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

Good afternoon, everybody. This is Gerard Cassidy from RBC Capital Market. We're with our final fireside chat meeting with Bank of America Corporation. Really doesn't need much introduction, but I do like to share some of the important statistics about the company, has $2.8 trillion in assets, the company is in 37 states throughout the United States, has over 210,000 employees, about 4,200 to -- 4,200 branches, has a market cap, most importantly, of $319 billion, stock trades at about 1.3x book value, has a dividend yield of almost 2%, just shy of it. Its common equity Tier 1 ratio is 11.9%, and the company has announced a buyback of about $2.9 billion in the first quarter. So with that, I'd like to introduce Aron Levine, who is the President and -- President of Preferred and Consumer Banking and Investments for Bank of America. Aron took over this position in the last number of years, but more importantly, he's been with the bank since 1993, and we were chatting a little bit beforehand, and he came up through the fleet organization as his legacy. But Aron, thank you so much for joining us.

Yes. Thanks so much for having us. It's great to be with you and your guests. Thanks a lot.

Appreciate it. Maybe we could start off, if you would, with a more broader question from a 30-second flyover, if you will, for investors that describes these businesses that you're responsible for and how important they are to bank of America.

Yes. Absolutely. So very quickly, again, overall consumer and small business serves 66 million U.S. customers. And we do that, as you said, through 4,300 financial centers, 17,000 ATMs and then when you think about preferred, that's one of our 8 lines of business at Bank of America. So within consumer, we have retail and preferred and small business as our main lines of business. Preferred really serves 25 million of those 66 million customers with banking, lending and investment solutions. And we do that really in 2 main ways. One is our leading digital capabilities, which I'm sure we'll talk a lot about. But also important to remember, we have over 20,000 client professionals that sit within our financial centers, financial solution advisers, small business experts, lending experts that really help provide that human touch. We are $1.4 trillion in assets for just the preferred business and consumer business. You're talking about a $880 billion in deposits, over $300 billion in loans and over $300 billion now in investments. We have a dominant share of deposits. We are 1, 2 or 3 in 25 of the top 30 markets, and we hold the #1 share in 14 of those 30 markets, which I think is probably twice as much as I think the next. So very strong player, obviously, critical to our digital capabilities, but huge footprint around the country. And a very important part of BofA, as you can imagine, with those assets represent probably 40% of the revenue and -- of the company.

Yes. No, very helpful. Speaking of the business at hand, maybe if we could talk about some macro or client activity in what you're seeing these days. And we can start with maybe a quick update of client activity trends. Particularly in the payments activity area, you guys have a real pulse on what's going on in the U.S. economy with that activity data. And then also, what are you seeing across the deposit area, loans and investments within this bank of America consumer base?

Yes. Great. I think payments is a great place to start. And the good news is there are some really encouraging signs. So first and foremost, year-to-date, we've seen 4.5% growth in total payments and then, but specific to debit and card, I think a lot of people are most specifically interested in, we're up 2% year-to-date. But remember, that includes a pretty rough February with storms certainly around the Midwest and Texas. So when you zero in now in just March, we're starting to see real pickup. We have 8% growth across debit and card. And most importantly, for us, we're seeing credit flip to the positive in terms of year-over-year growth for the first time. So debit has been strong, but we're now seeing credit. And again, we're seeing the bounce back in Texas and some of those states. So geographically, we're seeing pickup that's coming with, obviously, the vaccinations and now the reopenings. Certainly, this is all pre-stimulus, which I think is working its way through the -- I think, working it's way through the house just now. So that's coming. So we're also seeing travel, restaurants, all those categories that have certainly been suffering are starting to pick up. So on the payment side, really positive signs here early in March, picking up from where we were. To the rest of your question, for us, I mean deposits has been quite a story. I mean, think about this. I never thought I'd say this, but we grew $166 billion in 1 year, 23%, again, bringing us to that $885 billion in deposits in the consumer business. So that was just tremendous growth, showing our share and our clients' reaction to our brand and what we offer them. But also on the investment side, probably not as obvious, we grew $66 billion or 27%, and of that, $26 billion was in net client flows, so not market-driven. And that's a record for us to drive $26 billion in net flows, and that's just again out of our consumer investment business. That's not including Merrill Edge or the Private Bank. And so we hit a milestone, as I think you know, Gerard, of $300 billion in our consumer investments, which was a big milestone. Remember, we started at about $50 billion 10 years ago. We also crossed 3 million accounts. So it's an exciting year for us on that front. And then finally, loans. As expected, more flat to a little bit down last year. Obviously, a lot of headwinds, and we're starting to see that pick up again, certainly on the card side as well as auto loans and home equity. So a good momentum that we're now bouncing back here as we start the year and head into the next chapter here, hopefully, between vaccinations and stimulus.

