Bank of America Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 17, 2023

There are 14 speakers on the call.

Operator

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

Speaker 1

Good morning. Thank you. Welcome and thank you for joining the call to review the 3rd quarter results. As usual, our earnings release documents are available on the Investor Relations section of the bankofamerica.com website, And it includes the earnings presentation that we will be referring to during the call. I trust everybody has had a chance to review the documents.

Speaker 2

I'm going

Speaker 1

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 we do that, let me just remind you that we may make forward looking Statements and refer to some non GAAP financial measures during the call. Forward looking statements are based on management's current Information about non GAAP financial measures, including reconciliations to U. S. GAAP can also be found in our earnings materials That are on the website.

Speaker 1

So with that, Bryant, I'll turn the call over to you.

Speaker 2

Good morning, everyone, and thank you for joining us. As usual, Starting on Slide 2, our 3rd quarter here at Bank of America was another strong quarter as we delivered $7,800,000,000 in net income. That is a 10% growth over the year ago Q3. And for the 1st 9 months of the year, we have earned $23,400,000,000 an increase of 15% over 2020 We grew clients and accounts organically and at a strong price across all our businesses. Our operating leverage was about flat.

Speaker 2

We improved our common equity Tier 1 ratio by nearly 30 basis points in the quarter to a level of 11.9% against a current minimum of 9.5%. We saw an increase in our deposits and we maintained our strong pricing discipline. We continue to maintain $859,000,000,000 Global Liquidity Sources. We do also deliver a good return for you, our shareholders, with a return on tangible common equity of over 15% and a 1% return on assets. Just a quick note on what we see in the economy.

Speaker 2

Our team of economists predicts a soft landing with a trough in the middle of next year. We see that in our customer data, our 37,000,000 checking customers, we see their spending slowing down. You can see that on Slide 34. The Q3 was up about 4% over last year's Q3. Earlier this year, that would have been more of a 10% increase year over year.

Speaker 2

And for the entire year 2022, it increased 10%, round numbers over 21. This 4% level is consistent with the spending we saw in the pre pandemic period from 2016 to 2019. That is consistent with the low inflation, lower growth economy. As we move into October, the spending is holding at that 4% level, so growing But growing at a basis more consistent with low growth, low inflation economy. With that, let me turn to Slide 3.

Speaker 2

We provide various highlights and Alistair is going to cover a lot of this. Our team continues to focus on driving organic growth, driving digital progress and operational excellence, which Keeps us focused on operating leverage. A few words on organic growth as we flip to Slide 4. Every business segment had organic growth. In Consumer, in quarter 3, we opened more than 200,000 net new checking accounts this quarter alone.

Speaker 2

We also opened another 1,000,000 credit card accounts. We have 10% more investment accounts this year, 3rd quarter end than we did last year. In small business, we have seen 35 straight quarters of net new checking account growth. We have also seen good small business loan growth And our loans are up 14% from last year. That was in this quarter, our small business teammates extended $2,800,000,000 in credit to Small Business in America In Global Wealth, we added nearly 7,000 net new relationships to the Merrill and Private Banking franchises, and our advisors opened more than 35,000 New bank accounts for the 3rd consecutive quarter fulfilling both investing and banking needs for those clients.

Speaker 2

We also increased our number of advisors. In the past year, Across our wealth spectrum in GWIM and in consumer investments, they have combined to gather $87,000,000,000 in total net flows. Our Global Banking team, we added clients and increased the number of products per relationship. Year to date, we've added 1900 new commercial and business banking clients. That is more than we added in the full year last year.

Speaker 2

Even while activity is low, the investment banking team continues to hold its number 3 position. In the Global Markets, we continue to see performance establish new records for our firm. I'm going to cover that in a little more detail in a moment. As you can move to Slide 5, you can see the digital adoption engagement volumes continue to increase. We lead the industry in digital banking and continue to provide the best in class disclosures.

Speaker 2

You can find those disclosures by line of business in the appendix on Slides 26, 2931. We also continue to receive top accolades from 3rd parties around these capabilities. Most important, these capabilities are valued by our clients and customers and allow us to grow with great expense leverage. Let me give you a few examples. Our consumer Merrill clients logged into our consumer banking app, a record $3,200,000,000 times this quarter.

Speaker 2

Even at this scale to beat our expectations with almost 19,000,000 users, up 16% in the past 12 months. CashPro app sign ins with our business clients are up more than 40%. And we recently added the Erica functionality to CashPro to help corporate clients benefit from that artificial intelligence. Likewise, Zelle uses continues to grow. Zelle transaction levels are up more than 25% from last year, and Zelle is becoming a meaningful way Our customers move money.

Speaker 2

In fact, customers now send money with Zelle at twice the rate they write checks. We're nearing a period where the Zelle transactions sent will exceed the combination of checks written and ATM withdrawal transactions. As you move across the lines of business on the slide, the story is the same. All these capabilities help us deliver faster, Safer and more efficiently and all of it gets strong customer and client feedback. When you put that together, that helps us drive operating leverage And again, more recently, we've had an 8 quarter streak leading to this quarter.

Speaker 2

We acknowledge to you this last quarter that operating leverage is going to be Tough for a few quarters as we navigate through the trough of net interest income. But as you can see on Slide 6, we managed to grow our Revenue year over year faster than expense in dollar terms this quarter, even though the percentage change was basically flat. Now in January, we told you we'd manage our headcount down to help make sure we got our expenses in line. Over the course of 2023, We've seen moving from 2022's great resignation to a current level of record low attrition in our company. All that meant the team had to work hard to manage that headcount down.

Speaker 2

And they did it. Our headcount is now down over 7,000 FT feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet Es for a peak in January, Even with the addition of 2,500 college grads this fall. As a result, you've seen expense decline from $16,200,000,000 Quarter 1 to $16,000,000,000 in quarter 2 to $58,800,000,000 this quarter. And by the way, we've done this without special charges or large layoffs. Expense will decline again in the 4th quarter, excluding any FDIC special assessment, of course.

Speaker 2

We expect to report 15.6 1,000,000,000 in expenses in 4Q. Now interestingly, the debt is up only around 1% from Q4 of last year. This is stronger expense guidance than we thought we could do earlier in the year and sets us up nicely for next year. Shifting gears, let's focus on the balance sheet. Slide 7 shows the breakout of deposit trends on a weekly ending basis across the Q3.

Speaker 2

We gave you this chart last quarter In the upper left hand, you can see the trend of total deposits. We ended quarter 3 at $1,880,000,000,000 up from quarter 2 and better than industry results. What you should also note is the cost of these deposits. Our team has rewarded customers with higher rates for We initiated deposit growth and growing share with all with superior mix and cost. You will note that we are now paying 155 basis points All in for deposits, which is up 31 basis points from last quarter.

Speaker 2

I ask that you remember 2 things when you think about the deposits. The rate remains low relative to many because of the transactional nature of our deposit relationships with $565,000,000,000 in non interest bearing deposits. And you can see in the upper right alone, in low interest and no interest checking, there's $504,000,000,000 in consumer. Secondly, remember the importance of the spread against The quarter's average Fed funds rate. This position is very advantaged compared to past cycles because the transactional accounts in the current cycle are a much higher mix of Bank of America's deposits.

