Bank of America Corporation (BAC) Earnings Call Transcript & Summary

Okay. Thanks, everyone, for joining. We're ready to get started with the next session. Up next is Bank of America. With us today is President of Merrill Lynch Wealth Management, Andy Sieg. Wealth represents 15% to 20% of Bank of America's revenues, so it's obviously a big piece of the overall company. The format is going to be a virtual fireside chat. If there's any questions and you're registered for the conference, please enter them into the webcast and I'll work to read them in. Andy, thanks for joining.

And I thought we would just start big picture here. How are you operating in the current environment given the massive swings in the stocks, near 0 interest rates? Obviously, a lot has changed in the last 6 months, and you're in the thick of it.

Hey, Matt. Thanks very much and good morning to you. Good morning to everyone. Of course, before we dive in, I just want to reiterate, I hope everybody is staying healthy and safe out there. We're all doing a lot to reposition businesses and try to serve clients in new ways and innovative ways. This conference is a great example, moving it to virtual. So thanks for the opportunity. And I think to just dive in on your question, Matt, to a remarkable extent, the business has not been interrupted by the change in operating posture. We've seen more than 20,000 employees shift to work from home. We haven't had any breaks in terms of operating platforms or disruption in terms of serving clients. And when we look at the last 8 or 9 weeks, the thing that really stands out to me has been a surge of client contact. We've -- in all manners and forms, whether that's calls, e-mails, social media outreach, there's been enormous connectivity with clients that's taken place through the pandemic. And I think the importance of these connections has really come through in terms of what we're seeing around client satisfaction despite the volatility in the markets and, obviously, the way everyone's lives have been interrupted. We see client satisfaction levels right now with our advisers and firm at record levels, and I think that's directly tied to the amount of outreach, the amount of contact.

As we think about your current priorities and areas of focus, it's only been a few months and it feels like so much has changed. But have -- has anything changed as you think about how to focus on the business, both in the near term and longer term?

Well, I think, of course, we've had -- our near-term operating priorities changed by the crisis. And being able to affect kind of repositioning of our business that I just talked about, I mean that obviously took some great work across many different teams here at Bank of America. When we take a step back though and think about this franchise, our strategy and the direction of the franchise remains intact, and we remain extremely optimistic around the future of this business. This is, of course, the #1 wealth management franchise in the world. We operate with tremendous scale across all client segments. We think we're in position to deliver a uniquely comprehensive set of capabilities to clients. And this is a wealth management franchise, which is benefiting every day from deeper and deeper connections to Bank of America overall. We are enormous beneficiaries of the fact that Brian runs the company to have both global presence and local presence. Our Merrill Lynch business across the country benefits from referrals that come from the fact that our Bank of America market presence and other lines of business are active and operating in local markets. And as I'm sure we're going to talk about a little later, when we think about the deposit franchise of Bank of America, the power of that franchise, the digital capabilities around the franchise, we're deepening the capabilities between what the bank does and what we do here in the wealth management business with our clients. And so from that kind of flows a very constant and consistent set of priorities. We're focused on serving clients as broadly as we can, making their financial lives easier. We're focused on continuing to drive growth because, as I just said, we've got uniquely broad access to high net worth and ultra-high net worth clients in the U.S. We're moving forward with digitizing this business. I'm sure we'll talk about that more because there's been remarkable progress there in the face of the crisis. And we're modernizing the business in many different ways. We've been modernizing our brand, which has been quite visible, but we're also modernizing the profile of the talent in this business. And we see areas like diversity as key opportunities to continue to modernize the business and ensure that our wealth management franchise aligns with the communities and the segments where we're serving clients.

I guess to follow up on some of that. And you'd said at the very beginning, 20,000 FAs and other staff working from home haven't had any system issues. I would think, on the one hand, that group, it's almost easier for them to work remotely, but then there's also probably the challenge that a lot of the clients are used to the high-touch, in-person to kind of help justify the payment for the overall relationship. So maybe just talk about how you can still keep that high-touch aspect going remotely.

