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

Ladies and gentlemen, welcome back. Good afternoon. This is my most nerve-racking presentation of the day because I'm with Paul Donofrio, the Finance Director of Bank of America, who pays the bills. But I think we're in good shape. He's joined today by Lee McEntire, Head of Group Investor Relations. Paul and Lee, thank you very much, indeed, for your time this afternoon, or this morning, indeed. Perhaps I'll kick off, Paul, if I could, with the big picture. So the last 6 months, how has the [ bank ] dealt with the last 6 months? And I guess that's across risk and client, but it's also society, the community. I think that's been quite an intense focus. Thank you.

Well, thank you, Alastair. It's great to be here. Hello, everybody. In terms of how Bank of America has weathered this crisis to date, this health crisis to date, I would say that the last few months have tested us as a bank. And our grade, I would give ourselves -- I would self-grade us as receiving an A. Look, the economy is recovering from one of the worst economic periods in history. But throughout the worst of it and into the recovery now, we have continued to deliver for our customers, our communities, for our employees and for our shareholders. We're able to do this because we had transformed Bank of America over the last 10 years by focusing on our purpose, on our values and on responsible growth. That's pretty clear in a number of obvious ways. One can see it in the level of our liquidity and capital as we entered this crisis, but also in the levels of our liquidity and capital as we have moved through this health crisis. One can see in how we've delivered for communities, for our employees and for customers. Probably the best and most obvious example of that is our level of pretax, pre-provision profits over the last 2 quarters, which by the way, has been driven because of the strength of our relationships with customers, our leading market positions and the diversity of our product globally. But there are less obvious ways that are still to be demonstrated, I think, as this pandemic unfolds. As we get to the end of this crisis, we'll be able to look back at credit losses and operational losses and improved market share and reputations. And in these areas, I expect our transformation, how we have focused on responsible growth for the last 10 years, I think that's what's going to truly differentiate us as we earn our way through this crisis and come out the other side even stronger. So that's how I'd sort of set it up. And with that, maybe I'll turn it back to you for questions.

So we are global, [ I'm sighting ] a rather damp global. But to a degree, [ the clues ]. Could we start with the U.S., the largest deposit taker, one of the largest payment providers. So you've a strong view of the economy. And I guess also, away from real estate, the largest commercial lender. So just a little bit of color, please, Paul, on some on the American consumer. Spending, how should we -- what are you seeing through the network? Any key differences you'd highlight by industry or by region?

Sure. So you're right, Bank of America, we see about, I don't know, 15% or 20% of consumer spending in the U.S. So we have, I guess, a direct view into what the consumer is up to, at least in the U.S. Total consumer spending in the U.S. continues to improve after falling dramatically during the shutdown. Before the pandemic, we were growing in the U.S. at about 3% to 5% year-over-year, month over -- year-over-year. Since then, if you look at April, spending year-over-year fell 26%. May was down 13% year EPS -- year-over-year . June was flat year-over-year. So you can see the trend here. Then July began running ahead of last year in terms of spending year-over-year. And since then, spending has been trending up and sideways a bit. So we've seen a decent recovery overall already in consumer spending even with the economy not being fully reopened. And after going sideways for a bit, it's now moving up modestly. If you just focus in on September month-to-date, total payments are up low single digits year-over-year. And on a month-over-month basis, they're up high single digits. If you look at total payments year-to-date in total, they're about $2.2 trillion and remain flat year-over-year. As credit, bill pay, cash, checks, they all continue to be down year-over-year, which has been more than offset by increased debit spending which is more focused on everyday necessity spending here in the U.S. Unemployment insurance of $600 million a week stopped at the end of June here in the U.S. And likely because of this, we have seen some spending by lower-income families taper off a bit. But at the same time, we're seeing some benefit from those households in states around the U.S. who have started to receive the new $300 a week benefit. In terms of the industries and regions, it's what you would expect. Those industries that are more affected by the pandemic are clearly seeing -- we're seeing less spending, travel, leisure, airlines, obviously. And those industries that have benefited from people staying at home and doing more things online are doing clearly better. And from a regional perspective, it changes depending upon where the disease may be on the rise or perceived to be on the rise or getting better. It's -- but it's not -- I wouldn't say there's much of a regional effect in the U.S. It's more week-to-week, certainly, month-to-month, depending on kind of what the news flow is about the health statistics in any given region.

