Bank of America : Webcast Transcript Q4 2022

Bank of America

Fourth Quarter 2022 Earnings Announcement

January 13, 2023

Fourth Quarter 2022 Earnings Announcement

January 13, 2023

Participants

Presenters

Brian Moynihan - Bank of America, Chair and CEO Alastair Borthwick - Bank of America, CFO

Lee McEntire - Bank of America, Investor Relations & Local Markets Organization Executive

Participants

Glenn Schorr - Evercore ISI

Gerard Cassidy - RBC Capital Markets

Mike Mayo - Wells Fargo

John McDonald - Autonomous

Erika Najarian - UBS

Ken Usdin - Jefferies

Matt O'Connor - Deutsche Bank

Betsy Graseck - Morgan Stanley

Vivek Juneja - JP Morgan

Presentation

Operator

Good day, everyone, and welcome to today's Bank of America earnings announcement. (Operator Instructions). It is now my pleasure to turn today's program over to Lee McEntire. Please go ahead.

Lee McEntire

Thank you. Good morning. Welcome. Thank you for joining the call to review the fourth quarter results. I know it's a busy day with lots of banks reporting, and we appreciate your interest. I trust everybody has had a chance to review our earnings release documents. They're available, including the earnings presentation that we'll be referring to during the call, on the Investor Relations section of the bankofamerica.com website.

I'm going to first turn the call over to our CEO, Brian Moynihan, for some opening comments and then ask Alastair Borthwick, our CFO, to cover some other elements of the quarter.

Before I turn the call over to Brian, let me remind you that we may make forward-looking statements and refer to non-GAAP financial measures during the call. Forward-looking statements are based on management's current expectations and assumptions that are subject to risks and uncertainties.

Factors that may cause actual results to materially differ from expectations are detailed in our earnings materials and SEC filings available on our website. 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, take it away, Brian.

Brian Moynihan

Thank you, Lee, and thank all of you for joining us this morning. I am starting on Slide 2 of the earnings presentation. During the fourth quarter of 2022, our team once again delivered responsible growth for our shareholders. We reported $7.1 billion of net income after tax or $0.85 per diluted share. We grew revenue 11% year-over-year and delivered our sixth straight quarter of operating leverage. And again, we delivered a strong 16% return on tangible common equity.

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If you move to Slide 3, we list the highlights of the quarter, which have been pretty consistent throughout the year. We drove good organic customer activity and saw significant increases in net interest income, which all helped drive operating leverage. Revenue increased year-over-year 11%. It was led by a 29% improvement in net interest income, coupled with a strong 27% growth in sales and trading results by Jimmy DeMare and the team. This growth well exceeded the impacts of lower investment banking fees and the impact of bond and equity market valuations on asset management fees in our wealth management business. The positive contributions of NII and sales and trading were also enough to overcome a decline in service charges driven by the fully implemented changes in NSF and overdraft fees in our consumer business.

Importantly, we improved our Common Equity Tier 1 ratio by 25 basis points in quarter 4 to 11.2%, and we achieved that without changing our business strategies. We're well above both our current 10.4% minimum CET1 requirement and above the requirement that we'll have beginning next year in January of 10.9%.

We added to our buffer of both growing loans and reducing outstanding shares in the quarter. On a year- over-year comparative basis, both net income and EPS are up modestly with strong operating leverage more than offsetting higher provision expense. The higher provision expense is driven primarily by reserve builds this quarter, a result of loan growth in our portfolios and also our conservative waiting in our reserve setting methodology, which I'll touch on later.

Last year, we had large reserve releases. Net charge-offs increased this quarter, but asset quality remains strong. Charge-offs are well above both the beginning of the pandemic as well as longer-term historical levels. And again, I'll touch on this in a few pages. All that being said, the simple way to think about it is pretax, pre-provision income, which neutralizes these reserve actions, grew 23% year-over-year.

Let's turn to Slide 4. Slide 4 shows the year-over-year annualized results. And quarter 4 results were a nice finish to a successful year in which we produced $27.5 billion in net income on 7% revenue growth and a 4% operating leverage. While the year was strong, full year earnings declined as a result of loan loss reserve actions. For the full year of 2022, again, we built about $370 million reserves. And by contrast, last year, in '21, we released $6.8 billion of reserves. Isolating those changes, again, you'll see that PPNR grew a strong 14% over 2021. As I said earlier, the themes were characterized by good organic customer activity, strong NII and always helped by our years of responsible growth.

