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

Good morning, everybody. I'm Erika Najarian, Co-Head of Financial Sector Research and a large-cap bank analyst here at BofA Securities. On behalf of my senior colleagues, Michael Carrier and Ebrahim Poonawala, we'd like to welcome you to the 2020 Virtual Future of Financials Conference. And of course, we hope that you and your loved ones are staying healthy and well during these challenging times. As a reminder, you can pre-submit your questions to the management teams that we have up on our virtual stage by submitting the questions through the webcast portal in front of you. Kicking off this year's conference is Bank of America's Chairman and CEO, Brian Moynihan. We thought we could make this year's conversation even more valuable to investors. Given Brian's role as Chairman of the International Business Council, we'll spend some time today addressing Bank of America's efforts to advance stakeholder capitalism, aiming to deliver great returns to shareholders and address important societal priorities. So also joining us today is our own Head of ESG Research and Head of U.S. Equity and Quant Strategy, Savita Subramanian. Brian, thank you so much for joining us today.

It's great to be here, Erika. Thank you for having us, and good morning.

Good morning. So Brian, before we turn it over to Savita to discuss this topic with you, I wanted to ask you a couple of questions on how the company is faring during this downturn. The first, 2020 is clearly a noteworthy year. What are the bank's clients saying about how they're feeling about the prospects of economic recovery in 2021?

Erika, the first thing is welcome, everyone, to the conference, and you and your team under Candace's leadership do such a great job. So thank you for all you do, but more importantly, thank you to all our clients for joining us today. The second thing is before we talk about what our clients are thinking, obviously, the COVID crisis was -- the crisis and the racial social justice crisis came in, but we also had an election going on. And we at Bank of America want to congratulate President Elect Biden and Vice President Elect Harris on their victory. And we also want to note that we'll work -- we're ready to work with this administration as we have been working with administrations for over 200-plus years in this company's history. So we look forward to working on the big problems that face the world. So I just wanted to start with that. Now let's talk about what our clients are thinking. And obviously, that's going to be shaped a little bit by what starts to -- what happens here. But our clients basically -- the good news is that consumers have stayed in the game. After a downturn in March and April where the shutdowns really took hold, the consumers could have picked up their spending to the point that in October of 2020 versus October 2019, consumers spent more money at Bank of America. And year-to-date, over $2.5 trillion of money going out of consumers' accounts and doing things, they've actually spent about 1% more than last year. And so that means the consumers are in. Now it's different, obviously, because the consumers are spending. There's things they can't spend on, flying on a plane, staying in a hotel, going to movie, at any great magnitude. But there's things they can spend on: improving their home, takeout service versus in-restaurant dining. And so they're spending money just differently, in the aggregates more money. And that's good for the economy, and that's why you're seeing the economy pick back up with a strong quarter 3 rebound off the quarter 2 that you guys all predicted and actually have been increasing your predictions in terms of the growth rate of the U.S. economy for the year, i.e., being less negative. And so that's the good news. On the corporate side, it's kind of interesting. We had the panic borrowing that went on early in the year. It was a -- massive line draws. The capital markets kicked in after the Fed did a great job of stabilizing them, and the fiscal stimulus kicked in. And so suddenly, you had everybody pay down those loans and you had breakaway financing through the high -- both the high-grade and the high-yield markets just take off and a bunch of balances moved in the markets, which is exactly what should happen. And so that meant the loan balance that have been out come down and are down year-to-date and year-over-year. But that's largely because people have just been able to -- the higher -- bigger clients have found the capital markets well open, and after they had to draw on their lines to pay down their commercial paper, now they can finance it out. And then secondly, even in the midsized companies, what happened is they got conservative because you would. You're facing these projections. If you think of what people's projections were in March and April and May of what was going to happen versus now, which is different, 14% unemployment down below 7%, those changes now. And so what we've seen is that activity start to level off, and the optimism and the forward-looking start to kick in and CapEx start to pick up a bit, and imports from China picking up to fill consumer demand. So we look forward to that -- changing the rate of growth in loans, i.e., turning it back to positive, but just stabilizing now. And I said not stable, but stabilizing would be the word. But what they're telling us is they're ready to go, they're making money, those in the businesses are open and going forward. And those in the business are affected industries are just waiting for this vaccine, when it's going to be safe. And today, we had a major piece of news that the vaccine is closer to coming than -- at least as close as people thought, and that's good news for those companies that are affected heavily by this virus.