I'll come back to business in a second, but just to dig a little further into the consumer. So between the branch network and the online presence, I mean, one assumes there's been a bit of a rebalancing back. But how -- are people dealing with bank physically again? Or are still very much online?

Well, we've never been -- we never closed our branches. There were some branches around the country that, for health reasons, needed to be shut down temporarily. But our -- we're considered a necessary business or whatever, I can't remember what the exact phrase is now. But obviously, people need to transact. And so many of our employees have been either at a branch or in a back office serving our customers throughout this whole pandemic. That's not to say we haven't seen an increase in digital activity. We certainly have. If you think about digital adoption, my guess is we've accelerated digital adoption probably by, I don't know, 3, maybe 4 years because of this pandemic. If you look at some of our statistics, mobile check deposit is up 20% year-over-year. Zelle users are up close to 40% year-over-year. Zelle transactions are up 80% year-over-year. Our digital sales are up double-digit percentages. Paperless is up 20% year-over-year. Mobile banking users are up. All of the mobile activity is significantly -- the penetration has been significantly increased into our customer base. And by the way, it was never just "millennials." But certainly, in this pandemic, we've seen the older generations get much more -- interact with us in a much more digital way.

Thank you, Paul. Just then shifting on to business. And starting with small business, there's been a lot written about how impacted small businesses have been. So perhaps, what's mid-market America doing as the bank sees it right now? Working capital investment or deleveraging? Is there nervousness? Or has the peak nervousness passed through?

Yes. Look, again, I think that we certainly have -- when you think about small business, let's put it that way, there are small businesses all across the United States, restaurants that are involved in restaurant, leisure. Those businesses, it's been tough. I mean early on it was very tough, but there was -- we have something called a PPP here, which is a Payment Protection Program. And I think that's helped out quite a bit. I live in New York City. I can tell you that restaurants are open. We're all dining on the street, but they're open. So other than the obvious categories where we haven't seen a significant pickup yet, like for example airlines, most businesses are -- small and large, are working their way back to normal. And we're providing credit, again, to our customers and to -- for those companies that, pre-pandemic, were in our risk profile, we're out there supporting them. And they're coming back. They're just coming back very slowly.

And I guess then at the top end, so in your global division, what are the biggest corporates doing after that massive draw which the bank was able to support at the heart of the crisis? What are you seeing from those companies now?

Well, look, those companies were smart. They went out and raised a lot of liquidity. So we've seen record bond offerings. And basically, I think Corporate America, large corporates are -- again, putting aside the industries that are directly affected, leisure, airlines, but even -- I'll come back to them in a second. Most CFOs, CEOs, Boards, recognized we were in a health crisis, recognized they needed liquidity and they went out and they got that liquidity one way or another, either through working with their banks or hitting the capital markets. And even in those affected industries, like cruise lines, for example, they went out, they brought -- gone on and raised massive amounts of liquidity. It's been more equity, it's been slightly more expensive, but they've been out raising capital as well. So I think Boards and management teams are doing the right thing to make sure that they can weather the significant downturn in the economy we saw and the recovery, whether it's fast or slow, that's coming.

So continuing on that same theme, but switching to the health of these customers. Could we talk about the credit environment a little? First, perhaps by the deferrals that banks made for consumers and for commercial clients, how that's been developing.