No, it's a great question. The -- a great deal of the wealth management business is conducted remotely even in a normal operating environment. There are annual reviews with clients, which are generally face-to-face, probably less frequently. We have clients where there are quarterly reviews face-to-face. When clients are new to the firm, there tends to be more face-to-face contact than in later periods, as they're working with their Merrill Lynch teams in kind of a more regular way environment. So I think that not being able to be face-to-face with clients for a period of a few months, that entails less change than one might normally think. What we've seen at the same time, however, is an embrace of digital technology by our clients as well as our financial advisers, which frankly, we've been surprised by because the pace of change has entailed a 5- or 6-year leap forward in our digital operating model in the course of just 5 or 6 weeks. A great example of that, for example, is how rapidly clients and advisers have embraced videoconferencing. We see this in other categories of our lives as consumers. In our business, financial advisers have been launching their own WebEx-based seminars for existing clients and increasingly prospective clients, which is giving them the ability to have a very direct face-to-face, with quotes around that contact, with clients and prospective clients that is accomplishing much of the same high-touch feel that we would have in a normal operating environment. So that's, to me, a great example of how we're seeing kind of a continuing high-touch operating model in a very different environment.

It's obviously a very large client base, massive across wealth and brokerage, and everyone always wants to know what positioning is like out there. So maybe just give us some thoughts on how things were trending as the markets were going down aggressively in March. And obviously, there's been a strong rebound in markets. Have they come back if they left back in March?

Yes. If -- and we've spoken publicly about the repositioning that we saw in March when there was very heightened volatility and a powerful selloff in the markets. We did see a shift of client asset allocation toward cash. Just to review, we came into the year with the client allocation that was about 10% cash, 23% fixed income, 60% equities and 7% across a variety of smaller categories. We just sort of lump those together and call them other. Today, client cash is 13%. Debt is 24%. Equity is down 4 percentage points from 60% to 56%, and that other category has remained constant. We talked about these numbers at the beginning of April, kind of looking back at what happened in March. They've remained very stable since the early weeks of April. One of the things that could be a bit surprising to some is while the VIX has come down and the equity market has rallied, our client cash levels have remained very constant here in the second quarter. They've been up a little, down a little week-to-week, but essentially, very consistent with where we ended the first quarter. I think that what I take from that is we've not seen clients move to any more defensive posture. On the other hand, they've been participating in the equity market rally, but have not been moving funds out of cash to extend themselves further into the equity markets right now. I think that the general feeling that our financial advisers are getting, and this is anecdotal, but that clients, they have what they believe are long-term asset allocations. I think our advisers were successful with them largely in the month of March, helping them avoid panic selling. And clients are remaining focused on their long-term goals and long-term allocation. And they have not, on average, been inclined to invest more deeply in equities even as the market has been coming back.

And how about some of the other products? Obviously, there's a huge slug of loans in your segment, about $180 billion. About half is real estate, consumer real estate. But what are you seeing in terms of loan demand across some of the other areas? And then obviously, this is a more affluent customer base than, say, the average Bank of America borrower, but thoughts on credit quality as well?

Yes. I mean I -- just in terms of our overall trend in loans, I mean, we're continuing to see some loan growth here in the quarter. The demand for residential mortgage loans and activities is -- it remains pretty strong. There continues to be a significant refinancing activity taking place, which I'm sure is a surprise to no one in this rate environment. We're also seeing what we call our custom lending activity. These are generally loans to more high net worth, ultra-high net worth clients with a broad range of collateral types, sometimes securities, but also could be real estate, art, aircraft and the like. We continue to see that loan book increasing at a slightly reduced pace from the first quarter, but those loans are increasing as well. The -- our securities-based loans, in particular, we have a program we call our Loan Management Account, LMA, at Merrill Lynch. We have seen some deleveraging there, although on the order of 1% decline in the quarter in terms of loan balances. So not dramatic change. Overall growth with a little bit of shifting in terms of activity as I've described. You saw the provision that was taken in our first quarter results. I mean we continue to feel our clients and the credit exposure here. It's, of course, consistent with what Brian and Paul have talked about broadly, where we are the beneficiaries of a very strong 10-year focus on responsible growth, ensuring that we understand our credit exposures extremely well. And I think you're going to continue to see that responsible growth strategy reflected in terms of credit quality in this part of the franchise.

And how about deposit trends? Almost 20% of total Bank of America deposits are in your area. What are the trends like here in terms of volume? And then I think broadly speaking, we've seen the ability of banks to lower deposit rates. And has it been easier or harder among this -- your customer base?