Slide 5 highlights some of the attributes of organic growth for the quarter and the year. This, plus the slides that we include each earnings materials in our appendix, would show digital trends and organic growth highlights across all the businesses. Our investments over the past several years in our people, tools and resources for our customers and our teammates, as well as renovating our facilities, have allowed us to continue to enhance the customer experience to record high levels and fuel organic growth. In the fourth quarter of 2022, we added 195,000 net new checking accounts, bringing the total for the year to more than 1 million. This is twice the rate of addition that we had in 2019 in periods before the pandemic.

This net growth has led to a 10% increase in our customer checking accounts since the pandemic while keeping that 92% of our accounts are primary checking accounts of the household, and the average opening balance, not the average balance, but the average opening balance of these new accounts is over $5,000.

We also produced more than 1 million new credit cards, the sixth consecutive quarter of doing that, bringing us back to levels that we generated pre-pandemic. Credit quality, you can see on Appendix Slide 28, for consumer remains very high in new originations. Verified digital users grew to 56 million with 73% of our consumer households fully digitally active. We have more than 1 billion log-ins to our digital platforms each month, and that's been going on for some time now. Digital sales are also growing, and they now represent half of our sales in the consumer business. Erica, our virtual digital system, is now handling 145 million interactions this past quarter and has passed 1 billion interactions since its introduction just a few years ago. This saves a lot of work for our team.

When you move to the GWIM business, the wealth management business, our advisers grew by 800 in the second half of the year. Our team added 28,000 net new households across Merrill and the Private Bank in 2022. We experienced solid net flows despite the turbulence of markets. By the way, during 2022, our average Merrill household opened with balances of $1.6 million. Again, very high-quality account openings.

On flows, when combined across all our investment platforms in our consumer wealth management business, we saw $125 billion of net client flows this year. Additionally, we continue to see increased activity around

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both investments in our GWIM business and our banking products. The diversified bank element adds a strong differentiator for us as a company. It also supports the healthy pretax margin. This helped the GWIM business deliver strong operating leverage for the year, and they grew net revenue and net income to records.

In our Global Banking business, we saw solid loan production and growing use of our digital platform throughout the year and added new clients to our portfolio. As you well know, the overall investment banking fee pool was down. However, we continue to deepen and expand client relationships with our build-out of commercial bankers. Our global treasury services business also grew revenue 38% year-over-year as a result of both rates as well as fees for service on cash management.

In Global Markets, we had our highest fourth quarter sales and trading performance on record, growing 27% from last year ex-DVA. This was led by a strong performance in our macro FICC businesses, where we made continuous investments in the past 18 months. Equities had a record quarter 4 performance as well.

Let's move to Slide 6 and talk about operating leverage. As I've said to you for many years, one of the primary goals of this company, which is an important part of our shareholder return model, has been to drive operating leverage. Those efforts, including investments made for the future, coupled with revenue growth, produced 18 straight quarters of operating leverage, as you can see, leading up to the pandemic.

Beginning last year, in the third quarter of '21 -- 2021, I told you that we've now started achieving operating leverage and gotten back on streak. Since then, we're at 6 quarters of operating leverage despite all the things that are going on out there, and the team continues to drive towards that for 2023.

So I thought I'd spend a few minutes on a discussion of topics that's been important to, as we've talked about, investors over the last couple of months, deposits and credit. So let's go to Slide 7. First, on deposits. There are several factors impacting deposits as our industry works through and the economy works through an impressive period, a surge in deposits from the pandemic-related stimulus, the impact of monetary -- unprecedented monetary easing, impact of high inflation and then the reversal of that with unprecedented pace and size of rate hikes and monetary tightening.

But on a year-on-year basis, average deposits of $1.93 trillion are down 5%. This reflects the market trends, and in fact, it reflects high tax payments to the governments in quarter 2 2022. In addition, as we move forward through 2022, customers with excess cash, investment-oriented cash, sought yield as rates increased for money market funds, direct treasuries and other products.

It's probably more relevant to discuss the more near-term trends. Comparing third quarter of '22 to fourth quarter of '22, average deposits were down 1.9%. Noninterest-bearing deposits are down 8%, while interest- bearing deposits are up 2%. The mix shift is especially pronounced in treasury services in the Global Banking business. Corporate treasurers manage $500 billion of deposits they have with us. The impact of their activities has a change in the mix.