No, no, very helpful. It's staggering to me, when you mentioned the $166 billion deposit growth in 2020, that represents about the 11th or 12th largest bank in the country.

Yes.

Just amazing numbers. It -- wow.

I mean, yes, I think it points to just that -- the share of the market that I think the larger banks, us included, certainly, and others that are gaining through the -- again, the combination of digital capability and that human touch I talked about.

Yes. No, very true. You touched about -- touched upon the stimulus bill that the President is going to sign any hour or any day now as we all know. Can you help us think through the different impacts of this customer liquidity? We see the savings rate around the country is about double what it normally has been in the last 10 years at around 13% or 14%. So how are you guys thinking about this consumer customer liquidity?

Yes. There's actually some research put out today. So that was nice of the team to coincide with us. But if you look at the first stimulus, the $600, the research that we've seen is 73% use that money to either save the money entirely or they use it to pay down debt or they invested in, right? So that 73% used almost that money for that purpose. And when we did additional research on kind of new stimulus, I think the expectation is widely the same at higher income brackets. Again, I think we're showing 70%, 75% or higher, closer to 80% as you go up to that upper level, that will use the money either for savings or for debt repayment or invest. And I think then either at the lower income levels, our research is showing even there, you might see 40% or 50% of it going to those 3 categories. So we'll get some spend. And again, that's subject to change. But clearly, the sentiment is that a lot of this money has sat in, again, attributing to some of that deposit growth I talked about, but also in people just being really in great shape across the spectrum around paying down debt and probably having a little more savings than they normally have had. So that's what we've seen. I think, clearly, you're seeing increase in investments and increase in trading activity. So we think that will also happen here with the next stimulus, certainly some of the younger demographics, the research shows that they're talking about potentially investing it. So key is, hopefully, we can educate them to do it wisely and make sure that money lasts, and so that's important for us.

Very good. And when we kind of take a step back for a moment and we know, and this is an overused word, unprecedented, but truly was in our lifetimes what we went through in 2020. So putting the pandemic itself aside for a moment, what were the surprises that you saw? What Bank of America managing through what you had to go through last year? And what are some of the lessons that you learned that will be still used as we go forward?

Yes. Well, look, I certainly would say, I don't think we expected $166 billion of deposit growth. So that was the one I predicted and would love to take full credit for it. But that I would [indiscernible], again, how people use stimulus is certainly what was an interesting development and idea that a lot of it went to some savings and investing was interesting and interesting learning as we go. I think for us, one of the most interesting was just the level of engagement. So while, obviously, our financial centers, and we'll probably get to this, so we took a lot of safety precautions and did everything to make sure associate safety, client safety was first. And so traffic came down and centers had to be temporarily closed, but our engagement went through the roof. And just to give you a sense, we had over 3.5 million appointments that were kept. So not just made, but kept bank by appointment, meaning our technology where people can make an appointment online and come in and see us, 3.5 million. We did 20 million outbound calls and probably 20 million outbound e-mails and the receptivity to that was really high. Ordinarily, you say people aren't interested in kind of having that kind of outbound outreach. But certainly in 2020, because that outreach was all about checking on our clients, making sure they had what they need, it was really positive receptivity to it, which was, I guess, a pleasant surprise. And then I guess third, I'd say, Gerard, is certainly the digital -- the acceleration of digital, probably at this point has been talked about a lot. It's just very true. I mean, all the work we've done and all the investment we've made in digital certainly paid off in quite a lot, but just the amount of activity around things like Erica, I think we have over 7 million first-time users in Erica, almost doubling Zelle. I mean -- and again, across generation, so it was across generations that were sort of had to adopt technology like we're doing here. And that sort of translated into how they were working with their financial institutions. So those are probably the 3 -- the key ones that we learned. And obviously, just a lot of lessons for us as operations of flexibility and ability to adapt quickly to a very challenging environment, certainly in the financial side of channel, part of what the team accomplished not only in keeping the centers open but also helping those that are more high risk be home and be safe and retrained into other roles. So probably a lot I could talk to there, but I'll end there.