Speaker 2

I would also add that while we maintain disciplined deposit pricing, we pay competitive rates to customers with excess cash Seeing higher yields across all the businesses. If rates fall, those particular products will see the rates come down also. Dropping into the business trends, in consumer, if you look at the top right chart, you saw a $22,000,000,000 decline. Note the difference in the movement through the quarter between the balance of low to no interest Checking accounts and higher yielding non checking accounts. You can also see the low levels of our more rate sensitive balance in consumer investments and CD balances In total, we have $982,000,000,000 in consumer deposits.

Speaker 2

In consumer alone, this is $250,000,000,000 more than we had Pre pandemic, the total rate paid on consumer deposits in the quarter was 34 basis points. This remains very low driven by the high percentage of Most of the quarter's rate increased as concentrated in CDs and consumer investment deposits which are about 13% of the Turning to Wealth Management, balances were flat. We saw a slowing in the previous quarterly trend of clients moving money from lower yielding sweep accounts into higher yielding Preferred deposits and off balance sheet products. Suite balances were down by $7,000,000,000 and replaced by new account generation and deepening. At the bottom right, note the global bank deposits grew $2,000,000,000 and have hovered around $500,000,000,000 for the past 6 quarters.

Speaker 2

These are generally the transaction deposits of our commercial The annual stress tests are now over a dozen years old Using ever increasingly harsher test scenarios have proven that capital is sufficient. Banks have proven to be a part of the solution during the more recent pandemic and the banking disruption in March this year. If we add to our capital, it will reduce our lending capacity to American business consumers And those trade offs are being debated. But as far as the rules are concerned, there are many parts of the rules that our industry doesn't agree with because of double counts or increased trading and market risk. And we're talking through the proposals and working, and we're hopeful they'll change.

Speaker 2

But in any event, they may not. If they don't, how will they affect us? If you go to Slide 8, you can show the expected impact as we interpret those proposed rules. This assumes that they're proposed today without any changes. The proposed rules would inflate our risk weighted assets by about 20%.

Speaker 2

The biggest increase in RWA would be a couple of $100,000,000,000 in operational RWA. The next biggest category investments in solar and wind. Looking at the capital we held against the inflated RWA on the right side of the slide, I'd remind you today that our minimum capital requirement is to hold 9.5% in common equity Tier 1. But based on our GSIB charges That are going to come into effect on January 1, 2024, we moved to 10%. So I'm going to use that as a requirement.

Speaker 2

Holding 10% today Means $163,000,000,000 that we finished the Q3 with $194,000,000,000 So today, we have more than $30,000,000,000 excess capital. Now let's assume the proposed changes going through in full. Those proposed changes are phased in from the middle of 25 to 28 Under the current proposal, when those are fully phased in, as we used to call Basel fully phased in, if you remember, we would have a need for 100 So we hold the required capital today and of course we'd have to build a buffer to that throughout the implementation period. But if you look at the bottom of the page you can see just The last 9 quarters, the kind of capital generation this company has. Once we understand the final rules, we'll of course have a chance to optimize our balance sheet And appropriately price assets to improve the return on tangible common equity.

Speaker 2

Now before I turn over to Alistair, I just wanted to highlight one of the businesses that we've talked about Over the many years, that's our Global Markets business. Global Markets represents 17% of the company's year to date earnings and is one of the top capital market It's one of a handful of firms that can do what it's due, providing advice and execution in every major market around the world. Jimmy Damara and the team who run the business asked us for an additional investment around 4 years ago and they've grown this business with an intensity that clients have appreciated and rewarded us with more of the business. This has produced strong revenue growth. We've grown the balance sheet here, but have done it efficiently.

Speaker 2

That's allowed us to grow sales and trading revenue over the past 12 months consistently, Now stands 32% higher than the average of the 5 years leading into the pandemic and the investment in the business. And through effective cost management, we also generate 11% to 12% returns on capital in this business. This exceeds our cost of capital even as we continue to allocate more capital to the business. Churns are even larger if you combine it with the Global Banking business that many show the businesses combined and take because our corporate clients also take advantage of these industry leading With that, let me turn over the call to Alistair to walk through the quarters. Alistair?

Speaker 3

Thanks, Brian. And on Slide 10, we present the summary income statement. I'm not going to spend a lot of time here because Brian touched on this and the highlights that we show on Slide 3. For the quarter, we generated $7,800,000,000 in net income, resulting in $0.90 per diluted share. Both of those are up double digits from the Q3 of last year.

Speaker 3

The year over year revenue growth of 3% was led by improvement in net interest income, Coupled with a strong 8% increase in sales and trading results and that excludes DVA and a 4% increase in investment and brokerage revenue driven by our Wealth Management businesses. Expense for the quarter of $15,800,000,000 included good discipline from our team, which allowed us to reduce Costs from the Q2 even as we continue our planned investments for marketing, technology and physical presence Buildouts including financial center openings and renovations. Asset quality remains stellar and provision expense for Quarter was $1,200,000,000 that consisted of $931,000,000 of net charge offs and $303,000,000 of reserve build. The provision expense reflects the continued trend in charge offs toward pre pandemic levels and remains below historical levels. Our charge off rate was 35 basis points, that's 2 basis points higher than the 2nd quarter and still below the 39 basis points we saw in the Q4 of And as a reminder, that 2019 was a multi decade low.

Speaker 3

30 day delinquencies Also remain below their Q4 2019 level. Lastly, our tax rate this quarter was 4%, driven mostly by higher than expected volume of Investment tax credit or ITC deals for the rest of the year and we can expect other income in Q4 will reflect Okay. Let's turn to the balance sheet that's on Slide 11. And you can see it ended the quarter at $3,200,000,000,000 up $31,000,000,000 from the 2nd quarter. So not a lot to note here.

Speaker 3

The driver of the increase was a $34,000,000,000 increase in available for sale securities. With cash levels so high, we chose to reduce the cash and just put some of the money into short term T Bills this quarter, And those are in essentially the same rate as cash. Our cash remains high at $352,000,000,000 In addition to the cash level change, We saw another $11,000,000,000 decline in hold to maturity securities as those securities matured and paid down. And as Brian noted, Global excess liquidity sources remain strong at $859,000,000,000 That's down very modestly from the 2nd quarter and still remains approximately $280,000,000,000 above our pre pandemic Q4 2019 level. Shareholders' equity increased $4,000,000,000 from the 2nd quarter as earnings were only partially offset by capital distributed to shareholders.

Speaker 3

During the quarter, We paid out $1,900,000,000 in common dividends and we bought back $1,000,000,000 in shares to offset our employee awards. AOCI was $1,100,000,000 lower, reflecting both a modest decline in the value of AFS securities, modestly impacting CET1 as well as a small change in cash flow hedges, which doesn't impact the regulatory capital. Tangible book value per share is up 12% year

Speaker 4

over year.

Speaker 3

Turning to regulatory capital. Our CET1 level It's now well above our current 9.5 percent requirement as Brian noted. Risk weighted assets declined modestly as loans And stronger at the bank level. Let's now focus on loans by looking at average balances on Slide 12. And loan growth slowed this quarter as a decline in demand for commercial borrowing more than offset our credit card growth.

Speaker 3

So we saw that lower commercial demand in lower revolver utilization among higher funding costs. And commercial balances were also impacted by term loan repayments due to borrowers accessing other capital market solutions. Focusing for a moment on average deposits and using Slide 13, given Brian's earlier comments, I would just note the comparisons. Relative to pre pandemic Q4 2019, average deposits are up 33%. Consumer is up 36% with Consumer checking up 45%.

