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

Good morning. Thank you, everyone, for joining us on our second day. We're very happy to kick off today with Bank of America CEO, Brian Moynihan. Brian, as you know, this conference is about the strategic vision of the top CEOs across the country and across all industries, and we really appreciate your support at this conference over the past 10 years, and we are grateful to have you back again this year.

It's good to be here, John. Thank you for having me, and I hope everybody is faring well out there as we finish up on the pandemic.

Great. We thought we'd start off with your views on the macro and give us a sense of what kind of dynamics you're seeing across your businesses so far this spring.

So our research team is one of the best in the business, if not the best. And they have GDP for U.S. at 7% for this year. I'll stay in the U.S. because it might be most relevant here in terms of what we see. And if you think about that, that's an economy, which I think this quarter is predicted to be as big as it was in '19 before the pandemic -- or before the pandemic growing at predicted growth 3x the rate, and that's kind of the interesting thing. And then, by the way, the second year '22 is at 5.5. And that sets up a pretty strong picture of growth in the United States. So what do we see that supports that from our clients? First, on the consumer side. I talk to you often, John, about the spending that we see. So, so far through May 24, it's $1.5 trillion -- $1.4 trillion of spending has gone through our consumer customer accounts. That has grown at 20% over '19 level. So it's a much bigger growth rate over 20%, but that would be expected due to -- now you're picking up the shutdown months. And the good news there is you're seeing it across the board, and you're seeing the growth rate in credit card purchases, which largely were used for travel, entertainment, things like that, now growing at a growth rate over '19, even if you sort of de-annualize it, which would be consistent with the growth rate that went into '19. And overall, the spending is actually growing at a faster rate. And if you look at '17, '18, '19, the spending was picking up from sort of a 5%, 6% level to 9%, 10% level. It is actually now growing at that rate. So it's bigger. It's growing faster. And when you go to the commercial side, we see our clients starting -- it's still -- they're very flushed with cash. They've operated well. The ones that are in the most troubled industries are still working a way out of it. But you're even seeing those troubled industries starting to see some light at the end of tunnel. So you've seen hotel operators talk about how their rooms are now full with leisure travelers. You're seeing auto rental agencies like cars, and you're seeing all these things that show that people are moving about, especially in the United States, because the vaccine levels are up, and it can't go abroad, frankly. And so to that means that the United States is going to have an internal economy that is actually stronger from travel and purchase and entertainment movement and those types of things than it might have had because trips abroad are still difficult. And so we see that the constraints and issues they see are obviously the ones I'm sure CEOs talk about, supply chain constraints, labor constraints. And we can't forget that the path of the vaccine -- the path of the virus is not assured. The miracles of modern science that were brought to bear, the vaccine levels, but we've got to get through with no more resurgence. The good news is with half the people vaccinated, those resurgences seem sort of impossible to calculate at the same level, but we've got to be careful that we don't see another resurgence. Those are the 3 factors on their mind. So overall, it looks very good. Consumers are spending. Credit's in great shape, credit's available. We're lending money at the exact same way we lent before the pandemic started at this point in terms of credit quality criteria, et cetera. PPP went out in the system and really benefit small business [ hurt ] overall loan growth because there came a bunch of money, and now it's being forgiven, but it was really cash in the system. And then the biggest news is our consumers, as best as we calculated, have only spent about 30% to 35% of the stimulus dollars that went into account from the last 2 rounds. Therefore, they have lots of purchase power waiting to go out if they choose in the future.

Inflation is a big topic around investor's minds, Brian, as you know. How do you think about the risk of inflation? And what are the pros and cons specifically for banks operating in an inflationary environment?