On the personal side, you can see the checking account balances floating down a little bit from core expenses and spending while more affluent customers put money into higher-yielding deposits in the market. We do manage all these products differentially. And the discussion of deposits by business segment you can see on Slide 8, and we'll talk through that.

So this breaks down our deposits in a more near-term trend. In the upper left, you can see the full year across

• for the whole company going across the page in the upper left-hand chart. We also put in the rate hikes that you can see. On the chart, you can see the heavy tax payment outflows in the second quarter. Then we saw the acceleration of rate hikes and deposits to move to products seeking yield in certain customer segments.

But in large part, what you've seen over the course of the quarter 4 has been stabilization and more normal client activity. Simply put, we ended quarter 4 of '22 with $1.93 trillion in deposits, roughly the overall level as we ended in quarter 3 ending deposit balances.

So let's look at those differentiated by business. In consumer, looking at the upper right chart, we show the difference between the movement through the quarter between the balance of low to no interest checking accounts to somewhat higher-yielding nonchecking accounts, money market and saving accounts and a limited portion of CDs.

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Across the quarter, we saw a $24 billion decline in total, down 2%. We have seen small declines in customers' continued higher levels of spending, paid down debt and also move money to the brokerage accounts even in this business. Higher wages have offset this. While we saw a decline in quarter 4 deposits in consumer, correspondingly, we also saw brokerage levels of consumer investments increase $11 billion, capturing a good portion of those deposits.

In general, think of these consumer deposits as being very sticky of $1 trillion. That stickiness, along with net checking account growth, reflect the recognition and the value proposition of a relationship transactional account with our company. It also has -- it reflects industry-leading digital capabilities we offer and the convenience of a nationwide franchise.

It also reflects that the customers in our mass market segments have fewer excess cash investment style cash balances. 56% of the $1 trillion in consumer deposits remain in low and no interest checking accounts. And because of all that, overall rate paid in this segment remains low at 6 basis points.

In wealth management, which you can see at the bottom left of the chart, more than $300 billion of deposits became more stable across the fourth quarter. They also -- here, you also witnessed a shift to higher-yielding preferred deposits, as you can see on the labels, from lower-yielding transaction deposits as these customers have more excess cash and move them to seek higher yields.

Early in the quarter, we saw modest declines in balances, but November's rate hikes began to slow, and the probability of future rate hikes became less. People had moved their money, and we saw an uptick in balances as we moved through the quarter. This reflects the seasonal inflows that happened in the fourth quarter for wealth management clients.

At the bottom right chart, you can see the most dynamic part of this equation. Our Global Banking deposit movement moves across $500 billion in customer deposits. The shift here is what drives the mix total for the company. It's pretty typical with the exception that it happened very quickly in quarter 4 driven by the pace of rate hikes.

In a rising rate environment, where a company's operational funds are more expensive, we anticipate these changes, particularly in the high liquidity environments as clients use both cash for inventory [build] (corrected), pay down debt or manage their cash for investment yield. We have seen the mix of Global Banking interest-bearing deposits move from 35% last quarter to 45% in quarter 4. And obviously, we're paying higher rates on those deposits to retain them.

Customer pricing here is on a customer-to-customer basis based on the depth of relationship, the product usage and many other factors. So overall deposit rates paid as a percent of Fed funds increases are still very favorable to last cycle, even as rates are rising much faster than last cycle. I would note, relative to the last cycle, that the Fed increases have been rapid, and we'd expect to pay higher rates as we continue to move through the end of the interest rate cycle.

So just remember, while we're paying more for deposits, we also get that on our asset side. That is simply why the NII, net interest income, is up 29% from quarter 4 2022 versus quarter 4 2021.

Now let's move to the second topic I want to touch on specifically, which is credit. And this begins on Slide 9. First, it is an ineluctable truth that our asset quality of our customers remains very healthy. On the other hand, it's impossible to gainsay that the net charge-offs are moving to pre-pandemic levels. So in the fourth quarter, we saw net charge-offs of $689 million increased $169 million from quarter 3. The increase was driven by both higher commercial and credit card losses. As these charts show, they're still very low in the overall context.

In commercial, we had a few of older company-specific loans but not related or not predictive of any broad trends in the portfolio. These were already reserved for in prior periods, and based on our methodologies, went through charge-off in quarter 4.

Credit card charge-offs increased in quarter 4 as a result of the flow-through of modest increase in last quarter's late-stage delinquencies. This should continue as we transition off the historic lows in delinquencies to still very low pre-pandemic levels.

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