That's a good update. The other question I had, Brian, is the company has been operating in responsible growth mode for over a decade now. And could you give us a sense of how this has benefited BofA during this downturn? And do you think investors fully appreciate how the strategy has benefited results?

Well, I think -- we've been operating this way. And the responsible growth is not only -- everything is a credit risk question, which it is, obviously. But it's also an operational risk perspective and how we keep the expenses in check. So -- and how we can basically be ready, honestly, to answer the bell on these massive programs that we had to implement as the largest sort of consumer bank in the country, whether in small business bank, whether it's PPP or whether it's EIP payments, unemployment distribution, all these things that we have to participate in keeping our branches open during the crisis. So responsible growth allowed us to have the operational discipline as well as the credit. And I think if you look at the credit, what we're seeing is the credits proved out to be what we thought. As the spike in unemployment came, we put up reserves, and now it's clear -- we released some reserves in the third quarter on the consumer side. But that's because a decade ago, we -- more than a decade ago, actually now, it -- probably 12 to 13 years ago, we started to reposition the portfolios to a balance between commercial and consumer, a balance on the consumer side between secured, i.e., mortgages and cars, secured versus unsecured, meaning credit card. And you saw that balance come in, and that's fared well, and you can see that in our reserve levels. You can see that in our stress test results, again, for the -- every year except for one, we've had the lowest losses in the stress test, and you can see it in our SCB requirements. And so investors will always be skeptical, that's what you get paid to do, is be skeptical, and they will always be looking ahead saying, is this really going to be what they said, but I think it's proven out so far, and we expect it to continue to improve -- prove out over time.

Okay. Thank you, Brian. Savita, why don't I turn it over to you to pick up the conversation?

Great. Thanks, Erika, and good morning, everyone. Great to be here. Brian, I'm really excited to be interviewing you about my favorite topic, ESG. So let's start with a recent exciting development, which is that the big 4 accounting firms have basically coalesced around a set of ESG metrics, or environmental, social and governance metrics, drawn from a range of existing standards, which include SASB, the Sustainability Accounting Standards Board, and the Global Reporting Initiative as well as other accepted disclosures. So this is work that you have led in the IBC at the World Economic Forum. And I think this is just -- this is a really interesting kind of development in the ESG world, especially in terms of disclosure. And if the goal of ESG reporting is a universal set of common metrics for issuers and investors, what role do you think that the IBC and the accounting firms play in reaching that goal? And just in general, why should our clients care about the topic of ESG and measurement?

I think, Savita, there's a lot in that question, but let's try to parse it out. First, go to your last point, why should investors care? And the investors that are talking to us are investing, generally, other people's money. They're investing their clients' money, and they're managing for them, and that's what they get paid to do, like we do in our Merrill and private banking platforms. And so if you look at the research that you and your colleagues have led, you're telling institutional investors and you're telling Chris Hyzy in the private side of our house and the wealth management side, look, companies who don't do well on ESG are going to have a higher probability of failing at 90%, could avoid 90% of bankruptcies. That's an important thing for an investor to understand because if you can avoid the losers, frankly, especially in large capital, that's success almost by definition. So that's one piece. The second piece is the underlying clients are demanding that we, as companies, respond to society's needs. And so whether that's who they'll do business with, i.e., they have a bank account or private wealth management account or commercial account with Bank of America or even investor or who they'll invest with, and it comes out both ways. So the underlying clients are demanding it. That's the second piece. And because society is demanding. And then the third thing is you really have the issue that we had to figure out a way that we can define long term as in the stakeholder capitalism. And these metrics define what that means because often, when we say we believe in the stakeholder capitalism, whether it's a business roundtable or whether it's the IBC and the WEF for 50 years, and many other people talk about Jim Collins, a great business writer, profits and purpose, whenever we said that, people would say, Well, that's fuzzy. That doesn't mean anything. I don't know how to measure -- on both sides, both on -- the people are more -- they believe more in just a straight return question, and the people who believe in trying to get stakeholder capitalism say it's fuzzy. So we had to have a set of metrics. And those metrics then collide to assess long-term -- who's investing long term, who's driving long-term growth, who's doing profits and purpose. And those metrics had to be such that they can be disclosed, and you could see across industries and you could see within an industry who is doing the right thing. And that's where it led us to the big 4. You have to have metrics, which are the kind of metrics that can be -- hold ourselves accountable but also hold -- the people can see you're holding yourself accountable. And the big 4 has come together and done a fabulous job of convergence, and that's the piece we have to think about, which is convergence to these metrics. So we end up with a set of metrics, which meet the SDGs, which meet the demands of society and then can be refreshed over time. But what they do is they provide a -- 21 metrics that go across all the SDGs, a series of supplemental metrics that almost all of them, somebody does, not -- so we had to sort of push a whole bunch of circles on top of each other and end up with one set, and they did a great job for us doing it.