Speaker 3

And you can see the other segment comparisons on the page. Turning to Slide 14, let's extend the conversation we've been having over the course The past couple of quarters around management of our excess liquidity. This slide serves as a reminder of the size of our high quality deposit book, The magnitude of deposits we have in excess of those needed to fund loans and the way we've extracted the value of that excess To deliver value back to our shareholders, the excess of deposits needed to fund loans increased from $420,000,000,000 pre pandemic To a peak of $1,100,000,000,000 in the fall of 2021. And as you can see, it remains high at 835 That $1,100,000,000,000 of excess liquidity has always included a balanced mix of cash, available for sale securities and securities we hold to maturity. In late 2020 and into 2021, We concluded that additional stimulus was going to remain in client accounts for an extended period and we increased the hold to maturity securities portion So we could lock in value from those deposits and we made these investments given the core nature of our customers' deposits.

Speaker 3

Note the split of the shorter term investments in cash and available for sale securities and then the longer term hold to maturity securities. And I just draw your attention to just how much cash we have above the actual level we need to run the company. On the available for sale, we would just note the duration is less than 6 months as it's mostly all short term treasuries. And the combination of the cash And available for sale securities represents about 47% of the total noted on this page in the Q3 of 'twenty 3 And if we look at the hold to maturity book, it had grown from $190,000,000,000 pre pandemic, peaking 2 years ago And now falling to just over $600,000,000,000 currently, that $600,000,000,000 consists of about $122,000,000,000 in treasuries. Those will mature in a little more than 6 years and about $474,000,000,000 in mortgage backed securities and a few billion other.

Speaker 3

Hold to maturity securities peaked at $683,000,000,000 and we're now down $80,000,000,000 from the peak And $11,000,000,000 in the last quarter, that $80,000,000,000 decline from peak was all driven by the reduction of mortgages from 5.55 Given the increased cash rates, the combined cash and security yield has risen now to more than 3%. It's up more than 200 basis points since the peak size of the portfolio in the Q3 of 'twenty one, And it's risen faster than the rate paid on deposits. In fact, today, it's 178 basis points above what we pay for deposits. And remember also, we have a $1,000,000,000,000 of loans that are largely in floating rate in addition. From a valuation perspective, We did experience a decline in the valuation of the hold to maturity book this quarter and that's in the context of mortgage rates reaching a 2 decade high.

Speaker 3

Comparing the valuation change to the year ago period, it worsened $15,000,000,000 And over that same time period, we grew regulatory capital by $19,000,000,000 And hold global liquidity sources in excess of $850,000,000,000 And importantly, as we move to Slide 15, I'll make one final comment here, which is the improved NII over this investment period. The net interest income, Excluding Global Markets, which we disclose each quarter, troughed in Q3 'twenty at $9,100,000,000 That compares to $13,900,000,000 in the Q3 of 'twenty three or $4,700,000,000 higher Every quarter on a quarterly basis and that gives a sense of the entire balance sheet working together. Okay. Let's now turn our focus to NII performance over the past quarter, and we'll talk about the path forward, and I'm going to use Slide 15 for that. On last quarter's call, we guided to expect Q3 NII to be about $14,200,000,000 to $14,300,000,000 on an FTE Our 3rd quarter performance turned out to be better than our guidance.

Speaker 3

And on an FTE basis, NII was $14,500,000,000 this quarter. We expect Q4 will be around $14,000,000,000 fully taxable equivalent, and that increases our full year guidance for NII In 2023 versus 2022 to 9% growth for the year. We believe NII will hover around this expected 4th quarter $14,000,000,000 level, plus or minus in the first half of next year, And then we anticipate modest growth in the second half of twenty twenty four. By the time we get to the Q4 of 2024, We believe we can see NII up low single digits compared to the Q4 of 2023. The good news is we believe NII will likely trough around the 4th quarter level of $14,000,000,000 and begin to grow again in the middle of next year.

Speaker 3

I'd note a few caveats around that forward view I just provided. It includes an assumption that interest rates in the forward curve materialize And it includes rate cuts for the second half of twenty twenty four. It also includes an expectation of modest loan and deposit growth as we move into the second half of Focusing again on this quarter, dollars 14,500,000,000 NII was an increase of nearly $700,000,000 from the Q3 of 'twenty two or 4%, while our net interest yield improved 5 basis points to 2.11%. The year over year improvement was driven by higher interest rates and partially offset by lower deposit balances. On a linked quarter comparison, NII improved $239,000,000 from Q2.

Speaker 3

That comes from the benefit of an extra day of interest, Rate hike and higher global markets NII, partially offset by increased deposit pricing And the net interest yield improved 5 basis points. Turning to asset sensitivity and focused on a forward yield curve basis, The plus 100 basis point parallel shift at September 30 was $3,100,000,000 of Expected NII benefit over the next 12 months from our banking book and that expects or that assumes no expected change in balance sheet levels or mix relative to our baseline forecast and 95% of the sensitivity is driven by short rates. The 100 basis point down rate scenario Was $3,300,000,000 Okay. Let's turn to expense and we'll use Slide 16 for the discussion. Previously highlighted that we guided you to a trend of sequential declines in our expense each quarter this year.

Speaker 3

And We achieved that in Q3 with our expense down $200,000,000 to $15,800,000,000 Additionally, we expect the 4th quarter to go down another couple of $100,000,000 to $15,600,000,000 excluding any FDIC special assessment. That would mean our 4th quarter expense of $15,600,000,000 Compared to the Q4 of 'twenty two, would be up by only $100,000,000 or less than 1%. And we're proud of that work by the team, Especially considering our regular FDIC insurance expense alone increased by $125,000,000 quarterly starting in the Q1 of this year. Without that, we would be flat year over year in Q4. The decline this quarter from the second was driven by the reduction in litigation expense And lower headcount offset somewhat by investments and inflationary costs.

Speaker 3

Our headcount is down nearly 2,800 from the 2nd quarter To 213,000 and that includes the addition of 2,500 or so full time campus hires we brought into the company. So that's good work by the team after we peaked at 218,000 in January month end. And you can see the movement here $1,900,000,000 of expense for the proposed notice of special assessment from the FDIC as a possibility. Absent that, we'd expect our Q4 $15,600,000,000 expense target to more fully benefit from the 3rd quarter headcount reductions and that will allow expense Let's now turn to credit and we'll turn to Slide 17. Net charge offs of $931,000,000 increased $62,000,000 from the 2nd quarter.

Speaker 3

The increase is driven by credit card losses as higher late stage delinquencies flow through to charge offs. For context, the credit card net charge off rate rose 12 basis points to 2.72% in Q3 and it remains below the 3.03 pre pandemic rate in the Q4 of 2019. Provision expense was 1,200,000,000 in Q3 That included a $303,000,000 reserve build. It reflects a macroeconomic outlook that on a weighted basis continues to include an unemployment rate It rises to north of 5% during 2024. On Slide 18, we highlight the credit quality metrics for both our consumer and our And on consumer, we just note that we continue to see the asset quality metrics come off the bottom And for the most part, they remain below historical averages.

Speaker 3

30 90 day consumer delinquencies Still remain below the Q4 of 2019 as an example. Commercial net charge offs declined from the 2nd quarter, driven mostly by a reduction in office write downs. And as a reminder, our CRE credit Exposure represents 7% of total loans and that includes office exposure, which represents less than 2% of our loans. We've been very intentional around client selection and portfolio concentration and deal structure over many years and that's helped us And in the appendix, we've included a current view of our commercial real estate and office portfolio stats we provided last quarter. We've also included the historical perspective of our loan book derisking and our net charge offs, and you can see all of those on Slides 36, 37, 38 and 39.