Yes. It's interesting, Aron. We, as investors, have seen the increase in digitalization and the trends, and Bank of America puts out great data every quarter about increased usage and about deposit gathering and interactions with your customers at Bank of America and some of your peers has been the loan growth or the asset growth through the digital channel, which really, in my eyes, really picked up in 2020, and it's a testament to what you were just describing at your organization, and that's something that obviously is likely to continue for you folks and your peers.

Yes. No question about it, really across the board, whether you're talking about credit cards or mortgages, auto loans, we're in all the lending categories. You're just seeing really big adoption and just digital in general around how people open accounts, the whole pull-through is it's been a huge part of, again, where we've invested, and our clients are really responding to it more and more.

Very good. You touched on already a few times, so maybe we'll go into it about we all focus on the financial impact, of course, on the bank due to the pandemic, but there's also the human side of it. And any -- can you talk a little further about what Bank of America did, obviously, for its employees, its customers? And how that -- though it may not show up in a return on asset number right away, what it might mean for the longer-term for the culture of the organization and then the future growth?

Yes. No, so I appreciate the question very much. It's actually a real point of pride for myself, I think, for the whole company. So I'll give you a couple of client ones, and I do want to hit a couple of socio ones because they're particularly important. But in 2020, we originated over 340,000 PPP loans. So I think that puts us certainly right there at the top, I think over $23 billion in loan balances, just think about the staggering number that is to do in probably a 5-year period or a 10-year period, let alone a 7-month period or whatever we did. And we processed over 2 million payment deferrals for clients, making sure we help them at the most time of need. And again, a lot of that now is flowing through, and we're seeing that the benefits of giving the clients the extra time. But on the employee side, I think it is really important culturally. We were really early one to make sure we would start requiring mass and putting in and installing all of the flexiglass and all the protections, the 6-foot stickers and all the things in our centers. Probably equally importantly is just my business alone, we had 8,000 associates that had raised their hand as being more high risk. And we got them out of the centers and really put them to really productive uses in other parts of the company where they built new skills. And certainly, I talked about all those PPP loans. So we had a lot of our financial center associates retrained very quickly and work from home and support that endeavor and others like it. I think around the company, we ended up around 20,000 change -- employees that we were able to help sort of, again, reposition and keep safe. And you think about now the culture of the company, all of that shared skill set and all of those new skills that have been developed as we bring them back to maybe original jobs or some will stay in the job they went to give us a lot of efficiencies and a lot of ways for us to work better. There's a whole list of things that we did around child care, around compensation benefits that Brian and Sheri Bronstein, our Head of HR, did a remarkable job on that really just took care of our clients. And so it's been remarkable to see and I think we're benefits of that in very low attrition rates and just overall high morale and associate sat scores at the highest levels we ever had them. So again, all in all, very proud of the way we handled it from our clients' perspective and our associates' perspective. And I'll tell you, it translates because our client satisfaction scores that we had hit all-time highs pre-pandemic, and we kept them. And we're talking about 92% of the time we're getting a 9 or a 10 when someone rates us leaving a financial center and to maintain that through the crisis was something we're very proud about.

No, very much so. It's interesting. We're starting to see, not so much in our -- the financial services world yet, but there seems to be, potentially, even though I know there's a number of people unemployed, a shortage of skilled labor. So if you can keep your employees very satisfied and engaged as you guys have done, as you just explained, that, again, it may not show up in the next quarter, but over the long term, that's a real positive for the continued growth of the organization.

Yes. No question about it. We've put a lot of investment over the years in what we call our Academy in terms of development, training, onboarding and how our associates can really build a career path in multiple ways. And I think that's a topic we've talked about in the past. It's really important to us and one that I think is now certainly paid a lot of dividends to have that kind of infrastructure to allow us to take advantage of it when we needed it most.

Great. Moving on to growth. When you think about whether it's a loan or even a deposit, credit card, et cetera, can you share with us how much of, in the consumer space, is the growth attributed to customers taking on more products? Maybe it was just a check-in account customer and now they have a credit card versus actually acquiring new customers. Can you balance that out?