Well, if inflation is for the wrong reasons, not controlled, and they're going to have to shut down the economy that many of us lived through in our younger days when the rates were pushed up in the 19%, 20% range to shut down an economy that was -- shut down inflation that was out of hand. That's not good for anybody because it's just the extreme nature of it. But that's not what people are really projecting. On the other hand, you can't have all this activity at this rate of growth without fearing that, and even so, the consumer expectation of inflation happened. That's actually what I would watch in some ways because if the expectation inflation remains high, then I think it becomes more of a needed intervention by the Fed because that's an expectation that they worry about as well as the actual. So I think the Fed has been clear about their criteria and average inflation rate above their target rate for a period of time, whether that's 4 quarters, 6 quarters, whatever. But also, they -- remember, they do talk about, and at the end of that period of time, what are the expectations, which means you could have very strong inflation, 15% rise in prices that people would say was inflationary. But if the expectations were to mitigate, they don't need to do as much as if the expectation were for it to continue. So I think the time to watch this is really as we move into the early part of next year. You've seen that inflationary come through the test of temporary or not or interim or not or whatever the words that the economists use. But I think the fear that the markets have and all of us have is you won't know until you see it, and then it maybe too late to stop it. And that's going to be the expectation. So I'd watch it carefully. It's a real risk. It's incredible that we're talking about that risk versus -- think of ourselves in '17, '18, '19, say, can we ever get the economy to grow at 2% to 3%? Can we, in fact, get inflation above target? So I think we got to all keep in perspective, but I think it's going to be a tug of war in the markets for now for another year or so until it feels that the rate structure and the intervention -- or the accommodation has been pulled out of the market. And you haven't seen to have the negative effect, and it's been pulled out soon enough to stop the inflation effect. And that's going to be the test, I think, for the next 4 to 6 quarters.

And there is a sweet spot, obviously, for banks where you get to enjoy the higher rates if it doesn't choke off the economy.

Yes. I mean, John, if you look at it, we lost $2 billion a quarter in NII from the rate structure, which is still very low. I mean, that's the thing we forget about, the Fed funds rate below 3% and the 10-year below 4% or whatever it was at the time. That is extremely low in the context of history. We made a lot more NII because we're just a massive accumulator of 0 interest deposits and transaction accounts that can't go below the [ 0.4 ], and as rates come down, that hurts us.

Yes. Let's talk a bit about Bank of America's efficiency journey as you've been CEO for the past decade here. And maybe you can discuss specifically, Brian, the transition from one where you were kind of optimizing the size and taking costs out to now where it feels like you're more investing for growth and focused more on positive operating leverage than absolute expense reductions.

Well, investors don't have to look too hard to find that. If you think about where we were going in like '17, '18, '19, we had 20-odd quarters of positive operating leverage as rates stabilized and started coming up to very low but near normal. The loan growth started kicking in net, not gross, because we -- all the runoff portfolios are gone, and the expense base had been brought in so that it was sustainable. That's what it will look like. And so -- but John, and we talked about this in 2012, '13, '14, all that time, we're investing. All that time, we were moving. So the investment we've made to retool the branch system. Just last year, we put up 57 brand-new branches in places we've never been in before. We put -- we will put up more than that this year. The year before that, we put up even more than that. Last year, it was just hard to even get the leases out. So we've entered into new markets, and we've moved to top 5, 10 market share in those markets in 24 months, 36 months. We have invested heavily in our digital capabilities across the whole platform, including the GTS, the transaction services business. We invested in more salespeople across the whole platform. But meanwhile, through good work the team has done, engineered out the cost and on the other side through operational excellence. And so it's worked. The COVID expenses sort of messed that up right now, but that's -- but we invested a lot of money, of a lot of years to improve this franchise. And that has come to our benefit, and that's why you're seeing the growth rates we have and core transactional capabilities across all segments, mass market consumers, wealthy consumers and businesses of all sizes. Those are stick-to-your-ribs type work that took a lot of investment to get us there.

So investors look today at your productivity or your efficiency ratio, as we call it in bank land, 60%, low 60s on the efficiency ratio. Admittedly, like you said, tough interest rate environment, you've lost some NII due to that, and you've got these COVID expenses. As we look to '22 and beyond, do you see this path to kind of get back into the 50s over time as positive operating leverage resumes?