Speaker 3

Okay. Let's move on to the various lines of business and their results. And I'm going to start on Slide 19 with Consumer Banking. For the quarter, Consumer earned $2,900,000,000 on good organic revenue growth And delivered its 10th consecutive quarter of operating leverage, while we continue to invest for the future. Note that the top line revenue grew 6%, While expense rose 3%.

Speaker 3

Reported earnings declined 7% year over year, given credit costs Continue to return to pre pandemic level and we believe this understates the underlying success of the business in driving revenue and managing costs Because PPNR grew 9% year over year. Much of this success is driven by the pace of organic growth of checking card accounts as well as investment accounts and balances as Brian noted earlier. And expense reflects the continued Investments by the business for their future growth. Moving to Wealth Management on Slide 20, we produced good results and we earned a little more than $1,000,000,000 These results are down from last year due to a decline in NII from higher deposit costs, which more than offset higher fees from asset management. While lower this quarter, NII of $1,800,000,000 derives from a world class banking offering and it provides good balance in our revenue stream and a competitive advantage in the business for us.

Speaker 3

As Brian noted, both Merrill and the Private Bank continued to see strong organic growth And they produced solid assets under management flows of $44,000,000,000 since the Q3 of last year, reflecting good mix of new client money as well as our existing clients putting their money to work. Expense reflects continued investments in the business as we add financial advisors and capabilities from technology investments. On Slide 21, you see the Global Banking results. This business produced very strong results with earnings of $2,600,000,000 driven by 11% year over year growth in revenue to $6,200,000,000 Coupled with good expense management, the business has produced solid operating leverage. Our GTS or Global Treasury Services business has been robust.

Speaker 3

We've also seen a steady volume of solar and wind investment projects this quarter and our investment banking business is performing well in a sluggish environment. Year over year revenue growth also benefited from the absence of marks taken on leverage loans in the prior year ago period. The We held on to number 3 position given our performance. Provision expense reflected reserve release of 139,000,000 Certain troubled industries and credits outside of commercial real estate continue to have improved outlooks. Expense increased 6% year over year, reflecting our continued investments in this business.

Speaker 3

Switching to Global Markets on Slide 22. The team had another strong quarter with earnings growing to $1,300,000,000 driven by revenue growth of 10%, and I'm referring to results The continued themes of inflation, geopolitical tensions And Central Bank's changing monetary policies around the globe have continued to impact both bond and equity markets. And as a result, it was a quarter where we saw strong performance in our FICC trading businesses as well as a record Q3 in equities. Focusing on sales and trading, ex DVA, revenue improved 8% year over year to 4,400,000,000 FICC improved 6% and Equities improved 10% compared to the Q3 of last year. And at $1,700,000,000 that's a record Year over year expense increased 7%, primarily driven by investments for people and technology.

Speaker 3

Finally, on Slide 13, all other shows a profit of $89,000,000 So revenue improved from the 2nd quarter, Driven by the absence of prior period debt security sale losses in available for sale securities And partially offset by higher operating losses on tax credit investments in wind, solar and affordable housing. As I mentioned earlier, our effective tax rate in the quarter was 4% and that reflects a higher than expected volume of investment tax credits from a state tax law change. Excluding renewable investments and any other discrete tax benefits, our tax rate would have been 25%. And as we wrap up 2023, we expect our full year tax rate excluding discrete And special items such as the FDIC special assessment, we expect that full year tax rate should end up in the 9% to 10% range. So To summarize, we grew our earnings double digit year over year.

Speaker 3

We reported NII that was above our expectations and we increased our full year expectations. We've managed costs aligned with our guidance and brought expenses down in every quarter so far this year, and we expect to do that again in the Q4. We earned more than 15% return on tangible common equity. We returned $2,900,000,000 in capital back to shareholders, including a 9% dividend And we built 30 basis points of CET1, positioning us well for the proposed capital rules. So all in all, it was a strong quarter.

Speaker 3

It was one where our teams executed well against responsible growth. And with that, David, I think we'll open it up for the Q and A session.

Operator

And we will take our first question from Gerard Cassidy with RBC. Please go ahead. Your line is open.

Speaker 5

Thank you. Hi, Brian. Hi, Alistair.

Speaker 3

Hi, there.

Speaker 2

Hey, Gerard.

Speaker 5

Brian, can you come back to your thoughts? You were talking about the Consumer spending holding at 4% right now, obviously down from the very strong levels of a year, 2 years ago.

Speaker 6

When you look out and

Speaker 5

you mentioned how you guys are thinking the economy troughs in the middle of next year, do you think you could hold that 4% consumer You think your consumers will hold that 4% spending number or could it actually deteriorate from here?

Speaker 2

I think, a couple of things, Gerard. One is the there's obviously external events which could change the situation in the globe and Dramatically. And so but given just a pathway that doesn't that kind of event doesn't take place, you'd think that the Rate they're spending out now is consistent with a lower inflation. So embedded in our teams, Kenneth Branion Platinum team's economic Projections is a return to inflation to the 2% target at the end of 2025. The rate structure comes down beginning in the middle of next year, but still stays around 4% at the end of 2025.

Speaker 2

And so given that the economy the inflation is coming down, the economies will still be growing then and getting back towards trend growth, I think it would hold steady. And so, it's been pretty steady the month of August into September and October at this 4%, 4.5%, 5% level and that's kind of just that came through the pandemic into the last couple of years sort of adjust out of the system. What I mean by that is you had a lot of goods purchased, then you had a lot of travel, Yes, a lot of return to office spending. We can track that, people buy and stuff. All that's kind of leveled out of the system, including a drop in fuel prices and an increase.

Speaker 2

And basically, it's relatively Bouncing around about the same and they're spending about the same amount of money on gas that they spent last year. So all that being said, in the big aggregate numbers, I think, yes, it could Keep bumping along at that level, which is consistent with low inflation, low growth economy, in effect, we shows the consumer has been brought more in line With the scenario of the Fed reaching their target, that's what we see. Now, we'll take some time for all that to work through the system and retail sales number seems to be But that all shakes through, but this is what they're doing at the moment.

Speaker 5

Very good. And then as a follow-up question, you guys give us good detail in Slide 8 about the Potential changes coming from Basel III Endgame and you show us obviously the organic capital generation. Can you share with us Possibly some of the mitigation strategies you might use and specifically if you could touch upon these changes for the Equity investments, particularly in the alternative energy space, I guess they're going up from 100% RWAs to 400%. Would that change your thinking in that line of business as we go forward? Should they stay in the final rules?

Speaker 2

So I think number 1, I think the first thing is there'll be at the end of November, the comments are due, there'll be comments by our company, By all the other companies, by industry participants and then the staff at the Fed will have to sort through all that and think to what they all mean and there will be very Rigorous points about our views of the wisdom of the changes, the need of the changes, the balance of the changes, the double counting, all the things that you've heard much about. That being said, it is a little puzzling that you see some of the RWA increases for mortgage loans or for these types of investments In the environmental and housing and other spaces, which sort of counters the policy that we want to do it. Now what would happen is we'd have to adjust the pricing It would become more expensive. It's been a great business for us. We continue to drive it.

