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

Thank you, everybody, for joining us this afternoon. I'm pleased to have Dean Athanasia with us, Bank of America's President of Consumer and Small Business. Dean, thanks so much for joining us.

Hey, Betsy, thank you. Thank you for having me, and great to hear your voice again. If I can't see you, it's great to be here. So thank you.

I know. I know. Next time in person, and if not, Zooming.

Yes.

I do have a disclosure I have to read really quickly here. For important disclosures, please see Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative.

Okay. So Dean, your team is responsible for providing a full range of financial products and services. So I think it's 66 million consumer customers and 3 million small businesses.

Right.

And you're responsible for $200 billion of client assets through Merrill Edge. So that's a big portfolio that we need to dig into. I guess the first question, I just want to understand how you are running your business. And what are you looking for from your management team in this environment? Is this the kind of year where you just throw the budgets out? Or do you change goals or something in between?

Yes. Well, I'll hit that. I can hit that one last. But yes, it's been an interesting year. We've had to be nimble. We've had to adapt. We've had to change the way we do things. And we've adjusted -- the management team's adjusted pretty quickly to the reality of the social distancing economy, I call it. We reposition. I mean we have a high-tech, high-touch model. You've asked me about that before, but that's how we go to market. And we've had to adjust that all along the way to best service our clients and service our clients in how they need to be serviced in this type of economy. So as you may have expected, we've leaned heavily on our digital platform and our automated capabilities, whether that's the advanced center, Erica, ATMs, our digital platform, mobile, all of that have been absolutely terrific in this environment to connect with our clients. We've used all of our data and analytics to look at how clients, their needs and behaviors are changing and evolving and what patterns they will work within. And so we can be there in front of them and helping them out. We've sort of -- we've had -- not that we relied on foot traffic because we have a huge digital platform, but we've had to replace the foot traffic because, obviously, clients can't get to us. So we've done -- made over 6 million outbound client calls. We've sent out over 450 million e-mails to clients, touching base, looking as to what helped them need. And we've empowered Erica, has made over 40 million Erica assists as of today out there to clients. So Erica has been a huge, huge help for us. And then we've retrained over 15,000 individuals over the last 4 to 5 months into different positions, given them new skill sets, helping us out in the call centers, helping us out behind the scenes in a lot of different ways. Obviously, the PPP program, small business program, we'll talk about that. But we've leveraged and retrained a lot of employees. And then, of course, last, we've all had to work in a virtual environment. About 60% of our -- obviously, we have some folks out in the financial center servicing clients, but about 60% of our folks are now working from home, are connected, our communications and how we handle that and how we monitor that and how we drive our businesses all completely changed in the same way we're doing today. So I'll stop there and sort of let you react to that, but we've completely changed how we run the business, how we connect, how we operate, how we interact with clients. And thankfully, we have built a huge digital platform that helps us do that in a better way.

Well, I know when we've spoken in the past, your primary goal in expanding your reach is with your own customers through servicing incremental needs they might have that you can provide them with. The question I have is with Erica, with your app, with all the digital capability you have, are you reaching out at this stage to people who might not be your customers to gain them as new customers? Or are you still sticking with the growth from -- within your 4 walls of your own customer base?

Well, actually, I think it's both. We are growing within the 4 walls, but we also have people -- even -- because we have those digital connections, because we've enabled our phones and as people and new clients are calling us, as an example, I know you're going to ask me -- you mentioned Merrill Edge, but we've opened up close to 300,000 -- 275,000-some-odd new investment accounts for new clients coming in. And I would suspect seeking a more stable platform, seeing the strength and stability of Bank of America through the crisis. We attract, we have a flight to quality, a flight to safety, a flight to stability. So we are attracting an awful lot of new clients coming in, in addition to better serving our existing clients and having them come in and deepen -- and in some ways, I know Brian used the example with us, but a great example we like to use is we have a lot of baby boomer customers. And in this environment, they've reached out, and we've helped them, but they've been better connected and got on to our digital platform. So we've increased users -- the boomers users of our digital platform by over 23%. So we -- in every way, we're deepening and then also continue to reach out and find new clients and bring them in to become relationship clients for our organization.

Okay, great. And that 23%, what kind of time frame is that over?