Yes. I think our path is to continue to improve it, especially if rates get somewhat more normal, not even normal. But I think for the broader investor group here, I think really, the strategic thing, when I -- when the management team took over in 2010, we had 285,000, 290,000 people. We went up to 305,000. Just at the end of May, we had 210,000. That's the efficiency of continuing to digitize your practice, for lack of a better term. That's the efficiency of the customer using the information. And we just got a huge movement in that across the last 15 months. People -- seniors depositing checks with mobile check deposit have doubled or went up by a factor 2, 3x. It didn't go up a lot for people that were 30-years old, because they're already doing it that way. But you found reaches of places that you could go and push. On the corporate side, the same thing. And so the broader viewpoint is we can drive the efficiency ratio down, revenue lift, obviously, rates and stuff helps, but also just keeping the expense base. We're running expenses this year, even with the COVID in there, at the same level we ran them in 2015. That's 6 years. And think about that. Investments in people and salespeople, in more higher-paid people in a way, investments in facilities, investments in retooling branches. Basically half -- 3/4 of branch have been redone in that period of time. But also just it's not like our landlords say, here, we'll take your rent down every year. There's inflation and wages and benefit increases. We haven't raised our benefit cost for teammates under $50,000 ever, and we dropped it in half 10 years ago, and we've never raised it. That provides a better life for them. So all that investment is covered up by the efficiency, but that's the broad context. And when we challenge ourselves as a company and as an industry and as a group of industries, we don't know where this digital path continues to take us. It is pretty remarkable. And that's why I never say it's going to be 61.5% or 59.5% because there are step functions happening here which are pretty remarkable.

And within your overall tech budget, you've talked about $3.5 billion for tech initiatives and new investments. How's the profile of that? How has it changed as you've been at it for many years now on this tech spend?

Well, I think, yes, if you look at it in the mid last decade, you would see things like the big architecture on the markets business and a new core data architecture and system there called the [ core ] that allows us to do a lot of things. Now we're taking advantage of that. So that infrastructure is built, and now then you can simplify the systems that worked off of that, continue to work it out. So -- and make them -- and lead into more electronic products and things like that. So I think if you looked in the mid part of the last decade, a little more architecture, a little more fundamentals, a little more getting things simplified and investing heavily to make them better. And since that time, it's been more around digital competencies. So you take in new products and services across the whole platform. So the CashPro mobile that we talk about, 0.5 million users on it or something like that now, that was still in its infancy back then. So that constant investment rate drives that forward, never down. We continually invest that our systems are redundant multiple times in full capacity, so that we can not have any kind of outages and things like that. And with the volatility in the markets and the volumes surging, you really want to be there to take that volume and absorb it for your clients, which can be done much more efficiently if you do it with the right strategies. So it's changed a bit more probably across the last 5 or 6 years to new capabilities. But the architecture that we laid out in the philosophical underpinnings that architecture allows that new stuff to come in at a faster pace now.

And you've gotten credit for leveraging your tech leadership. But in digital, specifically, what would you say distinguishes your digital strategy from other strong competitors? And what do you see as the biggest opportunities for digital efficiencies to continue?

It's our customers like what we do because they use it. And so what that allows us to do is to run the largest consumer business, and by consumer, I mean, take it from mass market all the way through the Private Bank and Merrill, et cetera. We run the largest consumer business by a good chunk, with a lot less physical plant deployed against it because the digitization of that practice and all things. And I think -- so 40 million digital users is a nice marker. But it's 40 million core customers using it for core functionality which allows us to take out 0.5 million calls a month for this activity, 0.25 million for that activity had to have 4,300 branches versus 6,100 that we had a decade ago. It's just all by that work and, by the way, allowed us, frankly, through the pandemic to continue to grow customer bases through this type of interface with customers, which you weren't sure the customer would accept, but they did, because there was no alternative. Now the customers like it, and now we've got to figure out how that works in the future. So there's a step change there about the efficiency and productivity of where relationship business and the wealth management business and then Global Banking business, global investment banking and markets. But on the other hand, when I talk to our customers, they're saying, look, you don't have to send 5 people in the office to pitch an idea. We can do it this way, and they're used to -- we're used to it. So we'll see where that leads us also.

And on that idea of branches, financial centers, you've gone down, like you said, from 6,000 to 4,300 today. This really is one of the more efficient financial center footprints when we look at cost of deposits and deposits per branch. How might that evolve further over the next 5 years when we think about your footprint?