Well, kind of tracking back, Matt, to my comments earlier, we saw a significant shift toward cash in March, and that resulted in the elevated deposit levels that we reported at the end of the quarter. Merrill clients, we continue to have a record level of deposits in this business. Again, it's trended up slightly since the end of the first quarter. But by and large, we have a view and you see it in the cash levels that clients are -- they're maintaining some liquidity right now, and they have not been rotating back out of cash into the equity market. As the rate environment has changed, we've moved to lower rate paid to deposit clients. This -- of course, we think it's part of a very disciplined, responsible and symmetric way that we manage rate paid. We look at a variety of benchmarks in the marketplace as those rates are being set. I think the interesting point here to investors is as we've brought rates down, as the environment has changed, deposit balances have been very constant. As I mentioned, they're trending up slightly in the quarter.

And then maybe a few questions as we think about leveraging the broader Bank of America. You've had good net new household growth, including in the first quarter. Do you guys track in terms of how many of these have other relationships with Bank of America?

Well, we do track. We track that in a variety of ways. First, of course, I talked about the power of our local market strategy at Bank of America. The power comes through in terms of seeing the referral activity from the rest of the bank to our Merrill Lynch financial advisers and then, of course, the referrals that we're making back to the rest of the company. We continue to see referrals from other lines of business. This is an important driver of our new client activity and that has continued uninterrupted. The -- I talked earlier about the bank's deposit franchise. Across the bank, deposits grew about $149 billion. And as the bank is seen as the institution of choice in terms of the power of that deposit platform and the digital capabilities around it, that gives our financial advisers an even stronger platform to position our ability to comprehensively serve clients. And where you see that come in is increasingly, Merrill Lynch clients are also -- do their banking with Bank of America. Just in the first quarter alone, we saw 30,000 new bank accounts opened with Merrill Lynch clients. That's an all-time record for us. And this is more anecdotally, but as we've passed kind of through the last 8 or 9 weeks, our clients are telling us they're seeing the value of that convenience and single point of contact to handle transactional banking as well as the kind of advisory conversations they typically have with Merrill Lynch financial advisers. And so that's another place where I think the value of the overall franchise to really be the single place that clients manage their entire financial life where that is coming through.

And are you able to share what percent of the Merrill customers have their primary banking account with Bank of America? I mean I would imagine it's a relatively low number just given the size of the franchise but represents a big opportunity still from here.

Yes. I don't know that I can answer it exactly the way you asked it, which is kind of primary banking relationship. What we do know today -- well, I agree with you that there's a lot of upside in terms of the ability -- our ability to bring banking capabilities to Merrill Lynch clients represents -- that's a meaningful growth opportunity that we'll be pursuing for years to come. Today, about 55% of Merrill Lynch clients are -- have either a deposit or lending relationship with the broader Bank of America. So -- and if we got even more precise to your question, and we just focused on primary banking relationship, the upside would obviously be even larger than the implied 45% today that don't have any banking relationship with us.

Shifting to industry trends kind of longer term here. Can you maybe talk about the pricing pressure that we are seeing in parts of the business and then parts that have been quite resilient? So thoughts on that as well as the outlook?

Yes. From a -- this has been a -- if we take a step back, I mean, the wealth management business has been experiencing secular pricing pressure since the 1970s with the deregulation of fixed commissions. And so this is -- the existence of pricing pressure here is not new in this business. Over the last 4 decades, that potential for pricing pressure has led to continued refinement of the value proposition, strengthening the value proposition and the kind of transformation of this business over time from a transactional model of years ago to now a very intimate advisory-oriented business. We feel, today, the value proposition to clients has never been stronger. Quality of advice itself, breadth of capabilities, as I've talked about, the service quality that comes from our teams, the digital capabilities that are providing great convenience to our clients, all this has enormous value. We see -- we do see some continuing pricing pressure, but by no means is it extreme pricing pressure across our investment advisory book. Our annual pricing decline has been between 2.5 and 3 basis points per year. This has again been pretty consistent over the last several years. We see some of that pressure, frankly, coming from fact that as our existing clients consolidate assets with us, their pricing levels decline. But we also see that some new clients that join us are priced a little below some of the existing relationships that we have. As we build our multiyear financial plans for the business, we factor that in. And so we've built in an expectation of gradual pricing decline along the levels that I've described. We -- this is, of course, one of the things that is -- it not only is continuing motivation to make sure that we're delivering clear value to clients, it's also something that motivates us to continue thinking about how we can manage this business more efficiently. One of the strategies that Brian has driven across the company is a focus on operational excellence. And in this business, as in other lines of business, there's a lot of opportunity to bring more efficiency to the business, take costs out of the business in middle and back-office functions, use digital capabilities more broadly with clients not just to deliver convenience, but also to affect some of that operating efficiency. And so that's a big part of our focus here in terms of how we think about offsetting the limited pricing pressure that we do see.