Well, within the last -- well, you got to think since the end of February until now, 23% deeper usage by our boomer population and client base using our digital capability. So it gets them over the hump for the first time. They find out they love it. They can do it more and more and they repeat it. So no need to -- they could use their mobile device to deposit that check or send money through Zelle or to make a payment or to do whatever they used to do physically, they found they can now do digitally, and it's easy for them to do and to repeat doing. So I think we've found a new avenue into that client base or client segment.

Now does that change how you think about the branch footprint you need? I know you're in the middle of opening 500 new branches nationwide and redesigning 1,500. But given what you just mentioned, how do you think about the forward look on branches?

Yes. It's interesting. We'll always -- we plan to open up those new financial centers. I think we've learned a lot through the crisis here in terms of how clients want to use those financial centers and what they're coming in for. So we're going to take a look at all the learnings. There's many more, but we're going to look at all the learnings. We will still roll out 500 new centers. We're committed to that plan. I think we've done about half of that or close to half of that leading up to right now, and then we'll do another half in the years to come. But finding new markets, going to new markets, placing them strategically, the design may be different, the personnel inside the financial centers may be different. We'll have more client professionals within the 4 walls. We'll do more complex service like medallion, notary and add elements to that where people physically need to go to, to get service. We could probably space our financial center, our network out a little bit more in terms of geographic distance and proximity to one another. So we're looking at how we do that and what's the best use of capital in that deployment. So it -- we'll do a lot more outbound calling, as I mentioned. That's a skill set we're developing, why clients like to be called, when do they like to be called, how do they like to be called, about what do they want to be notified. So we'll do a lot more outbound calling from our financial centers than we ever have. Actually, that's up over 50% from what we were doing before. So we've discovered a lot of different attributes to the financial centers we could add to them, enhance them and make them better and make them more efficient. Lastly, I'll just give you, within the tool set itself, we rolled out a new program called ACT. So any of our financial center folks can be walking around. It's like they could do any type of transaction off that platform on an iPad so they can be theoretically untethered. We call them CSRs, could be tellers, could be whatever, but you could be sitting in an office and handle a transaction. So there's -- even if you do come in, there's no need to go up and queue up behind the teller line. You can do that transaction in any physical office or distant apart. So things like that, Betsy, we're learning and incorporating and enhancing our centers and making our capital go a lot more along the way.

And how does it integrate with the other parts of the organization that have been using your space as well? I'm talking specifically around some of your financial adviser brethren who have been using the branches. Will they have a say on where the branches come and go?

Yes. I mean our -- as we always do, our goal is to partner with the other entities in our organization there. We're all in this together. We all serve our client base. So the Merrill Lynch private bank, business banking and commercial, we all look at where the traffic is for customer base and for individuals, whether that's on the CRM -- whether that's on the individual side or the business side, and we lay out our financial center network in partnership with those other lines of business. And we all operate them together, and they're all used for the service of our clients, not for any one business. So it's a great partnership. They bring traffic in. We do -- we refer business to them. They refer business to us. And so when we go into a market, we go in with the strength of Merrill Lynch, the private bank and the commercial bank altogether. And it's a -- that's been a consistent plan over the last 3 years.

Got it. Okay. And while we're on the topic of investing Merrill Edge, you just -- you mentioned at the beginning pretty impressive numbers on the new account growth that you've had over the past couple of months. Could you just speak to how you've been able to keep up with the volumes? I know there's been some fintechs that have had a little bit of an issue, but I didn't see anything on your platform. Is that right?

Yes. We -- in fact, perfect timing for the question. This past Friday, you saw a surge in the market. But we had over 12,000 log-ins on our Merrill Edge platform, which is 2x the previous highs. And I think we've experienced previous highs in maybe the 10 of the last 9 sessions have all been this year. So it's an incredible amount of volume. We got through it. No issues whatsoever. The tech team and the operations team do a fantastic job for us. They've built a completely solid system that we used to trade off. So that stability of the platform, it's one of our selling points. And that's why we think that our new investment accounts of -- they're up 35% year-over-year. Trading activity is up 143%. Deposits continue to grow. We continue to have unique digital visitors, up 70% year-over-year because that platform is also digitized. So everything in that business is moving in the right direction, but it's because we have a very stable platform. We go to market with a hybrid model. We could do both the self-directed and we could do assisted through an adviser off the same platform. And then we have all kinds of great capabilities. We've added over 600 new features and functionalities over the last 2 years, and we're on the way to adding another 600 over the next 2. So we continue to invest in that platform, and it continues to pay dividends for us.