Speaker 2

We'd ultimately it'd have to go through the market if you have the equity Costs go up by a fourfold increase to get the returns. And so think about a pricing model just increasing amount of equity we have to dedicate. On a set of rules that basically after the financial crisis, Dodd Frank put in a set of rules and said here's how you count the RWA without much evidence that this is an issue for companies Because of the Volcker rule and all other stuff that are having issues with write downs or changes here, and so the idea going up 4 times seems odd to us from a

Operator

We'll take our next question from Jim Mitchell with Seaport Global. Please go ahead. Your line is open.

Speaker 7

Great. Good morning. Alistair, at the conference a month ago, you noted that if the Fed is done, you think deposit pricing is close to its peak. And I think you kind of Talked us through that a little bit today. Some of your peers have been more fearful of potential future material repricing and consumer Savings, for example, from greater competition or further outflows.

Speaker 7

So and to

Speaker 2

be fair, they worried about that

Speaker 7

for a while and you've been more right. But can you just kind of discuss your thoughts on that and perhaps the outlook on deposit pricing in general?

Speaker 3

Yes. I mean, Jim, one of the things that I think gives us some confidence around NII troughing and then growing in the back half of next year is, If you think we've seen the last Fed hike or you believe that the last Fed hike is a month from now or 2 months from now, And at some point, deposit pricing is going to stop going up. And there'll be a natural lag to that. That's pretty normal. And then what you see if you look forward into the forward curve is we've actually got that cuts, 3 of them in the forward curve So yes, we anticipate there'll be some lag.

Speaker 3

I don't think we're any different than anyone else in that regard. But we're just pointing out that as we get towards peak rates, We're getting closer now, so we can begin to see the end of that in terms of the later innings at this point. And the other thing just we always have to remind everyone of this is the deposits that we have are very relationship based. There A lot of them are core operating deposits where we've got the checking. They're thinking about the way we serve them in terms of digital.

Speaker 3

We've got And then on the commercial side, very similar. We've got a lot of operating deposits all around the world, And they're using our world class CashPro product. So there's a lot of relationship value here as well that we need to take into account. But fundamentally, we're just making A judgment that we're getting towards the top of the rate cycle here for Fed funds and then

Speaker 7

3 rate cuts in the forward curve and you are asset sensitive, but yet you still expect growth or Improving growth in NII in

Speaker 2

the back half, is that just sort of the lag effect there too? Or is there something else going on in terms of

Speaker 3

Yes. I think the other things that we've got going on, especially as we get into the back half of the year, Consumer balances are going to find a floor at some point. They again are in the late innings of returning 2 sort of more normal pre pandemic balances per account. So they're going to find a floor and at that point they're going to start growing in the same way that wealth has found a floor And in the same way that Global Banking found a floor a while ago and is now beginning to grow. So we have a point of view that the consumer side is going to find a floor.

Speaker 3

So that's one. 2 is, at that point you're poised for deposit growth, but we're also going to see loan growth through the course of the year. It's been slower this quarter, But at some point, you return to a more normal economy. As Brian has pointed out, we're going to see the loan growth. And so we're thinking that's going to start to evidence itself in the back half.

Speaker 3

And then the final thing I'd just say is, we have securities reinvestment every month and that's going to support And grow NII, and I think it gives us a sense that we've got a more durable NII stream underneath.

Speaker 7

Great. That's all very helpful. Thanks.

Operator

We'll take our next question from Erika Najarian with UBS. Please go ahead. Your line is open.

Speaker 8

Hi. Good morning. I have my first question is 2 pronged on the balance sheet. Alastair, if you could tell us sort of how much in cash flow Do you forecast your HTM book will have in 2024 As you think about the moving pieces underneath your NII outlook and for Brian, Clearly, this held to maturity portfolio has been a thorn in the side of the stock. And And no matter what we say to the investment community, the stock hasn't quite caught up.

Speaker 8

And I'm wondering as you think about the statistics that you share with us every quarter, like net new checking adds, maybe give us a little more statistics in terms of The strength of that growth and the strength of that retention, because I think that no matter what sort of print That you have on total deposits at the end of the quarter, there's always sort of pushback so long as the market is not yet Confident that we've hit peak rates. So that's sort of a 2 part first question.

Speaker 3

All right. So I'll answer the first part, Erica. I think if you look back through the course of the last couple of years, that portfolio pay downs in terms of maturities or pay downs, it sort of averaging $10,000,000,000 a quarter. So I think you could probably use that as a good starting point for the reinvestment horizon in 2024. That's what I would use.

Speaker 3

And then I'll let Brian answer the second part of your question.

Speaker 2

So, Erica, we drive Organic growth machine based on a responsible set across all the different operating businesses. So, As you've noted, if you look at what's driving our deposit base to be larger than the industry, I. E. Outperforming the industry is if you think from It compares against 2019 to now and we're up $250,000,000,000 in consumer deposit loan, but we also are up probably 10% in checking accounts, net checking accounts, those are 92% core. The attrition rate and All the deposit balances are in the preferred part of that segment is 99% the retention rate is 99% plus Long term customers, the preferred rewards program drives a basis on cards.

Speaker 2

We're now getting the balances back up to where they were pre pandemic with Even better credit quality than we had then. We got home equities hit a trough and are starting to work the way out. Auto loans We continue to produce a lot, doesn't the market is not real strong, but we continue to produce several 1,000,000,000 in a quarter. So, all the organic growth engines in the consumer business are very strong. When We're now producing net household growth at a faster rate than we produced in the prior years.

Speaker 2

If you go to the commercial banking businesses in the U. S, And is the strength of the $3,000,000,000,000 plus balance sheet and in fact is the reason that we have $1,000,000,000,000 $900,000,000,000 on a given day that Equity, all that has grown organically dramatically over the last 4, 5, 10 years. And frankly, The loan growth will continue to follow that as conditions improve. And then on the commercial side, as people go back to regular line usage, we saw it deteriorate this quarter largely due to the Demand side and so we feel very good. And then you talked about the markets business, gave you detail there and the investment banking team is gaining market share And actually, we fought to maintain relatively flat fees in a market that was down 20% or something.

Speaker 2

So we feel very good about the organic growth engine that's

Speaker 8

Got it. And my second question is for you, Alastair. Do you have any economic ownership of Visa Class B Shares remaining? Our understanding is until the litigation was settled, you weren't allowed to sell it other than to other banks in the initial consortium. But I'm wondering if you've So any economic ownership through swap or if you still have it on the books because we haven't seen any disclosures on that recently?

Speaker 3

Well, I mean, we essentially sold and hedged our Visa B position years ago. And then in our markets business, we've Finance the sale of Visa by other banks. You can think about that as a hedge thing that's just about a financing. So depending on how that all develops and what other banks choose We may end up having some RWA or some liquidity that we can recycle for other clients benefit in our markets business, We don't have any meaningful economic stake in vis a vis.

Speaker 8

Got it. Thank you.

Operator

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

Speaker 9

Hi. Do you expect the efficiency ratio expenses to revenues to improve from 63% and when? I guess this is a 2 part question. One is expenses. As you said, it's down every quarter of this year and you're guiding for the 4th quarter.