Well, the thing about it, John, is not only has it come down, but we deployed -- so just in the state of Ohio, I think we're up to 30 or 40 branches, which we didn't even have 18 months ago. Minneapolis, Denver, Indianapolis, Salt Lake City, et cetera. So it's not even the same footprint from the 6,100 branches to make it simple. And also, remember that we divested a lot of branches to small community banks because this was more efficient than to serve them. That was 500 of the branches. We gave them to be served by the community bank, and we pulled out. And so how it happens in the next 5 years, what's generally happening is if you walk in the branches, there's less transactions and more sales/complex service, would be the best statement. And so, that's why we are going to universal loan operations -- loan officers and those that can do all the different types of lending activity. We have FSAs, and we combined our training programs so that those FSAs can ultimately have a clear path all the way through that continuum into Merrill and the Private Bank. But they can start off with a straightforward product set, learn the business, get licensed and customers are coming to them. And so you're seeing -- so what's different, less of them, bigger, more sales relationship management, higher difficult questions, more capacity to do that, signature guarantees, power -- notary and things like that, that people pulled out of branches for years we've been putting back in because it's done. And -- but the numbers will always be dictated by where we are. And so our job originally was to cover the top 30 markets and the top 50 markets. And we're just basically making sure we're in all the markets that allow us to cover [indiscernible] 80% of the population, and we're moving forward from there.

And it does seem like the nature, the skill set and the background of folks you're hiring changes now that you've got different skill set required in the financial center. Does that relate to the minimum wage increase that you recently announced?

It does. When we looked at this a decade ago or more, we were sitting and looking at some things. And we want to make sure that company which has profitability and the need for talent that we do, that our starting wages would be a good living and it will be a career job. And that philosophy led us to look at what the minimum -- the living wage standard by the MIT calculations by every city. And so we just started on a course of saying, look, we've got to have the best people in all our jobs, not in the sales trading only, not on global investment banking only, not in the middle market banking only, not in the wealth management, also in all the retail things, retail parts of the business, call center, et cetera. So we looked at that, made a philosophical decision that we weren't going to have anybody that would earn a good living and have a good career path in this company, and then we started on a journey. That journey just keeps leading you up to higher and higher levels. In between the turnover of the branch and the call center and operations groups, which are also critical here, has dropped by probably 1/2 to 2/3. And when you have -- at the time, we had 280,000 people, more or less. If you have 200,000 people and you can go from 10 -- 12% to 9%, that doesn't sound a lot to you. To put across 200,000 people, that's 6,000 of those people you have to hire a year. Think about how much efficiently -- and the people you have are higher -- are more apt to stay with you, and so you get this cadre of teammates that are with you 10, 15, 20, 25 years, and they learn, and they get better at it. And the systems and things are just water off their back as opposed to the training. And so it's added to the customer service going -- marks going to all-time highs during that time period, the churn and people going way down and frankly, business growing better. And so we philosophically believe it's a statement of who we are as a company, but we also believe it's a business necessity. So it pays society, i.e., we've set a standard for what people should pay their employees, and it serves our shareholders by providing returns. And by the way, there are other types of companies that can't afford to do this and have a different talent need that we -- this is not saying everybody has to do it. It's -- we can do it, and we're going to do it.

And you've leveraged your technology, your products and your brand to gain significant share in deposits, yet it is hard to monetize those deposits in this low-rate environment. Does that dent your appetite to continue growing at all? Or are you looking longer term over the cycle of the profitability for your gatherings? And can you continue to gain market share in deposits, do you think?

