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

Sure. So bond premium amortization should remain elevated in the near term. Based upon the forward curve, we expect some modest benefit from lower premium amortization later in the year. Now it will all be dependent on what interest rates do. And really, again, what mortgage rates do. It is important to note that, as I said, it's mortgage coupon rates that drive prepayment activity, and those rates really have moved up a lot relative to how much the tenure moved up. In the last couple of days, they've started to move. So that's going to be helpful in terms of prepayment, let's see how that plays out. The other thing I would say is, you have to also remember that the balances in the securities portfolio have increased quite a bit. So part of the increase you're seeing in premium amortization that we've seen anyway is just due to that. So as rates come -- if rates continue to go up and premium amortization comes down. It's not like it's going to get back to what it was in the first quarter because the portfolio is so big. We just have more of it.

Understood. And that's helpful clarification. And in your commentary around deposits, you mentioned capital optimization. I'm curious in terms of the magnitude of the flows that you're seeing. And what, if any, implications you see for Bank of America, if there is no SLR relief extension at the end of March?

Yes. Look, we certainly expect deposit inflows to continue given the stimulus, as I said. But relative to SLR, we're well positioned. We reported a fourth quarter SLR of 7.2%, which compares to the 5% regulatory requirement. And even without the temporary relief, our SLR would have been 6.2%, which would not be our binding constraint. For our bank entity, where the SLR is the binding constraint, we chose not to opt into the relief that was offered by the OCC. We think we can manage it there, too.

Okay. Great. So we're going to get to capital in a minute. But while we're on guidance, and while we've clarified kind of the trajectory on NII. Let's touch on any other guidance points you'd like to share here, whether it's trading-related revenue, investment banking, fees or credit first quarter to date.

Okay. Well, with respect to capital markets, I don't really have anything specific for you, but just like a lot of our peers have already noted this week, activity continues to be fairly robust with revenue sales and trading a little better than we expected, and investment banking results have been strong so far, too. And the result of the higher market levels, wealth management has also been solid. On credit, you have all seen the continued positive trends in banks that reported the Trust data. I would just note that while the stimulus has helped asset quality, and there's more stimulus on the way. It has been a headwind for NII. With respect to reserve releases. I don't really have anything for you today. As we close the quarter, we will set our reserve for the facts, and the outlook at that moment. But I think, as everybody knows, trends have been positive so far this year since the last time we set our reserve. So that is going to be factored in. With respect to expenses, I think it's 3 things worth noting, as we come off of the $13.9 billion reported in Q4. First, it's worth reminding everybody, that Q1 is typically our highest quarter because of payroll tax expense. And in our case, that's around $350 million. Plus, as I said earlier, so far, we've seen fairly robust performance in sales and trading, investment banking, wealth management. So one should expect revenue related expenses to follow suit. I also want to note that in January, we made a change in one element of a portion of our incentive comp paid in 2020. This will bring into Q1 about $400 million in expense that would have been incurred anyway over the next 4 years. So it's just an acceleration in the Q1 of expense that we would have had over the 4 years. And lastly, net COVID-diluted costs remain elevated, given the slower-than-hoped vaccine rollout, the winter surge in cases as well as a new PPP program and additional unemployment claims processing. We would have hoped to be a little further along, but we will bring these corporate costs down as the health crisis subsides.

So just to clarify, before we move on to the next subject, with the expenses and the acceleration of the $400 million, which, if I heard you correctly, you noted, that's accelerating several years of expenses. So all else equal, would that push you kind of maybe a little bit over the $54-ish billion of the expense guide for the full year?

Well, we're still targeting 54 -- a little over $54 billion. We booked $55.2 billion is what -- I think what we said was that we're targeting expenses for the full year, roughly equal to what we had in 2020. That's what we said in the earnings call. Below $55 billion. But the big wildcard there is COVID, and how quickly we can bring down the COVID expenses.

