

Yes. So if you go back to we talked about this at the end of last quarter, Charles. At the end of last quarter, it was an interesting time for the industry, and we felt like it was prudent to just build cash during a period like that. And so that's what we did. And it was obviously an extraordinary period.

Speaker 3

Since then, as the environment is normalizing, I'd anticipate and I talked about that earlier, you'll see our cash levels just continue to come back down. And so that's all that's happening. It was a choice on our part to position with cash and you'll begin to see that drift lower now. Okay.

Speaker 7

And as a follow-up then, would that imply that the average balance sheet or more importantly RWAs will start to shrink And that would help your capital? I'm just trying to understand the capital.

Speaker 3

No, it shouldn't really impact RWAs because most of that is sort of Low or 0 RWA. What it should impact is if you look at our net interest yield, that's always A question of numerator and denominator. And when we increased the cash balances, That inflates the denominator for a period of time. So that doesn't hurt NII, but it does inflate your balance sheet just a little bit. So I think As you look forward, what you should expect is we just get back to work on both parts of that numerator and denominator.

Speaker 3

We'll grind away at the NII side. And then on the denominator side, we'll have a smaller, more efficient balance sheet as the environment normalizes. And in the meantime, it hasn't hurt NII

Operator

We'll go to Erika Najarian with UBS. Your line is open. Hi, good morning. I'm sorry, I missed the earlier On the net interest income trajectory, Alastair, clearly a big focus for your shareholders. You mentioned when you were responding to Gerard's first question is that you narrowed the volatility of net interest income.

Operator

And I think that investors are I'm sure I'm going to start asking you guys and us about the starting point of $14,000,000,000 for NII next year. I guess we're wondering if the Fed stays higher for longer, doesn't move, How does that impact that $14,000,000,000 run rate? Does that $14,000,000,000 capture a cumulative deposit beta that would Fully reflect what you would expect to experience through the cycle. And then I have a follow-up question from there.

Speaker 3

Well, all of our asset disclosures reflect The betas that we believe at the time, so that part's always in the disclosures. It's too early for me to say on 2024. We're giving guidance for the rest of the year, so you have a pretty good sense of what we're pretty confident around. But last time I looked at the forward curve, we had 1, possibly 2 hikes this year and then as many as 5 declines next year. So there's a lot between Here and there, and I think we'll just as soon take the next 3 to 6 months to figure out, Erica, exactly how we feel about 2024.

Operator

Totally understand. So going back to the down 100 basis point closure that would yield to down $3,000,000,000 for a full year basis. How much of that, given that you have Exposure to the shape of the curve, not just the short end of the curve because of your securities book. How much of that is Short rates versus long rates in terms of that drop. I guess what I'm trying to figure out is, if I simply divide $3,000,000,000 by 4, right?

Operator

That would get me a run rate of $13,250,000,000 on a quarterly basis. And you mentioned There are about 5 cuts in next year. But if it's not on the short end, right? And if it's half half, Then I could get to a run rate of $13,750,000,000 So just I know there's a lot in there, so I would just love your thoughts on everything I just said.

Speaker 3

Well, you lost me a little. But I'll say this, we've got it's actually down $3,600,000,000 It's not down $3,000,000,000 So that's number 1. Number 2, you should think about the short end being the vast majority of that. And number 3, part of the reason that I think we feel like We've narrowed this corridor and we've got a little more stability around it is, A, the securities book and B, just as importantly, there's been a large rotation To interest bearing. And so as rates in a disclosure like this, as rates come down, One would expect that we'll be somewhat insulated from that in a different way than we might have 2 years ago when we didn't have as much interest bearing.

Operator

We'll take a follow-up from Mike Mayo with Wells Fargo. Please go ahead. Your line is open.