Speaker 9

Slide 5, the digital adoption, it's about 3 fourths for your clients across the firm. So the Sustainability of those digital trends to help lower expense or control expenses given some of the headwinds and Especially given the threat of Big Tech and FinTech, the sustainability of the digital trends and why you think you have an advantage And the second part of that question is revenues. Your NIM is a bit over 2%, Went up a little quarter over quarter, but it was closer to 2.5% going back 5 years and maybe long term it should be 3%, I'm not sure. So what

Speaker 2

So, Mike, I think if expenses come down, revenue grows, the efficiency ratio continues to improve. 1 of the Big differences between us and other companies you can compare us to is the size of our wealth management business relative to the size of the company is large. And as you know, that's The business which we continue to work to make more efficient, but is the least efficient business in the platform. So Lindsay and Eric continue to drive the efficiency there. So, Yes, we expect the efficiency ratio to continue to improve and part of that will be as the net interest margin normalizes, we normalize the size of the balance sheet Given it's grossed up for a lot of reasons through the pandemic and stuff and you kind of fine tune it, you'll get a little more In the past, we ran up to 230 in NIM in the sort of a normalized sort of environments and you'd expect us to keep moving up from there.

Speaker 2

And that will be It will be bouncing around here as we work through the trough in NII that we described, which is we're sort of in the middle of starting this quarter into the first half of next year. So, Mike, as you know, it's all about managing heads and that's last year at this time, we all talked about the great resignation or last year, last summer and how we had to hire people and we over hired because the issue was could you hire fast enough to get what you needed this year. It's down from 100,000 people to 60,000 people and continues to drift down as we continue to use the Yes, that's the place of the most leverage in digital across the board. You continue to get less branches, less ATMs. You can see the statistics in the chart, More customer interactions and more customers, that's a pretty good trade and we continue to drive that including sales and digital that we disclosed in the back of things.

Speaker 2

So that's what we're going to do, continue to drive efficiency ratio to level and we'll see where we can get it.

Speaker 9

And then just on that big picture question, I mean, you've invested for over a decade in your data and tech stack and Digital engagement and now we have AI and GenAI as a news opportunity and a threat. Why do you think or maybe you don't, Why do you think that you have an advantage versus, say, smaller banks, Fintechs or Big Tech?

Speaker 2

Well, we have an advantage And that we've been applying it for a number of years now. So effectively, Eric is a form of that and now has 17,000,000 customers working on it, everything. And so think about that this quarter, I think there's 170,000,000 interactions or whatever $180,000,000 interaction, something like that. If you think about that, Mike, in the days gone by, every one of those would have been an email, a text or a phone call. And so it's obviously tremendously more efficient and we're continuing to prove we brought it out to the cash pro side, which is a commercial side.

Speaker 2

So that helps. If you think about In the $3,800,000,000 we'll spend in $24,000,000 on technology initiative spending, Aditya and the team continue to use the techniques that you read about in the paper to increase the efficiencies of that development effort. And it's probably Yes, 10%, 15% in the short term building up higher and higher as people get more and more used to it. And that will allow those dollars to Our capabilities, if you look, we have nearly, I don't know, 6,000, 7000 patents out there, 600 on AI already Related machine learning related activities sitting in the application filed, we got a lot of inventors in this And so we feel good about our ability to compete against the types of people you said. But by the way, we use Some of those people who might compete to actually be providers to help us do this stuff.

Speaker 2

And some of the big tech companies are as you Listen to them. They have it's a business for them to sell that AI capabilities to companies like ours to make us more efficiently. So near term customer help, Near term employee effectiveness, near term coding enhancements, Etcetera, etcetera. But one thing as you mentioned is we have invested heavily to have the data in a tech stack ready to go and 3 point whatever $1,000,000,000 interactions this quarter digital show that people are ready to use the services we provide.

Speaker 9

Okay. Thank you.

Operator

We'll take our next question from Steven Chubak with Wolfe Research. Please go ahead. Your line is open.

Speaker 10

Hey, good morning, Brian. Good morning, Alastair.

Speaker 3

Good morning.

Speaker 10

So, wanted to start off with a question on expense. You cited headcount actions should provide relief in 4Q and positive flow through into next year, I was hoping you could either help size the benefit from expense actions or just frame How we should be thinking about expense growth as we look out to next year?

Speaker 3

Well, I think what we've tried to do this year, Steve, is communicate pretty clearly what our plan was. As Brian said, we overachieved last year on hiring. So we started the year with $218,000 in expenses $162,200,000 and we've really been working on the trajectory over the course 2 turns into 16 turns into 15.8. We're now determined to deliver on the 15.6. And I think that's going to set us up really well.

Speaker 3

So our plan is to Finalize our strategic planning over the course of the next few weeks, and I think we'll give you more guidance next quarter.

Speaker 10

Great. And just 2 clarifying questions or clean up questions at my end. On the NII remarks, You talked about deposits. I was hoping you could help frame Alastair. What are the assumptions you're making in terms of reinvestment yields

Speaker 3

Yes. So I'd say reinvestment just assume the forward curve. And with respect to loan growth, ITUs low single digits consistent with a slow growth economy.

Speaker 10

Okay. And just one quick one here on the tax advantage investments. I just wanted to confirm, given the long duration, The ForEx increase in capital, are you still planning to fund tax advantage investments on the platform before the rules are finalized? Are you going to take a wait and see

Speaker 3

approach? Well, I mean, this remains something that's important for our clients. We've yet to see a final rule. So we'll be supporting transactions. But obviously, As Brian said, it is informing us with respect to pricing and it's informing us with respect to appetite.

Speaker 3

But until there's a change, we'll continue to

Operator

We'll take our next question from Matt O'Connor with Deutsche Bank. Please go ahead. Your line is open.

Speaker 11

Good morning. First, just to clarify, what's driving the drop in net interest income from 3Q to 4Q? Is that Core net interest income or is that on the market side?

Speaker 3

Well, you're talking about the fact that we think that we're going to be around 1,000,000,000 or so in Q4. I'd say first one is you've got a little bit of deposit pricing lag there. So we got to keep thinking about that. 2nd is, we're sort of baking into it some continued normalization of consumer balances. So that's just continued to drift slowly lower.

Speaker 3

I think 3rd, if we had hoped for loan growth in Q3, we just didn't see that. So that's going to flow through with Lower loan growth balances in Q4. And then the only final thing I'd just say is, the global markets NII may not repeat in quite the same way. Some of that depends on client behavior. And they benefited this particular quarter by just rate long term rates going up so significantly and that helped So it's all those things and probably a little bit of rate hike probability or timing delayed, but it's all those sorts of things.

Speaker 3

It hasn't what the portfolio hasn't changed. It hasn't changed from our expectation a quarter ago, in any way.

Speaker 11

Yes. Okay. That's helpful. And then just conceptually, as we think about your interest income guidance for next year, what if we get higher for longer rates, There's not cuts. Is that good or bad versus the guidance that you gave earlier?

Speaker 11

Obviously, you've got puts and takes of Some reinvestment on the asset side, but again, coming back to the deposit pricing issue, I think there's a view that higher for longer eventually drags up those consumer rates. So what would be the net of those 2 in the higher for longer? Thank you.

Speaker 3

Well, higher for longer is going to be better. So You're right. We've got the forward curve in our expectations. If that doesn't turn out to be the case, we'd expect NII would be higher.

Speaker 11

And that's simply the assets re pricing more than deposits or you're still thinking there's minimal consumer deposit re pricing even in the higher for longer?

Speaker 3

It will be both. I mean, there will be the repricing for sure. And in addition, we'd expect to capture a little bit of margin from any short term rate hike.