Okay. That's clear. So let's move on, in the next 10 minutes or so, to optimization of capital. And I think something that's pretty striking to me is where you're CET1 target and requirement is versus the peers. You're at 9.5%. And I would I see that as an advantage relative to the universal banking peer group where you benefit from both the lower G-SIB surcharge and a lower SCB. So with the size of your trading business. And the size of your balance sheet overall, how are you keeping these measures, both the G-SIB surcharge and the SCB? How is it that the Bank of America keeps these at the low end of the peer group? And how do you think of the trade offs?

Well, the answer really is responsible growth. With respect to the G-SIB, we finished the year within our current surcharge bucket, which is 2.5%, based at least on our estimates so far. We've managed that by compressing trades and other actions. But ultimately, there's only so much we can do as the overall market and the economy grows, given that the G-SIB score does not adjust cost for economic growth, which makes no sense, by the way. I'd also point out that we're managing it. But really, our first priority is at is to support our customers and clients. While at the same time, balancing that against the significant cost of moving up into another decent bucket. As you know, it's sort of a cliff effect when that happens. In the Global Markets segment, which drives a lot of this. We are constantly evaluating whether we can earn enough to support an additional 50 basis point bump, which for us, would be about $7.5 billion of capital. With respect to the SCB, we were below the 250 basis point minimum, in last summer's stress test, which is really, again, just a function of our balance sheet, our balanced portfolio, our client selection, our focus on prime and super-prime as well as the size and the risk embedded in our trading business. We've been below the 250 kind of minimum in all the stress tests over the years except for one, I think. Now depending on the severity of each CCAR scenario. That's going to bounce around a bit. But on a relative basis, we are quite comfortable with our position.

Okay. So given that positioning given your requirement, I think it's something like $36 billion of excess capital that sits on your balance sheet today. And we all understand the restraints that are on the distributions at the moment. If those restraints were to continue, and you can't buy back the entire $36 billion in stock. Let's talk about how you would deploy that excess capital? Is it Global Markets? Is it inorganic opportunities? What do you do?

Well, it's an interesting question. Let me start by saying that we are very well positioned, as you point out, to increase the amount of capital return to shareholders once the Fed lifts the temporary limit and the SEC becomes effective. And we do think they will do that later this year. Hopefully sooner, but certainly later this year. In terms of your question, Global Markets, acquisitions, taking more risk. With respect to Global Markets, our primary objective has always been to ensure that we have the scale and capabilities to serve our customers in every major market around the world, while earning an adequate return. We do that within sort of clearly defined company risk management objectives, which include keeping things in balance across the company, so that Global Markets is appropriately sized for the risk, the capital and balance sheet relative to the rest of the company. Generally, our Global Markets revenue is less volatile. And it's generated with less risk than many of our peers. Having said all that, we are evaluating. We continually evaluate resources devoted to that business relative to the regulatory constraints, such as the G-SIB buffer that we talked about earlier. And we do think there are areas where we can and should expand to better serve customers in the future. So that's kind of the Global Markets story. With respect to inorganic growth opportunities. First, I'm going to point out that banking laws do not allow us to acquire any deposits, given our market share exceeds 10%. And by the way we sold our asset management business, many years ago, the focus on wealth management and advice instead of the production of wealth products. Generally, we have everything we need right now within our existing mix of businesses to deliver our purpose and to grow. And while we look at smaller things from time to time, from a capability perspective, there's not much out there that we can't develop ourselves if we need it. So I think you should expect us to continue to grow organically. You should be looking for us to grow by leveraging our scale, deepening with existing customers and adding new customers within our risk and client framework. And I guess lastly, with respect to the -- our credit risk appetite, we've sort of covered that in a number of different questions. I would just say we're comfortable with where we are from a credit perspective. Our goal is to be able to deliver for customers, for communities, for shareholders and for employees through the cycle in good times and in bad. And that's what drives responsible growth, and our credit risk appetite where it is today.

Okay. Fair enough. So let's spend a minute or so talking about regulatory change and what's going on in D.C., vis--vis the Fed and banking industry regulation. And a couple of minutes ago, you touched on G-SIB recalibration, and it's pretty clear how all the big banks feel about this. What do you expect will actually change over the next several years? And what appetite do you think there really is for G-SIB recalibration. Can this happen?