And from a competitive landscape, I mean, it seems like there's a lot of interesting things going on right now. You've got JPMorgan and Goldman, say, pushing down into the high net worth and mass market versus more focus, historically, on the ultra-high net worth. Morgan Stanley is pushing even further down into mass market with the E*TRADE acquisition. So there's a lot of interesting, I think, competitive things going on. How do you think that's going to impact your positioning? And obviously, pricing is part of it, but also just the competitiveness of the platform.

No, it's a great question. At the top, I mentioned that we believe and we see many observers have similar descriptions of this franchise that this is the #1 wealth management franchise in the world. And the scale that we have across segments is one of the real defining characteristics of this business. We think about this business as a continuum of wealth management capabilities, serving mass and mass affluent clients through our Merrill Edge business and other capabilities that we deliver generally through our consumer investments business within the Consumer Bank; our Merrill Lynch business, which is really anchored in the high net worth market and then extends to the private wealth arena; and then our Private Bank, which is centered in the ultra-high net worth marketplace and has very broad and deep capabilities, particularly around trust and estate planning. Being able to operate across those segments with an integrated operating model and operating platform, to be driving period-over-period growth in terms of the advisers serving all those segments, now over 19,500 advisers, and to have that taking place with a platform, which is not only integrated across that continuum, but has an operating platform that's integrated with the broader bank, to us, this is defining what the endgame model looks like in wealth management. So your observations around some interesting moves by competitors, I think they're very good to call out. In many cases, those moves by competitors are efforts to try to get closer to this wealth management continuum, which we have in place today. So what we're focused on, of course, is now with the model essentially in place here, how do we make the most of it in terms of best serving clients and then best driving the continued growth in the business going forward. The backdrop to our strategic vision and view hasn't changed. And that view is that there will be a bull market for advice that we're going to continue to see the wealth management industry in the U.S. be a growth industry. The U.S. households need financial advice, and we've been talking about that for many years. And I think that what we've all experienced over the last 8 or 9 weeks have placed that in sharp relief.

So it seems like you're well positioned for the, call it, generational wealth transfer, given just the full spectrum that you just referred to. How about in terms of leveraging the corporate relationship, which is obviously an increasing focus for some of your competitors?

No, it's a great question. When you think about this -- the ability to serve clients across the continuum as your -- as you suggest in your question, when that -- when you bring that offering into the workplace, it can put you in a very unique and powerful position with corporate clients and in particular, with the human resources departments of corporate clients because we have an ability to serve clients in a workplace setting in a way that ensures that everyone from a member of the C-suite to individuals who are working on the shop floor can access the right kind of financial advice for them given their personal situation. That makes us a partner of choice for corporations who are thinking about how to do more to help ensure that their clients get a very robust set of benefits and the kind of guidance to help them prepare for the future. We not only have this, the continuum of capabilities that I talked about, but we also benefit from having a very strong suite of benefit solutions, specifically for corporate clients, and those include a full set of retirement platforms, retirement capabilities such as 401(k), some newer high-growth areas of benefits like health care savings accounts and then, of course, a very strong equity comp platform and set of capabilities around the equity comp. One exciting area of investment right now in wealth management is a set of investments to both tie together those benefit platforms with the broader digital platforms of the company, and you'll be seeing more around that soon. And then also to ensure that the -- our bankers that work in Tom Montag's part of the company are positioned with full access to these benefit capabilities so that they can be bringing them not just to large corporate clients, but to midsize and smaller businesses as well. So we view this -- the workplace as one more powerful opportunity for growth for the wealth management franchise.

Okay. That's great. Well, we are out of time. But Andy, thanks so much, and this is the end of this session.

Matt, thank you very much. Thank you.