Excellent. All right. So maybe we can just flip to efficiency overall and then dig into some of the asset questions that we have. But just on efficiency, you have done a phenomenal job with the expense ratio plummeting here, which is a good plummet, right, down below 50%. And I guess investor question really is, is it feasible to keep it below because you have obviously lower rates hurting the top line? Just wanted to get an update for you on how you're thinking about that.

Sure. I mean over the next couple of quarters, we had to get through a lot of temporary buildups, whether that's for our CAP program or for EIP program or small business PPP loans. So we've built up new infrastructures that I talked about. So I'd sort of say, once we get -- you can't -- I would not say judge the sort of run rate on sort of where we've been here because we've added costs that will eventually go away within this year and whatnot. So what we always do is we -- but at the same time, we've had some benefits from the digital platform as people continue to go paperless, continue to go to digital, less physical transactions, that helps control our costs and drive it down. I think that this environment, even though the tragedy of what it is, it's driving our ability and driving the adoption of digital farther than we had ever planned. So that's going to help us. We've added some costs obviously. So we have to get through that. And then you have low interest rate environment right now. So those are some challenges, but I think the fundamentals are going to be the same. We are going to drive and look at every last cost of this business. We are going to drive out waste. We're going to drive out anything that is sort of more manual and automated. And that work continues even at a faster pace because the client behavior is allowing us to convert to automation and digital much faster than we had planned. So rest assured, Betsy, we'll keep the focus on expenses. We'll spend wisely. We have to get through the sort of special programs here, which are not small. We delivered over 325,000 small business loans. We've done over 1.7 million client assistance helps. And we've done over 15 million EIP payments. That sort of activity will go away, and we'll get back to our normal course of business and sort of expenses.

Got it. Okay. So 2020, a little bit of an uptick, but then you get it back over the next couple of years. I'm not holding it to a specific year or anything like that, but just kind of how it's migrating.

We sort of entered -- you know us, we've entered as the best in the industry in this business, and we had the best expense and ratio as we went into it. I suspect everyone's going through those same costs from an industry perspective. And once we get through it, we'll return to have the best efficiency ratio out there once again. So -- and we'll stay focused on it.

Okay, great. So I will remind folks on the webcast, if you want to ask a question, you can throw it into the webcast. But now we're going to shift to the loan side, the asset side for you. I wanted to talk first about small business. The question we get most frequently from investors is on the small business side. And I think that a couple of weeks ago, Brian mentioned that you surveyed BofA's small business customers generating $50 million plus in annual revenues, and only 20% of them said they still needed additional financing over the next year. So I'm just wondering, why do you think that is the case that it's only 20%? And then can you talk a little bit about the health of this 20% and how you think it migrates going forward and what you can do for them?

Yes. If you don't mind, I can rephrase your question a little bit because clients of those size, that's -- I'd like to think everyone at Bank of America don't -- Tom, my good friend, Tom Montag, runs the $50 million-plus clients. I think Brian was referring to that client base. I run...

Got it.

Within -- it's okay. Within our group is small business, and we've done similar things as Tom has done in his side and looked at the health of our small businesses, and we do our own survey and look at those. Again, a lot of small businesses are being helped, as I said, through PPP loans, EIDL loans, [ ATCF ] loans. And so they've reached out for government assistance, about 15% of what we see. But looking at our discussions with our clients and our survey with clients, 73% of them -- again, these are clients that have less than $10 million in revenue, Betsy. So 73% of -- obviously have experienced revenue declines. 2/3 of those businesses anticipate their revenue will be down 25% or more, so they've taken an economic hit obviously from the shutdown and a lack of foot traffic for them. But 75% think they're going to make it through this without permanently closing. Some will take longer to -- than others. 65% say that it might take a year to recover fully from where they were but generally optimistic about where they're going. And then we use our intelligence to hone in on individual segments. So we have a practice solution that handles doctors, dentists and vets, and obviously, they were shut out from business. A lot of them took loan deferments from us. But when we speak to them again, the 92% of them have said that they don't need another deferment. They're ready to get back in business. They're already seeing foot traffic. If you notice in the jobs reports, 245,000 jobs in May were directed for dentists, which is a hugely important segment for us in their back-end business and coming back and generally healthy. So it is obviously a mixed bag. I think retail clients that rely on a lot of foot traffic, perhaps restaurants that rely on some, not that we have a huge lending book to them but just in general, will have tougher times coming back than others in this economy. But as an overall general small business, they are pretty positive to get back into business and get things ramped up as states begin to open up.