Speaker 6

Hey, I just keep staring at slides 4, 5 and 6 for the digital progress that you're making and trying to connect that to your expenses and operating leverage. And I guess where I get to is, certainly you're signaling that Trends should be good for revenue versus expense or at least you're trying to have that. But I still look at the efficiency ratio on expenses for revenues of 64% or 62% and then you compare that to the levels from 2018 2019 when it was 57% 58%. So I guess the question is, You guys with all these digital initiatives and progress and again, I appreciate The disclosure on these slides and it'd be great to have more

Speaker 7

of your peers disclose that.

Speaker 6

With all that progress, why can't you get back levels from 2018 2019 or at least below 60% and if so how long would it take?

Speaker 2

Mike, the linkage of the digital activity to produce the many quarters of Operating leverage over the last 8.5 years, etcetera, is an absolute tie in. And Betsy asked about the branch count and all the things that we've done. The efficiency ratio for us is has a plain element, which is the wealth management business is a big part of our revenue base It has a different operating dynamic because of how it's reported. As you well know that the revenue has a the cost of Compensation as a percent of revenue is high and we basically make $0.50 on a dollar for every dollar past the revenue takeout, which The advisor compensation level and we are continuing to try to improve that and make the advisor more efficient and things like that, but That's a major change. We improved year over year.

Speaker 2

And frankly, we're still cleaning out some pandemic related costs and things like that. Yes, we'll continue to drive that down. And as net interest income has come up and be a more important part of the business That helps push that efficiency ratio back down and that's the goal. I mean, you're describing what we go to work and do every day and the way we do it is The application of technology across the board and then removing work from the system and bringing that out and bringing it to the bottom line And then making the investments we did to make to make it happen again. So we'll continue to do that.

Speaker 2

But the efficiency ratio, remember, for us, if you go line of business It's best in class. It's just we have a bigger mix towards the wealth management business than most other people.

Speaker 6

And let me just try one more time. On the Erika and It could be Bank of America AI, maybe you should spin out your Erika business, but you guys highlight number of hours It saves in manual labor. And do you have a connection of that to what that saves In expenses or what that could save or should save over the next few years?

Speaker 2

Yes. It will continue to allow us to do more with same amount. So if you think about from 2019 to now, Mike, remember the number of customers who do their core checking list is up 10%. So it's not a and that is a lot of people. It's 3,000,000 more customers doing 20, 30 transactions a month and all that's going through on a relatively Flat expense base and we've been we've had inflation and wages and things, we've absorbed all that as part of the thing and That's why the costs have changed.

Speaker 2

But the reality is we flatten that back out and then we'll keep driving it back down. And that if you look at the cost of deposits, which is the cost of running all that As a percentage of deposits, you can see that on the consumer page, it still maintains a nice break against the rate they would receive For the deposit balances. So we're working at simply put we had 100,000 people in the consumer business a decade plus ago. We now have 16 going and it comes down a little bit every quarter, even though we're putting new branches with an average of 5 to 10 people and depending on the location and things like that going on. And so that just keeps Going in the right direction.

Speaker 2

Now if you take that across other things, in our operations group, the team there continues to have flat headcount to down headcount and we invest that back in technology side for more developers, you have 20 odd 1,000 on our payroll plus another 10 or 15 of third parties that go through frankly the Top lines and so we keep trying to drive it in to make us more efficient. So all the principle you're saying is right and we expect it to continue to have a benefit.

Speaker 6

All right. Thank

Operator

you. There are no further questions in queue at this time. I'd like to turn the program back Brian Moynihan for any additional or closing remarks.

Speaker 2

Thank you and for joining us all. As you think about the quarter, Yes, strong profitability, strong 15% return on tangible common equity or better, continue to drive organic growth, continue to drive operating leverage. And we gave you clarity on the future path of expenses in NII, but above all else in the quarter where we've had a strong Capital markets performance and the strong investment banking performance, I think, along with our other usual great performance in this business,

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Earnings Conference Call
Bank of America Q2 2023
00:00 / 00:00