Yes. Sure. Look, I think we've been clear that we've been very focused on this very significant customer base of ours. Because remember, we have a lot of clients that may be a check-in account client, but they don't have investments with us or they don't have a mortgage or a credit card. Probably a great example of that is I talked about all that significant growth on the investment side, 70% of all new Merrill Edge, consumer investment clients are an existing Bank of America client. Now that still leaves 30% to acquire and bring in new and, of course, we bring in Merrill Edge clients and then -- and help them to get to a DDA, a check-in account or some other offering. And I think the key to how we grow is, again, as we've said for many years, we've used this high-tech and high-touch joint approach, where we provide real convenience and capability on being able to open accounts and do research and engage with us through our digital channels, but then we have all these client professionals that are in our financial centers where someone who is really trying to understand their longer-term financial needs, and we really think about their life priorities, saving or retirement, proceeding for their kids education or trying to buy a home. And that level of advice and guidance drives additional deepening. And then we wrap all that with what is really, in my opinion, a unique industry-leading program preferred rewards, where we reward our clients, not for a single offering, but really across the spectrum. So as they grow with us, they get best benefits across banking, lending and investing. And so that model of having the technology, having the people advice and guidance and then having a really unique reward program that sort of benefits those who do the most with us and keeping with us, I think, is what's driving a lot of the growth that I talked about.

You just talked about 70%, I think, you said of the Merrill Edge new customers come from existing Bank of America customers of other products. Maybe can you share with us how does Merrill Edge work within consumer Banking? How is it integrated? And how does it work with the more full-service financial adviser-led business inside GWIM?

Yes. Well, that's great. It's actually really important part of our business model and so we really have had our consumer investments launched since 2010. I think what's important to understand about our model is, and if people think of Merrill Edge as a self-directed platform, and it is. But that's one part of our offering. Back in 2017, we launched Merrill Guided Investing, which was a managed portfolios. Some people refer to it as robo in the industry. But for us, it was always a CIO-driven, our chief investment office-driven offering where we can deliver it low cost and digitally to our clients. And so that Merrill Guided since we launched in '17 has been -- become a very important offering. And then in 2019, we expanded it to really take advantage of, again, the 3,000 financial solution advisers that we have in our centers so they can -- it's a hybrid model where clients can leverage the technology, but also work directly with one of our advisers. And so consumer investments, therefore, can meet the needs of clients who want to truly just invest on their own. And 19% of those who use our self-directed platform are really long-term investors, mutual funds, ETFs. We have about 2%, 3% that are more active trading. And certainly, while we deliver good capabilities there, for us, it's been about driving the broader bank brokerage integration, delivering the full suite of research and client experience. Merrill Guided and guided with advice has been a big driver of our business over the last couple of years. And that leads very nicely into for those clients who have needs beyond that. They want a broader set of solutions. They want a more dedicated, bespoke relationship. Then we can refer them very warmly and very quickly to a Merrill Lynch Wealth Management FA or a private banker. And so again, it becomes very much driven by client need. And therefore, when a client walks into a financial center, we don't have a predisposition as to where they should be served. We have the right conversation. We meet with them. We talk about their goals, and then we either can deliver that through our Merrill Guided or self-directed platforms or we can refer them as we do thousands and thousands of times a year to Merrill or to the Private Bank, and conversely, more and more of their clients, our advice clients, are looking for an extension into a self-directed platform, maybe for their child, maybe for themselves. And so there's a great 2-way relationship where we can not only defend assets but also gain more of them as clients bring all of the sort of different wealth platforms together. I think we're one of the few that can offer each and every type, right? Where we have self-directed, we have guided, we have guided with advice, we have full service. And that continuum is very unique in the industry. And I think, again, it's what's helped us drive that growth, as I said, from $50 billion in assets to now $320 billion in Merrill Edge assets over the course of the last 8 or 9 years.

That continuum you just referenced, is that the advantage you have? Because we hear a lot about the Charles Schwabs and the 0 trading accounts where you don't get charged anything for trading. Is the continuum offering the way you can come back that kind of competition?

Yes. And look, we've had 0 trades for a long, long time ourselves. That was actually early on one of the things we did to try to kind of get Merrill Edge off the ground. But I think for us, again, it's this idea that it's part of a broader preferred relationship where our clients who need banking, lending and investments. And so the fact is we have 4,300 financial centers and 17,000 ATMs. We have this amazing digital capabilities for clients who want to leverage Zelle and Erica and all of the things, alerts and fraud and all the things that help them with their normal banking, and we fully integrate that now with a full investment continuum to your point where, yes, if we can deliver whether they want to just trade for $0 or they want to manage solution or they want advice. And then, of course, as client's needs change, having a world-class wealth management division where our FAs are the best in the business, we can bring those clients to them and say, now is a time where they might want a broader solution. So I think the -- it's the combination of having such strength on the banking side, the lending side and the investing side as well as the continuum within investing, all of that gives us a very strong platform to compete with against really everybody.

Yes. No, very good point. Coming back to the $300 billion that you referenced, the growth from $50 billion. Can you share with us what drove that growth within the Preferred Banking client base?