Yes. We want the best product set across for people, again, from the unique [ borrowers ] the complete coverage of the continuum, from a child born to wealthiest person in the world at the point of passing and everywhere in between, handling their relationships well, everywhere they are, et cetera. And so that's what makes us unique. So we're not trying to be the most number of checking accounts or the biggest bank. We're trying to be the best set of services to serve those clients, and then we know we'll grow beyond that. And that's really started -- frankly, before I became CEO, we started -- I had the consumer business, we started retooling it dramatically to move towards depth of relationship. In the stair step, we call it a core transaction account, a core borrowing account, a core investing account, et cetera. That then leads you to the value of these deposits, is if we're taking -- we are growing at a faster rate of core checking accounts than we've grown at the company for 15 years. It's all good. It may not be worth as much because of the rate environment when you had a 0 interest account coming in, it may not -- but it is a depth of relationship question that we are working on. And so we watch -- this is why the Preferred Rewards program is so critical to our company. It's a rewards not for your credit card purchase but your entire relationship and about 75%, 80% of the deposit balances and value of consumers drilled out by those customers who have those reward structures that's sticky. They don't [ retract ]. They're highly satisfied. You can bring more products. It's a revenue over expense game, not just a transaction game. They sort of pay a lot of revenue directly and directly give some back and rewards that cements in this play. By the way, the same philosophy in commercial businesses, the stair step and everything, the deposits relationship. But the reality is -- so why we are taking on business accounts -- business transaction accounts, core operating accounts and consumers? It's relationships. It's not -- we don't have deposits. We have customers who give us deposits because we transact their business for them, so they can engage in the economy and support their households.

And then from a financial standpoint, how do you manage this tricky balancing act of deploying cash and liquidity into securities today or loans when loan demand isn't great and rates are low? How do you and the team manage that?

They try to just put it to work in riskless -- from the credit risk because we have enough credit risk, so mortgage-backed securities and treasuries, and try to manage the duration. A lot of it's floating. Even though it may be a stated term treasury, we swap it and stuff to try to manage the ALCO risk, which an interest rate liability risk within a paradigm. But we are the asset-sensitive bank not because we do anything with interest rates. We are asset-sensitive bank because we have the biggest core deposit franchise by a lot. And that means that you're going to be more susceptible to 0 staying 0. It's kind of funny because I'm hearing this dialogue start that we went through for a couple of years about deposit betas and all that stuff. Our deposit pricing didn't move hardly at all, and it wasn't because we didn't move deposits on competitively priced deposit rates up. It's just we had this huge, huge percentage that are 0. That's what the difference is, whether it's in commercial business, the consumer business and the wealth management business, is it's the mix that drives us to asset sensitivity in. So we put it to work, and we're careful, and we make sure -- and while there are all those cash stays in the system, going back to our earlier comments about the combination being taken out some point by the Fed, et cetera. But even when they shrank the balance sheet, the Fed, and rose rates, we grew checking balances $20 billion to $30 billion year-over-year consistently in consumer during that, which is at $7,000 an account. That's a lot of growth.

And how about our loan growth? Industry loan demand has been a challenge for everyone. Earlier in the year, you were somewhat optimistic that we might see customers looking to borrow more in the second half. Do you still think we could see that exceeding signs to suggest loan demand might pick up later this year?

Yes. It's an interesting dynamic. But January, February still, we're trailing down much different than it was coming into the last quarter of last year, stabilized in March and actually grew a little bit -- it continues to grow a little bit in April and May. So knock on wood, if the economy keeps growing, we're seeing line usage stabilize at levels low but at least stopping going down. We're seeing the consumer side, the cards moving a little bit. Now we got to get the payment rates down in that. And so I think it's good news out there is consumer credit is widely available, and people are taking advantage of it. Obviously, the mortgage side is still finishing up the refinancing booms. But on the middle market side and stuff, the prospecting is back to where it was, the calling of prospects. The pipelines are strong. The team is doing a good job. But there's simple things to just make it hard. The auto business doesn't have inventory. So if you talk to auto dealer clients, you're going to find out they -- I heard the quote from one in the other day, they had 10% of the cars on what they had the previous year to sell. Well, guess what that means. If you're in the -- providing credit to those dealers, obviously, they don't need to borrow the money because they don't have the inventory. They're financing until it turns over. Yet car sales are still at strong levels, record levels of pushing, so -- and then used car sales above that. So it's just -- it's creaking through. And then a PPP runs off. It replaced a lot of business banking, small business borrowing. But we're seeing loans for the last few months have continued to grow modestly. That sets us up well for the second half of the year, because frankly, some of the unfundamental dynamics are coming out of the system now, one is the PPP is running. It's done on the origination side. And then secondly, people are opening back up and hiring people, and they need to borrow a little bit to do that. And then hopefully, the supply chain dynamics do clean up that you see people -- right now, it's not just-in-time inventory, it's can I get the inventory, and that's what we need to see kind of resolve here.