Absolutely. And I think -- and you mentioned stakeholder capitalism, which is a phrase we've heard a lot just over the last few years. But is this a new idea in your view? Or what's your take on stakeholder capitalism and how you thought about this historically?

Well, you can think about a few different ways. Obviously, there is a good tug of war between Freeman and Klaus Schwab. 50 years ago when Klaus started the WEF to talk about stakeholder capitalism within -- in the first Davos Manifesto, and that was sort of one piece. But frankly, if you look at the oldest part of our company, it started in 1784. And if you look at the founding document, which I have, they gave to me as a momento of -- they gave to me a copy of this momento of my 10th anniversary as being CEO. If you go look at it, it says, we -- the people of a community form a bank. And so banking has always had this idea we come out of the communities because the end of the day, a bank's purpose, especially, is to reflect the economy and the economy from investors to the market, from issuers to the market, from people to the merchant, to the merchant to the people. It's -- that's what we do. We're product of the community. So this is really not new in banking, and we're not different than other people. It's just -- basically, we're all established by of people getting together and said we got to pull resources, i.e., deposits, and we got to get it to the people who needed to grow their businesses, i.e. loans. And that's what happened, and the capital markets came along, and that started the capital markets side. So banks have always been part of the communities. But if you go back and look in the U.S. heritage, as I said, Jim Collins was writing in the mid-90s about profits and purpose and the Genius of the AND, you have to be able to deliver both. If you look at what the business roundtable, who decided to revise their statement of purpose of a corporation because every time those companies which managed along these dimensions up to a company would go out and talk about it. They'd say, well, your business, trade group, for lack of a better term, has its extent statement, the business of business is business and shareholder returns are the primary thing. So we had to change it. So it's not a new concept. Most companies are managed along these dimensions. It's become more defined as the world [ meant ] in 2015, and the country said we want the sustainable development goals to be what the world should do to define what the society needs from us. But it's not a new concept. It's been around for years. But the key for everybody, and the investors demand this, is we got to be able to produce profits and purpose. We have to do what the investors need from a secure return, and we have to do what society needs from us. And that then is important to make sure people understand that and because if it's or, it won't work.

Absolutely. No, I think that's a great point. And stakeholders include [indiscernible] as well as customers, suppliers, communities in which we operate. And when it comes to employees, why was it important to you to lead the industry in issuing the human capital important? And just more generally, what's the business case for investing in the promotion of diversity and inclusion within your own organization? Or would you frame this differently? Is it a business case? Or how do you measure success in diversity and inclusion?

So let's go back to the -- sort of unpack that in a couple of things. One is the human capital report we've put out effectively is a broad -- includes the metrics that will go in the IBC stakeholder capitalism metrics. So the idea is we started reporting this because one of the things we wanted to do is to be clear with people that we have a diverse Board and we have a diverse management team, that we have employee policies which support employees in many ways, and that helps us have a -- to be a great place to work as we talk about it because at the end of the day, we have to have the best employees that we can possibly get. And so because at the end of day, we are -- these wonderful talented employees that all of you represent, we are a bunch of buildings and a bunch of computers and a bunch of data. And that's what we are. That's what the bank is. It moves that data through the system, it services clients. And we do it by having talented employees using that information to help the clients make choices and decisions and do things. We have to have a nice place for them to sit. So it's a straightforward thing. Without those employees, we won't be successful. And so the idea is that we're -- that we have to be the best place for teammates to work. The human cap report basically says we are the employer of choice for everybody, no matter where you come from, no matter what your background is, you can come to Bank of America, be successful and be yourself. And that's what inclusion means. And so diversity is representation, you can see the representation. And inclusion means I can be all I want to be at Bank of America, no matter -- and not have to change who I am because I work at Bank of America, et cetera. And we measure both of them, have for many, many years, and we measure our employee scores and we measure our diversity inclusion scores, and they're at all-time highs. And that helps us have low turnover, highly talented people who want to work at this company, and that's great. And it has to reflect society. At the end of the day, it's half woman, half men, and you can do all the percentages. And what we're trying to say is we need to represent society and face off against society with people who are as talented as they can, and you can't choose your people from some subsectors. And that's what people miss is if you say, if you're only going to have men or only going to have women, either one, you only have half the people to choose from. Well, we need 100%, and likewise, through all the different ethnicity definitions and characteristics. So we believe -- but we believe it's the right thing to do. In many years, people have come to me and said, let's make a business case for this. And I said, anytime you make a business case, you'll get people arguing both sides of it on facts and figures and assumptions. The route is this is the right thing to do. And the route is our clients are everybody out there. And therefore, we have to do a great job being the best place for teammates to work and facing off against our clients and people who can service them well and understand them well.