Yes. I think, for us, back early on in 2011 and '12, if I can go back a bit, we did identify that a self-directed platform as it's a sort of a stand-alone concept probably wasn't going to win the day against some of the players you talked about. And then you would be competing simply on the price of the trade or on the sort of bells and whistles of the trading platform. We mainly always view it as how is it part of a broader relationship. And to that end, we developed this financial solution adviser, a base salary and bonus-type adviser sitting in a financial center, fully integrated in the ecosystem, if you would, of that consumer relationship and then we make sure that, of course, that continuum was starting to be put in place so that as clients came in, we could warmly refer and work very closely with our wealth management partners. And so that model, with -- remember, back in 2011, we had maybe 150 financial solution advisers. Now we have close to 3,000. So that's been a huge driver of our growth as well as at the same time, we've really invested significantly in building out the platform and I'm very proud. I think this year alone, we've already won like 30, 35 industry awards for the Edge platform. And that just every year, it's gone up in terms of the recognition and -- but again, focusing on a couple of things. One, investor education. We really are trying to make sure that we provide great research, great education so that our clients are becoming more informed educated investors. We don't, in any way, encourage "the trade inside," we provide for it. But what we encourage is informed, educated investing over the long term. And I think it's been our commitment to the research side, innovation around some of those concepts and our commitment to client service and making sure that we have dedicated service along the way as well as that continuum and then the bank brokerage integration. I think it's all of those pieces that have worked together that have driven that kind of growth. And that's why you've seen it be very consistent kind of double-digit growth every year since 2011.

Very impressive growth, to get that double-digit rate of growth. Just shifting a bit on you, and you touched -- you had an expression you used earlier, high tech and high touch. The industry is -- and Bank of America has been kind of at the forefront of consolidating its branches, reducing the number of branches in the last 5 years. Can you share with us the importance of having both the high-touch channel branches and in the high-tech, and it's not just high tech, that high touch is still an important part of delivering that full continuum of products?

Yes. No, absolutely. And again, the financial center channel is actually one of my responsibilities I took on probably 4 or 5 years ago. And but you're right, look, the reality is it's a critical channel in that. What we see is the most engaged clients, the ones who deepen the the most retention and most growth, our clients who generally use both, right? They want to use digital because there's so much convenience and security and value out of our digital channels. But when it comes to really thinking about someone's priorities and life goals and life events, I want to save for my child's education, but boy, I'm also thinking about selling my home or I also have so many competing priorities. Having someone to talk to is really important. And I think a challenge for people. And so the fact that we have really -- financial center now is built around advice and guidance and not transactions. So we are actively and aggressively trying to work with clients to say, if you want to deposit a check, take a picture of it. You saw that leaps and bounds grow not only over the last few years, but especially in the last 12 months, if you want to -- or you can use an ATM to deposit your check or any of a lot of different movement of money or kind of transactional. The financial center is you can make an appointment. And as I said, 3.5 million appointments in 2020 and that's during COVID, right, to come in, sit down and talk to one of our specialists, whether it's about a small business, about a home loan or about just overall financial planning and so that high-touch model that, again, delivers not only advice to guys, but also service. People just have things that they need to talk to us about. It's been critically important, but it's allowed us to become very tactical and smart and optimized markets and really look at every financial center and how it works as a network. So meaning, how many do we need in any given market versus what we might have had? And we can constantly and are constantly evaluating to say, within a market, here's the right types of centers, the right numbers of centers, the right staffing, so we can get very efficient. I think that comes through in something like our power ratio with the number of deposits per branch is significantly higher than a lot of our peers. We really have reduced our footprint quite a bit in 10 years, still have 4,300, but it's down significantly from where we were 10 years ago, but the deposits, as we talked about, continues to grow. So our efficiency -- and that's where technology benefits us so much and will continue to benefit. So we can continue to evaluate our center footprint in the context of changing client behavior and increasing technology, but it's critical to the long-term relationship we have with our clients.

No, very much so. It's a critical part of the Bank of America story, and you guys are at the forefront on this, and it shows up in your profitability and pre-pandemic, if I recall correctly, back in 2019, the return on equity for the consumer business here at Bank of America had ROEs over 30%, if I recall correctly. So very important to the overall part of Bank of America. And Aron, really want to thank you. Great job in really informing us in more detail on one of the real drivers of the Bank of America story. So thank you very much.

It's my pleasure. Thanks so much for having me. Appreciate it.

Okay. We'll be in touch. Thank you. Have a good day.