So when you're thinking about that reserving against this customer set, are you thinking about that 25% that don't think they're going to make it? Is that where the bulk of reserve is going?

Not that they have questions about whether they'll make it, they're not saying that they'll be out. I'm not saying that's not -- some of those are not clients we lend to. Obviously, they're operating clients solely. So it's not a credit portfolio question. But for us, as we look at every single client, we review the risk rating for our clients, the credit performance, the ability to handle their loans within the different types of business segments because they're all slightly different. We look at the liquidity, the cash reserves to measure the risk/reward trade-off, how they are paying, their different trade lines and loans and their current credit history. All those factors go in when we meet with them. Some of this is obviously collateralized through commercial real estate, equipment or just sort of the value of the business. But we do sit down with our clients, especially those that have borrowed through us, look at their condition, look at pre-COVID versus post-COVID, how they're going to ramp up, what the impact is and we assess them, each one of them individually based on the industry they're in and look at their financial stability and their financial -- their ability to return to financial health over the next 6 to 12 months. And then that's how we start to look at our reserves in terms of how that group of clients is doing and what we need to reserve for them or a small portion of them.

Got it. Okay. Yes. And that's an important point you made earlier that this survey of clients is -- a client, however you touch it, be it either the payments or loans, they're not all loan clients. So that's a good reminder there. Maybe we could shift to the consumer and consumer behavior and what you're seeing there. It's been another 2 weeks plus since we've heard from BofA. And so how are you seeing forbearance request trending? And then how are you seeing spending going in the opened versus unopened market? A little color there would be helpful.

Yes. I look at it -- if I just -- if I could comment on credit and debit spend and just keep it simple. But we entered the year in January and February, things were looking pretty good. You had 6% to 8% growth year-over-year. Then things started to happen in March, obviously, in the second half of March, and that year-over-year spend went down by 6%, so negative 6% year-over-year. April was definitely the worst. Combined debit and credit spend was down by 25%. And then we started to see things rebound in May. May was only down by 12% year-over-year, so cut it down half. And we're early here in the month of June. So the first week or so, I think we're maybe down like 5% or 6% year-over-year, measuring that credit and debit spend. So you can start to see things -- that gives you sort of a general sense of how things started and then where they came to with April, definitely the worst. Obviously, all the financial stimulus out there is helping us -- or helping the clients, I should say, and that spend is out there and savings is out there. So consumers and small businesses continue to use that to their advantage. In terms of just pure deferrals, March, definitely one of the -- March and April, April, definitely the high point. I would say, overall, May, probably about only 20% of what it was in April. And June is shaping up to be maybe 10% to 15% of May. So if you think of the deferrals are down, people generally did not know what their outlook was in April, so they came to us and asked for a lot of assistance. May, that was down by 80%. And then it's early yet for June. But again, that looks like it will be sort of 10% of even May. So that's how far deferrals have gone down and come down. Now all that's helped out by -- as states reopen, and we're starting to see higher spend. In some of the states, particularly New York and California, are big -- have big impacts on spend. Other businesses coming online, more spending on restaurants and gas, up 35% and 22%, respectively, year-over-year as of the end of May. So things are starting to happen from spend. We're a long way from where we were. But as things come back state by state and then the individual spend categories as people move away from just essentials to spending more on food, services, clothing and other retail aspects, you'll start to see that pick up more and more. Did I lose you, Betsy?

Sorry, no, I was on mute.

Yes, that's right, my -- yes.

Sorry about that.

[indiscernible] mute button.

Well, I was trying to keep you from hearing my fingers on the keyboard. So there's a question on the web that is drilling down a little bit into the forbearance points you were making. And really, the question is, how long is the forbearance that you're giving? When do you assess that it's over, the forbearance period? And does that start to clock on delinquencies and things like that? Maybe -- and it might differ by asset class. So if you could give us some color on that, that'd be helpful.