Sure. Let me just first say on credit just generally, despite high unemployment rate here in the U.S., which now is around 8%, it was higher earlier. Asset quality, for us, has held up quite well. I won't use words like extraordinarily well, amazingly well. Let's just call it quite well. And because of our responsible growth, our mix of loans, our underwriting standards, high underwriting standards for years and years now under responsible growth, we should be, and are, reserved a bit lower than our peers. Now as you sort of noted, everyone is watching deferrals. We've been and we continue to be cautiously optimistic about our clients who took deferrals, who asked for deferrals. In the early days of the pandemic, a lot of those customers hit the deferral button, given all the uncertainty that was out there at the moment. The key now is the pace at which these borrowers return to normal status and stay current. So we granted more than 1.8 million deferrals, which peaked in early April at more than 400,000 a week. We are now down to receiving about 7,000 or 8,000 a week. That's down 98%. And 85% of the original requests were for consumers and small business cards, where 60% made a payment since that initial request and more than 30% made a payment each month since the initial request. If you look at what we said at earnings, which was mid-July, we told investors that we had 1.7 million accounts on deferral. And then a week later, when we filed our 10-Q, that number had already fallen to 1.3 million. And currently, today, we're down to less than 200,000, representing about $13 billion in balances, with only about $500 million of that in card. So why? Well, it's because as statements roll in the middle of each month, more deferrals expire, and customers have decided they don't need further assistance. So what remains important is to watch how the payment habits of these borrowers that have come off deferral progress. And what we've seen so far is that 90% of the expired deferrals across all products have made at least 1 payment. Deferral balances remaining are primarily customers in consumer real estate with longer original duration periods. And 85% of these, at least for us, have FICO scores above 680. Putting deferrals aside and just looking at actual losses, I mean, people are very focused on deferrals, but you got to look at what actually is going on with our credit quality. And if you look at non-deferred delinquencies and net charge-offs, they remain low, and they were both down from Q1 to Q2. Just to quickly finish up on deferrals. If you look at commercial deferrals, they were about 1% of balances originally and are down about 80% from original grant.

Very clear. Now I've had 2 days of European banks lamenting IFRS 9 and how that's -- has mainly recognized bad loans -- loan losses very rapidly. Obviously, IFRS 9 is like the shallow end versus CECL, which is a bit, quite a thing. Is there anything that you can add on build reserve timing? How the bank is thinking about that at this point? Is there anything key building?

Look, clearly, CECL, as designed, was meant for banks to build reserves early in a recession or crisis. And I think it's working that way. We've got 2 quarters here where we've built significant reserves. The way CECL works, for those who may not be familiar with CECL, we have to look at our balance sheet at a point in time at the end of the quarter. And we have to look at all of our loans and a few other assets beyond just loans. And we have to say, "Well, how much reserve do we need as a company to account for all of the expected losses for that portfolio at that moment over the lifetime of those loans and assets?" And so that forces you, as you enter into a recession, to add significant reserves, and that's what we did. And what -- but once you build those reserves, then the question really becomes, from that moment, "Okay. How does your portfolio change quarter-to-quarter? Is it getting bigger? Is it getting smaller? What's the mix doing?" Because that could affect your reserves that you're going to need. And how is your view of the recovery, or what's going to happen in the future, changing? And so we may add a little bit to our reserves this quarter. We'll have to see. But it will be because of what we've seen probably in specific credits as opposed to a significant change in our portfolio because it really hasn't changed that much in the quarter. And if you think about how we're proceeding in terms of the recovery, is it really that different this -- at the end of this quarter than it was at the end of the last quarter? So I wouldn't expect to see, at least U.S. banks, have significantly differences or changes or builds or reductions because I think it's a little early for reductions in their reserves. But you could see some movement on the margin depending on what their experience is with the individual credits. The only other thing I'll say about reserves, if I can. There's a lot of discussion, press out there about reserve builds in one quarter and who had a bigger reserve build, who had a smaller reserve build. We have to -- you have to remember, particularly in the first quarter you're building your reserve, all you're doing -- a bank has loss-absorbing capacity. And that loss-absorbing capacity is your equity and your reserves. And all you're really doing when you build a big reserve is moving loss-absorbing capacity from one place on your balance sheet to the other place on your balance sheet through the income statement. You haven't really changed the loss-absorbing capacity of the bank. You just moved it from one place in the balance sheet to another. And so it's important that we do that. Those are the rules. And it gives everybody some more transparency in what we're thinking about potential losses going forward. But what's really important is your ability, I think, to -- what's really important is how you run your company for the last 5 years, what your loan portfolio looks like, how carefully you've been with your underwriting standards, how carefully you've been managing your businesses, your policies. That's going to show up in operational losses. That's what's important. It's not about what you do with 1 quarter into the crisis. It's about what you've done for years leading up to the crisis in terms of building a quality loan portfolio. And it's about your ability to create profits in the crisis. So that's why PPNR is so important. And that's why the strength of your franchise, your relationships, the diversity of your products are so important, so you can earn your way and build even more capital, which I think you're going to see a lot of banks in the U.S. do in this crisis, build even more capital and liquidity, as you work your way through the crisis.