Absolutely. And we found empirical evidence that companies with diverse management teams, diverse core, diverse employee bases, actually experienced higher returns on equity. So I think to your point, it's not necessarily something that's nice to do, but it's actually in the best interest of investors. So let's pivot to sustainable financing. And this is a hot topic, with green bond issuance up from -- I think this year, we're tracking about $0.5 trillion of sustainable issuance, which is primarily composed of green bonds but is also -- or environmentally focused bonds, but also is including this growing cohort of social bonds, if you will, or labeled issuance in general. So this is -- essentially, we've seen volumes double over the last few years now. What's your take on sustainable bond issuance and just sustainable financing in general and Bank of America's role in this important initiative?

Well, number one, the team in the capital markets area has been a leader in driving this for many years. And so that's what we do. But I think we need to back up a little bit and talk about if you believe the sustainable development goals are what society wants, capitalism to do to be successful. And that means capitalism is the only way to bring the innovation, the capital, the talent and the real money to do these things. And so if you think about the SDGs, they cost $6 trillion a year is the current estimate to do. And all the charity in the world is about $1.5 trillion a year. And it's wonderful, but it isn't enough to solve it. If you think about all the endowments and foundations, they have something similar in amount in total balances, so you could give it all away and be done with it in 1 year and then you don't have it for next year. And by the way, they support a lot of other activities. The governments are running massive deficits and have for years but also because of COVID crisis. So where's the money going to come from. And so the money has to come from aligning capitalism around all dimensions, the equity basis, the bond issuance basis, the activities, the expense basis, how you use your -- the supply chain, how you work with your clients, in our case, et cetera, to drive the money towards solving these issues because that's what society wants from us. And if we don't solve those issues, we're going to have unfair aspects of capitalism, which will cause it to be challenged all the time. And yet, the flip side is without capitalism, you're going to console them. So how do the green bonds fit into that? How do the sustainable building bonds fit in? Well, they're an expression of 2 things. One is they are an expression of the investor demand, i.e., we need to -- as an investor, to help drive that. And the way we're going to do it is by investing green bonds. And they also are the operator domain. Companies like us are saying, we need to do all these projects, and we're going to identify that we're doing these projects by the issuance of bonds, which support the financing of those projects, whether they are wind and solar financing, whether they're -- what we do in terms of economic mobility, all these different elements we have to do. And so we can't forget the purpose is to help drive capital because capitalism is the only way to solve the environmental problem and is to drive it through the demand side of investors saying, I want -- I will buy green bonds because I want to help -- change because my clients are telling me to change. And then the operator is saying, I need to get carbon neutral. And how am I going to do that? I'm going to build a cogeneration plant of solar or something like that. There's lots of different projects. So it's set back and forth. And so the market is deep, and since 2013, I think we've done 250 issuances or something like that. We've done billions of dollars of bonds. Recently, we've rounded out the definition of those bonds away from traditional green bonds to social bonds or sustainability bonds, widening the purpose out so that there's more use of proceeds scope, I guess, might be the element. And so the idea is it's just -- it's a continuous expression of the -- on one hand, the demand from society, I want to help support the change. And the other operator saying, I'm going to use this money to help drive the change faster. And then through your guys creativity, you've seen structures which reward behaviors. A power company saying that they get their -- a power distribution company, if they get their underlying power from green sources, their rate stays lower. We've seen them in terms of reforestation, agreeing to accept a lower rate of return on the bonds to allow a slower logging over time, so that's more sustainable forestation, still keeping the jobs in the logging business. And so the idea of these bonds having a flexibility to be structured in certain behaviors at the baseline is accretive element also. And so we'll see the sophistication of these continue to develop. But right now, the EU is going to do a massive one. So these are becoming a statement by society. We're bringing the capital to the task, and the way we are expressing that is by allocations of bond resources. And by the way, in ESG funds, you're doing by expressions allocation of the equity resources.