Yes. I mean, I think we're still in the middle of it, and we're still helping our clients through it. So I can't -- the process is still ongoing because clients are still coming to us. Others are in -- others came to us in May, as I said, versus April and different points of it. So we're assisting them all the way through. I'm just saying that less clients are coming in asking for a second forbearance. Others are still paying. As I noted in one of your reports, 45% of our credit card clients, even though they've asked for a deferment, is still paying and 20% of our mortgage clients are. So there is a lot of activity going on. And as we emerge through the next month or so here, we'll have a better picture of that, whether that stays permanent and moves off and we can move to a normal type of BAU environment. But we're sort of still helping our clients through this, and we haven't officially ended that in any way. Our goal is to help our clients look at what they're doing and assist them through this period. I'm just saying the demand for that is less and less as we move into the next months here.

Right. And when you've given deferment before it's been maybe in a hurricane situation or something like that, is there like a trigger that says, hey, deferment period is over, that's a function of economic situation in that marketplace? Or is it much more idiosyncratic customer by customer?

I think it's more customer by customer, and it depends on as the individual states come back and what stages they're at, they're all in different states. I'm in Massachusetts, and they've come back slower than others as, say, maybe in North Carolina or South Carolina and other states like that. And then the industry, it's done by industry. So if you worked in the restaurant business, in the foodservice industry, obviously, you may have been on unemployment. You may have started your job up or you may be still waiting. So that becomes an individual customer basis in terms of how we look at that. But again, we're watching it. Encouraging job reports that just came out of people getting back to work. And when they get back to work, they come off deferment because they feel more confident about the next few months.

Oh, so they call you and say I want to be off deferment? Or you just noticed that they've kept on paying for long periods of time and then take them off?

No, no, either way. They can call us and not -- sort of not re-up it. They don't want to [ confirm ] in our conversation, we can talk to them about how they're doing. We try to connect with our clients, and they may want to come off. But any number of different ways, they can come to us. And we are in contact with them all the way through. So this is a constant conversation over their financial wellbeing and what's the best situation for them over the next few months and how we can help them get through it.

Okay. And so last question here, just a forward-looking question coming in off the web. Post COVID, you've got the digital app. You've got capability set beyond just the app. How do you see your product set evolving or expanding, particularly within your successful -- highly successful preferred rewards bundles and packages? I mean, is there going to be -- have you given some thought to how you plan on playing offense with your product set and digital capabilities?

Yes. I mean we continue to add, as I said, new features and functionalities. Last year, we've done -- we did about 1,000 new features and functionalities on our digital platforms and some of the product enhancements. We've done 450 already this year. We just continuously invest in the key right areas for us. We'll enhance our rewards -- preferred rewards package with all types of digital activities, capabilities within that and the ability to receive rewards off the service element of it. I mentioned the ACT requirements in our financial centers, but we haven't -- we're rolling out a new application, a new digital app that will integrate even further bank and brokerage across Bank of America Merrill Lynch and our private banks. So completely seamless, again, the digital app will form around the client and the capabilities and the services they use versus the individual apps. So look for that. That new Erica features will be rolled out within Preferred Rewards and prompting and helping clients receive the most rewards. So you can ask Erica what's the best way to receive rewards from Bank of America and, hence, a preferred rewards offering. So we'll use Erica even more as an automated giver of advice. We're planning to launch a life plan, which will be integrated digital financial plan. That will be coming out later this year. We've got all sorts of mortgage digital servicing platform enhancements. I think digital mortgage is up 70% year-over-year. So that -- some of those enhancements and features we've made will be more permanent. So all those types of enhancements, when we put digital on the table to continue invest in, we will -- we'll continue to invest in the 500 financial centers that you and I talked about in the beginning. That does not come off. Those are all critical investments for us, people, technology and locations that we will continue to do and watch our expenses across other areas to be able to continue to do that in the most efficient way.

All right. Perfect. Well, 30 minutes went by. It's a pleasure speaking with you again, Dean. Thanks for joining us.

Anytime, and thank you, and I appreciate everything and open to any questions you would like.

All right. Super. Thank you. Take care.

Thank you.