Operator

We'll take our next question from John McDonald with Autonomous Research. Please go ahead. Your line is open.

Speaker 2

Yes. I was hoping you could give a little color on what you're seeing on credit, your outlook as you look at roll rates and migrations, how are you thinking about the trajectory of charge offs in the near term?

Speaker 3

Well, John, I'll just point out as You can see the trajectory we've laid it out on the slide. Most all of the net charge off increase over time has been really due to Card and consumer card. And the charge offs at this point are still lower than they were in the Q4 of 2019, which was a stellar period. And I'd anticipate in the short term that you'd see things begin to just continue that trend because it normally follows 90 days past due delinquencies and those are up ever so slightly again this quarter. So we're inching closer to the Q4 And at some point, that's going to begin to stabilize.

Speaker 3

From there, it's just a question of what does the economy do. So right now, as Brian has pointed out, we've got a slow growth economy in the plan. So I'd anticipate as we get back towards that kind of Q4 2019 number, It's going to normalize in there, but from that point, it will be very economic dependent. On the commercial side, the asset quality has been excellent. And the only place where we've got particular elevated concern is office, which is a very small part of our portfolio.

Speaker 3

It's less than 2% of our loans. But the commercial side has been terrific. And again, that will depend on how the economy plays out and whether we're talking about a soft landing, whether we're talking about a recession or whether we're talking about robust growth. So all of that's going to have to play itself out. With the commercial numbers being so low, that one could bounce around a little bit, but it's only because it's coming off a base It's so low at this point.

Speaker 2

John, just one thing on as you think about the commercial credit, remember we have A strong disciplined ratings change, rating capabilities company. And so we are Pushing through the reviews of the commercial real estate portfolio, etcetera. We put them on, you have criticized quickly. We did deal with the charge offs and that's why you see it come back down already. And we're adjusting those activities as we show in the slides in Part of the deck, you have to current appraisals, under current market conditions, under current rent rolls, etcetera.

Speaker 2

And so even though it's a very small part of our portfolio, frankly, A lot of the issues are through the system for us because of the high ratings integrity and ratings The conservatism we've had in this company for many, many years and that holds us well. And I always remind you if you think back like an oil and gas thing in the End of 'fifteen, 'sixteen, we put up all of this reserve that was pre CECL and ended up bringing it back in because the charge offs were very modest. So, I think We feel very good about the original underwriting, but you also have because of our ratings integrity on the office part of the Portfolio pushed a fairly significant amount through reappraisal and relook and we have the CECL reserves, but importantly the charge offs Are falling already. Got it. And one bigger picture question, as you think about the Basel III and the opportunity to Mitigate and optimize, does a 15% ROTCE feel like a good aspiration for the company Over time, Brian, through the cycle, I mean, recognizing that's where you are already today, but as you factor in the potential for new rules,

Speaker 4

how do you think about that?

Speaker 2

So, I think we're doing on a I think a simple way to think about it is we're doing on $194,000,000,000 of capital, which we did it this quarter. And that is You need about another, say, dollars 10,000,000,000 to put a buffer on the end state need, dollars 10,000,000,000 to $11,000,000,000 to $195,000,000,000 to $195,000,000 0.5 percent, which is our normal buffer, without any mitigation. That would be a very modest Increase, yes, ten over 200, let's make it simple. And that would hit the ROTC a bit and we I'm Sure, we can figure out ways to price to get that back. But remember that we're different than everybody else, John, because we're actually sitting on this amount of capital today.

Speaker 2

And so We are getting a 15% return on it. So I don't want to don't take that as saying I agree with the rules, but saying we got to deal with the cards that are dealt to us. The rules say that you have to have $195,000,000,000 plus, about $10,000,000,000 cushion for and maybe a little bit more cushion, but For 50 basis points or so, but if we're doing 15% today, so that'd be a slight dilution to that number, but not something we could make up and that's before any mitigation. And there is always mitigation. You know that.

Speaker 2

You've been around this industry for a long time. So there's always mitigation, how you construct things, what you'll do, what you'll not do. And I fully expect there'll be Modifications and rules which ought to help also. But I think the simple point is, we earned it on that amount of capital today. So it's not like some

Operator

We'll take our next question from Vivek Juneja with JPMorgan. Please go ahead. Your line is open.

Speaker 6

Thanks. Alistair, question, just want to clarify your NII comment. So If rates stay higher or better, are you implying that rate cuts would therefore be negative for you from an NII standpoint?

Speaker 3

Yes. I'm saying right now, Vivek, that if you think about what rate cuts look like in the back half of next year, In the absence of that, we might guide NII higher. Yes, that's what I'm trying to communicate.

Speaker 6

And is that because Your assets, you have that many floating rate assets that will reprice faster than you can cut funding costs?

Speaker 3

Yes, on the way down, I'd anticipate that as rates are going down, it's going to cut into our margin on our deposit spreads. So That's essentially what we're talking about.

Speaker 2

Yes, Vivek, I think I've just listened to you and Alistair. I think remember the forward curve has Multiple cuts in it next year. And I think the question earlier was if those didn't occur, what would happen? And I think Alistair said NII would be higher if those cuts didn't occur. It's not a rate it's just mathematically at 75 basis points in the second half of next year of not being cut Would hold us higher because of all the deposits being worth more in the floating rate assets holding pricing up better.

Speaker 2

Dominant part of our balance sheet. I just sense that you're talking by each other, but maybe not.

Speaker 6

Okay, thanks.

Operator

We'll take our next question from Ken Usdin with Jefferies. Please go ahead. Your line is open.

Speaker 4

Thank you. Just a follow-up on the securities portfolio on the AFS side. Alistair, how much of that $180,000,000,000 is still swapped. And can you kind of help us understand like what that kind of all in Yield is on that book and if you would still also have repricing help going forward on that book as well as you mentioned earlier on the HTM maturities?

Speaker 3

Yes. So most of the book we swap to floating. We've tried to establish that over the course of time. So You can almost think about most all of the available for sale securities repricing kind of every day, every week, every 2 weeks, whatever it may be. So that tends to look a little bit more like the cash type moves over time.

Speaker 3

There's a few securities in there that are fixed rate, but very, Very little in terms of the total complexion, Ken.

Speaker 4

Okay. That helps. Thank you. And then just wanted to also say, on the fee side, obviously, another really good job both on the Investment Bank and the trading businesses, Still in certain environments, just wanted to get your thoughts. You were able to hold the IB fees flat sequentially, which was I think better than You had indicated just your thoughts on reopening here in the markets and how you're kind of expecting the business to hopefully albeit understanding it's still

Speaker 5

Yes. So

Speaker 3

this is, I suppose, unusual and not unusual. Investment banking obviously has the potential for swings in fees. And what's interesting about this one is We've now been bouncing around this sort of $1,100,000,000 per quarter, dollars 1,200,000,000 per quarter. And normally, investment banking would to return within a year or so and we're now 7 quarters into this. So we've got a good pipeline and mostly what I think Corporate America and around the world, C Suite Executives are looking for is the confidence that comes from Macroeconomic certainty, geopolitical certainty.

Speaker 3

So for as long as we've got the volatility, it's going to stay in this kind of a range. But if you were to look back in periods past, Investment Banking can come back very, very quickly to a more historical range of kind of $1,301,400,000,000 $1,500,000,000 per quarter. It's just that we've grown tired of predicting when that might be, Ken.