Absolutely.

And ultimately, we've got to get full alignment.

Yes, absolutely. And can you talk just a little bit about -- so Savita recently initiated the first of its kind of $2 billion sustainability bond where proceeds will help advance racial equality, economic opportunity and environmental sustainability. Why do you think it was important to issue this bond? And what do you think it signals about the market for sustainable financing?

Well, again, it goes to this question, broadening out the purpose, for lack of a better -- and then piece of proceeds because the use the proceeds on the green bonds, which we all worked on many years ago to define what is a good use of proceeds along the green dimension, now you're basically being able to define the use of proceeds along other dimensions. But if you think about it, it's consistent with our $1 billion program. And so we've been working on economic mobility, education to help that, housing to help that, health care to help that. And so we announced a $1 billion program. So these are all thematically along the same dimensions, which is raising money that requires us to put that money to work to do specific things, which is a business for us. The thing that people sometimes forget is we -- if those investors look at our tax line, the reason why our tax are low is because we have somewhere around $1 billion of credits a quarter for green financing and -- in those things. So it's a business which gets good returns and has become more mainstream over time. 10 years ago, if you and I were talking, people would have thought doesn't really work. But 10 years later, more energy, more electricity production in United States from alternatives than coal, and it all crossed over in the last 4 or 5 years has been -- but it's driven by the economic efficacy of these things. So the sustainability bonds will follow that same dimension. It's a business for us. It just widens the use of proceeds and opens up new asset class. At the end of the day, we have a responsibility as a capital markets player to open up asset classes up to create, for lack of a better term, benchmark bonds. And this is a benchmark bond. This defines now a bond, then all your colleagues can go out and work with other issuers to issue, maybe not in the same size of $200 million, $300 million with the same use of proceeds that will get a market going like we did 7, 8, 10 years ago with green bonds.

It's an interesting point. Yes. It's definitely a broadening market. And maybe someday, we won't even call those sustainability bonds, but all bonds will be sustainability bonds.

That's a question, Savita, of alignment. At the end of the day, you're kind of -- we need to move the capitalism to actually continue to do what it does, which is solve the problems better than any other system by far. And so -- and if we don't, then it will be regulated, and that will maybe have strange things happen. So the idea is you need regulation to provide -- you have some guardrails, absolutely 100%. You need regulation to provide incentives, that helps. You need a regulation to also make sure there's not perverse subsidies and things. But what you need is private sector to come in and just flood the zone. And so one of your investors out there, it has to realize that we see this a couple of different ways. As an issuer, we see the advocacy market come to us, and that's what the metrics are trying to sort out. So instead of having to respond to everybody's idea of divest or not divest, we're saying, that's not the right question. We should stay with the companies using environmental. They're making the transition. Because if they're making the transition, that really pushes a lot faster than to say, we'll just leave them behind and nobody will invest in them because somebody will invest in them, honestly. And so we need to provide the care to the companies making the transition to drive it. And then we need to provide a transition market, which is really what offsets and other things are. It's effective -- a declaration of carbon neutrality in a company is an internal tax, of which they end up paying by buying offsets that they can't get their operations down. But those offsets then provide capital to create the next thing. So it was in your business [indiscernible]. So as you think about all this, you have to think about this is aligning capitalism [ for the metrics ], the bonds and all this is running the same thing But to the investors, it's our clients saying to us, tens of billions of dollars have moved the funds on the equity side. And Andy Sieg and Katy Knox's platform saying, you have to invest this way. The ability for us to do a portfolio of $5,000 without certain specific stocks, and it is absolutely technology, okay, you can do it now. You couldn't done it 20 years ago. So the investor community says, I want the S&P, and I don't want these 3 companies. Then we can do it for them. It used to be -- just mechanically, it was hard. That kind of technology is allowing people to move capital. And so to the investors, you're going to have to manage some alliance to the issuers, you're saying, wait, do you realize if you don't make progress here, people can sort you. So if Erika crossed the index, the bank index, you can sort the bank index, and we could basically mimic it for everybody and drop out before a company somebody doesn't want. And if you start to get into that, what happens is that capital is going to move away from those companies. So they need to be driving this because that's what their investors are telling us. And the institutional investors have to respond, the people give them the money to manage. And the people who give them the money to manage say, I want this done. And that's where this is now a holistic case. At the end of the day, we're also doing it for the right reason, which is to make whether the environmental change or social changes happen.