Well, I'm not going to predict what the Fed will do. But I'll give you a couple of thoughts. First, we do think we're on the path to operating under the SCB framework later this year, as I said earlier. We're also, I think, hopeful that in the near term, we could see the NPR for the ESLR approved, at least by the Fed. And it will be appropriate, helpful logical, pick your adjective, if the OCC approved it as well. In terms of G-SIB, our reading of the tea leaves is that will come in some sort of "planned bargain" as we implement Basel IV regulator and like it's the, call it Basel IV, I guess. But I think we're all -- we've got some updates to Basel III. And as we implement Basel IV, I would hope -- and many governors have said that they think credit is about right -- not credit, but the capital is about right in the industry. And so that's the opportunity I think to make the G-SIB more logical as they implement the remaining elements of Basel III, so-called Basel IV. What I will say is that we focus on responsible growth. And our purpose, so we're always, always looking for better ways to serve our customers and to support communities, while at the same time, delivering growth and an adequate return. And there's always going to be regulatory wins and different focuses by different regulators. But because of the way we run the company for years now, and because of our business mix and diversity, we will always be or most likely always be, well positioned to manage through that change. I'll give you just one example. We lowered punitive fees and creative products like safe balance banking years ago to help customers avoid the type of fees that may now come under scrutiny in the near future. As a result, we have the lowest NSF OD fees as a percentage of consumer fees among large bank peers, with the mix of service charges skewed much more towards transparent monthly maintenance fees.

Okay. So we've got 2 minutes left on the clock here. And I have to say time flies because I didn't have this number correct at the outset. But you've been in the CFO seat now for 5.5 years, I thought it was 4. 5.5 years. And during that period of time, I would say that Bank of America has very consistently delivered with a consistent strategy, a consistent approach to banking, pretty much quarter in and quarter out. In all of this consistency, where do you see the most significant change across the bank?

Well, across the bank, I would say, a couple of things come to mind. The first is operational excellence. And the second, I would say, is employee engagement, including diversity and inclusion. And I would want to maybe have a significant mention about all the work that we have done to make this place more compliant, all the work we've done in compliance and all the work we've done around our data. With respect to operational excellence, what I think is significant about it is how we have driven it into the gene pool of the company. We have instilled across the company, and especially within the CFO group, specifically, a culture of continuous process improvement to drive improvements and efficiencies in the future. And with respect to employee engagement. Again, it's how really everybody understands, and I would say, believes that we cannot stay a great company unless Bank of America is a great place to work. We really work hard to make Bank of America a great place to work. And Brian and the management team, they've been at it a lot longer than I've been CFO. Perhaps the best and most recent example is all we have done to support employees so they can better serve our clients during this pandemic, improving health care -- improving child care. We improved health care as well. Supplemental leverage -- supplemental pay, enabling people to work from home, et cetera. Plus all the progress we've made in D&I, all of which, by the way, is laid out in our human capital report. If -- I don't know if we have another second or 2, but there's been a lot of changes in the CFO group since I took over. It used to be that if you worked in finance, it was good enough, I think, to report our numbers accurately and on time, and in a well-controlled and covered way to provide solid advice and analysis to business and to manage the liquidity and capital of the company. Those are basic requirements that we have to do flawlessly. But within the financial with the Bank of America, everybody now knows that we must also improve how we deliver those things. We must make how we deliver those things more accurate less operationally risky and/or more efficient. And getting everyone to understand and truly believe that this is part of their core job every day, I think it has been the biggest and most important change, at least in the CFO group at Bank of America. While at the same time, making the CFO group, the best place to work with for us.

Okay. Of course. So Paul, with that, I think it's a perfect place to stop. We're out of time. Thank you so much for joining us this morning and really rounding out perfectly the presentations from the bank group at our 22nd Annual Financial Services conference. Thank you so much.

Thank you, Susan, and thanks, everybody, for joining us.