Speaker 2

Yes. Ken, let me give you 2 other pieces. 1, the pipeline is still strong, but more importantly, Matthew and the team have done a good job of building out our capabilities to serve our huge middle market client base, our global commercial banking client base Under Wendy's leadership and that number is growing quickly and that's a market which is we're relatively unpenetrated in. We had good market share with our clients that we did business with, but we continue meaning investment banking business with and so that's generating probably Better performance for us than others in terms of holding our position flat relative up a little bit year over year, flat year over year versus a down market. So We added up.

Speaker 2

We basically doubled the size of that team and we'll double it again. It's that kind of opportunity for us.

Speaker 4

Got it. Great. Thank you for the color.

Operator

We'll take our next question from Manan Gosalia with Morgan Stanley. Please go ahead. Your line is open.

Speaker 12

Hi, good morning. My question was around deposit growth and what level of deposit growth do you think you need from here? Should it be in line with loan growth or are you happy to let some of the more maybe non transaction deposits run off? And the reason I ask is because, as noted in some of the prior questions, some of your peers are saying that there's more room for Consumer deposits to reprice higher, especially core checking accounts, it sort of sounds like you disagree with that. So wanted to assess how much you might need to respond if competitors act differently?

Speaker 2

So a couple of things. One, just broad base, we have a $1,900,000,000,000 deposits and $1,000,000,000,000 alone. So we have a Tremendously high deposit base, but also if you think about if you look at the slide 5 or whatever it is, we show the Deposits by business in the banking business, Global Banking, I think 6 quarters we've been relatively flat. So And starting to grow off of that. That is fully priced.

Speaker 2

It's not like corporate treasure is waiting around to talk to you about What you're paying in a non interest bearing percentage has drifted down. The amount they hold in excess of that, Part of that to pay fees has been relatively stable. And so we feel very good about that. If you look at wealth management, basically all the movement It's been made pretty much to the higher rate environment, I. E.

Speaker 2

Buying treasury securities directly. If you look in our wealth management business, the amount of Short term cash oriented type investments, money market funds, etcetera, treasuries, etcetera, has gone from like $500,000,000,000 to $700,000,000,000 or $800,000,000,000 over the last couple of years. So that move has taken place. And so the rest of it is now in a relatively stable base. You can see those numbers flat.

Speaker 2

If you go to the consumer side, there's basically 2 or 3 things. 1 is, in the medium income households plus or minus, you're seeing the slow Spend down even though they still have multiples of what they had pre pandemic in our accounts and even though that's a small part of the overall deposit base, there's still this low trend that where that's drifting down as All the things you read about go on. In the higher end part of that base, in a broad consumer base, they're actually below the pandemic by about 20%. And that's because they moved the money into the market and you can see that in some of the preferred category pricing. So, where people think about checking and Money markets in this, we think I always have thought about it a little more straightforward, which is transactional cash and investment cash.

Speaker 2

The investment cash has largely been resuited across the businesses. The transactional cash holds because it's money in motion moving every day. And for our consumer business, that's represented by the $500,000,000,000 of checking account balance that you can see on the page We have some modest amounts in money markets and stuff that are carried as the cushion people have. And if they move the money market, they've moved it. So we're watching consumer because there's a little more drifting there and it's up $250,000,000,000 since pre pandemic and you're saying you have the dynamics of loans, Student loan repayment starting, that's a million of our customers pay student loans.

Speaker 2

You have the dynamics of interest rate impacts on cash carry Of loan balances that's higher and that will sort out, but just takes a lot longer. It's across 37,000,000 people. So it's a the impact takes a while to sort through. And so we But we've seen them as adjust their behavior based on their household circumstances and largely through the system and most of it coming a little bit slower in consumer Because the natural question is there, if there are a lot of stimulus went in those accounts, what do I do with it over time? And now they're doing something.

Speaker 12

Got it. That's helpful detail. So I guess In terms of deposit growth from here, would you still prefer to grow deposits in line with loans or is there a little bit more room for that to come down?

Speaker 2

We prefer to grow deposits in line with customer growth and activity. So in the last four quarters, consumer I think we're up another 900,000 Yes. Net new checking accounts, which average balance is around $11,000 They come in at lower than that, mature up to that. We grow We have a transactional banking business for all types of customers and we grow it irrespective of it. That produces 2,000,000,000,000 You have a loan business to customers that produces $1,000,000,000,000 and that difference then is a wonderful thing to have every day.

Speaker 12

I appreciate it. Thank you.

Operator

We'll take our next question from Chris Kotowski with Oppenheimer. Please go ahead. Your line is open.

Speaker 13

Yes. Good morning. Thanks. I've been looking at your average balance sheet on Page 8 of the supplement. And I noticed that in this quarter, Your overall yield on earning assets was up 20 basis points and lo and behold the yield on interest bearing liabilities was also And I'm curious, was there some benefit unusual, the Lower amortization or something like that?

Speaker 13

Or is it just a function of that behind all the moving parts of balances Better than you thought.

Speaker 3

Well, I don't think it was an amortization issue. I think it was just the way the entire balance sheet works across Assets, liabilities, when you think about all the various moving pieces. So I don't think there's anything particularly notable there.

Speaker 13

Okay. Now it's just stunning with all the moving pieces, how the earning asset yield and the liability yields really moved in Tandem. So, all right, that's it for me. Thank you.

Operator

For our final question today, we have a follow-up from Vivek Juneja with JPMorgan. Please go ahead. Your line is open. Thanks.

Speaker 6

Brian, trading has grown nicely in equities you've had. You said it was led by financing. Is there room in your balance sheet from a capital standpoint to keep growing that? And second question related to trading would be, In your guidance on NII for next year, what are you assuming for trading NII in there?

Speaker 2

On RWA, as you know, Vivek and your experience in the business that the equity financing is not RWA intense. So but it is size intense. Now when you look at us with our supplemental leverage ratio 100 and Plus basis points over the requirements, we have lots of room on the asset size if we want and the Return on equity, return on the risk on that business is very strong. So Jim and the team have done a good job and Sue from the equities And we continue to experience, so there's plenty of room. And in fact, we have brought the balance sheet up by over $200,000,000,000 largely due to the financing side, A lot of that due to equities and we can continue to do that if the clients need the capabilities and the product.

Speaker 2

So That's a simple answer. Yes, there's a lot of capacity and largely driven by our huge capital base and our effect on all the size measures, we're way over The requirements, I think, 100 basis points on that is probably almost $50,000,000,000 of overage. So you have a Lot of room to

Speaker 3

go. And then Vivek, in terms of the NII guidance, we include global markets in there. So it's part of a big diversified portfolio. I think we would point to global markets remains liability sensitive. You can See that in the way NII has come down in 2021 2022 and into 2023 with rates going up.

Speaker 3

So it will perform according to the rate curve. And Then we may put a little bit of modest balance sheet growth in there, as Brian pointed out, just to continue investing in the business. But it's

Speaker 2

So thank you for joining us. Just in closing, go back to the key points. Strong earnings for the company, earnings growth year over year for the 3 months 9 months, in double digit. The returns of 15% of return on tangible common equity We're very strong. We have the capital to meet the new capital rules as proposed before any mitigation, before any changes in those rules.

Speaker 2

And we're returning 15% on that capital today. So we feel good about the path ahead to the company. We continue to do it the old fashioned way, growing our clients, growing our revenues from those clients and driving responsive growth. Thank you.

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Earnings Conference Call
Bank of America Q3 2023
00:00 / 00:00