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

Well, we bought a company in the GTS area, medical payments and something like that. So there's some stuff that goes on there. We invest with companies that provide services like in the trading platform, a lot of business have gone up to -- I think you said earlier, sort of digitized fixed income trading and things like that. We and our peers are investors in those companies, and Zelle will be a big example of that, right? We all basically took AWS and changed and revamped it into Zelle and things like that. So those are all investments we make. But by and large, it is not homegrown software. It's software that we can acquire and integrate and then also homegrown software. And we've got $3.5 billion of technology development a year and now $3.7 billion this year, $3.4 billion last year. It goes in all different directions. But a big part of that is integrating products and services that are out there from the best companies in the world and then figuring out how to make them work better. So Erica was not homegrown and that we went to people and got them to do the natural language processing and analytical capabilities and build it for us, with us, and we build it together. There wasn't a product like you take off the shelf, ChatGPT and other similar capabilities will change that. But it wasn't there. So that's one -- you've got some and built some, and that's what you do. But you let the team, the sort of experts in it, the tens of thousands of developers we have out there. They've got to figure out the answer to the business. People have to get the requirements and they have to figure out the answer. And you can't -- look, making acquisitions is just not the way we've done it, largely just because it's just hard to get something out of those because in the size of our company, to stop and do, so we acquired the merchant services business and take control of it, carved the half we didn't have. Spent $300 million or $400 million in the system and now we're out selling it. That was a little different. We already -- we owned half of it. So it wasn't that remarkable thing, I could bring in the half and redo it. Other things is a little harder to integrate because of just the cultural differences and all that stuff. But we're always looking and thinking about it.

Maybe spending a minute on Merrill and wealth management. Results have been extremely strong. When you think about the business, any product gaps that come stick out that you feel like we should be addressing? And then how do you see like the bank position relative to competitors which are all sort of different shape and times?

Well, the wealth management business, broadly, we are a U.S.-based business and there is just tremendous opportunity because I'd argue that we probably are one of the biggest business in the world. And we only do business in the U.S. that makes us one of the biggest businesses in the U.S. And I think market share is 7%, 8% or something like that, it's not like it's an aggregated business. That's consolidated business. And so there's plenty of opportunity. The way we build it starting 20-plus years ago was we wanted to have a continuum from personnel, take one of our teammates come to workforce, one of your firms that gets a job and starts the first investing and et cetera, et cetera, you want to have a first investment product and then you want to build through their life that they would ever have to change companies, and so if you go back to traditional banking, I came out of the fleet side, we bought a company called Quick & Riley, if you remember those days, and a lot of you are probably old enough to remember. But we bought that to start to fill in this gap that the banks typically had something going on at the branches, and then the customer disappear and then show back up in a private bank. Merrill changed that dynamic at Bank of America completely because you ended up with the best financial adviser force in the business to fill that gap. Everybody is trying to develop it. So everybody is doing 1,000 financial advisers to 2,000 financial advisers. So we now have 3,000 or 4,000 people in the branches still doing that, but we have this wonderful franchise with Merrill and the Private Bank, there's tens of thousands of people now with Merrill Wealth Management, and that continuum is a key. So if it's a business entrepreneur and they sell their company, you already have them on the business platform. If it's a person opening their account and then you move along, you have on the personal platform, and then you bring that together through how you go after the business and what we do in the local markets, that's execution in our company, we'll just reward our top markets. 7 million referrals going across the businesses in local markets up from 300,000 a number of years ago. Those teammates largely dominate in the field by what -- consumer teammates, Merrill teammates, private banking teammates and business banking and commercial banking, they're playing that in every market around the 90-odd markets we serve. They're in Asheville, North Carolina, which has come out well, Orange County, they are integrating that attack. And that's kind of interesting. So that continuum is critical, and that's why the wealth management business will continue to do better than anybody else because you're bringing 400,000 new investor clients into the Merrill Edge platform. And as some of those people will get wealthier and want advice and some people continue their whole life without advice. So you can do it. Even you become a multimillionaire, or any number you can continue to do self-oriented products that manage themselves, maybe automated rebalancing platforms and very efficient, or you can go to the advisers or you can have a trust capability and you can borrow, and those are interesting things. So it's the holistic nature of the continuum combined with having all the capabilities. We have the biggest -- one of the biggest trust business in the world, one of the biggest lending business in the world, wealthy people in the world and the investment business. Now are we always pushing around, yes, on alternatives, we keep improving our platform on things like that bring clients, things they might not otherwise see. You're always improving the product set. But the core piece of it is unique is that having that continuum, and I'm not sure anybody else is even that close.

Helpful. Maybe I guess, just maybe moving to top of the house in terms of expenses, clearly a big focus for the industry. I think our guidance is about 2% expense growth for the year. So 2 things. One, how do you have that controlled expense messaging? At the same time, have your line of business heads go out, make the investments, do it higher? Like how do you balance those dual investments?

Well, at the end of the day, it's not something we haven't done before. So all the way leading up to pandemic, we are managing headcount down. And then activity rose, and that was by doing all this OpEx, managing it out. In the pandemic there's some specialized programs we had to increase headcount because of just the flurry of activity and the way it did work and then some investments. So we've now got to bring that back down. And so we're doing it as we speak. How do you do that? You just slow down the hiring. So our attrition rate from last year this time this year has fallen in half. And so that was from 14% to 7%. So think about that across 200-plus thousand people, that's a lot less people you have to hire. So you had to pull that brake immediately, and we did. And now you're seeing the headcount get back down because it wasn't that we needed the people, it's that we couldn't think this, as we went through the summer last year, the Great Resignation, et cetera, you're afraid you couldn't hire enough. And the engine started cranking and when we decided to do something we're pretty good at it. So suddenly, we are filling all the jobs, and we hired net 3,000 people increase in the fourth quarter. If you look at it by month, it was much more loaded. Then we had people scheduled to start after year-end and are on and now we're seeing the headcount tip back down. Because at the end of the day, the way you control expenses in a big enterprise like ours is just the work. You have to engineer the work out. You can't not do a great job for your clients. You can't not do a great job for the risk and control and everything. You have to engineer the work out and then let the headcount drift into it. And that's what we've been doing for years. So when I became CEO, the management team came together, we had 285,000 people. We went to a high of 305,000 people, we reached a low of 204,000 people. Now we're running 217,000, 218,000 people, and we got to bring that back down. Now embedded in that is massive change in what the people are. So just the example I used in the branch before, going back 100,000 people, I'd say maybe 15,000, 20,000 were involved in the sales -- client sales process. And now twice that amount and the rest of the service side is coming way down. And that's by engineering out all that activity. There's checks deposited and there's cash at the ATM's that the methodology of the payment that Zelle replaced. There's more Zelle transactions sent by our customers or checks written by that crossed over about 3 or 4 quarters and is growing at a much faster rate and ultimately replaces all small balance checks. So the dollar volume of checks written is no different because the number of checks is down 25% the last few years. So all that engineering, you take out work -- but it's all about heads. I mean at the end of the day, we have a wonderfully talented group of people. We have a bunch of computers and data that they operate on. And we have the buildings to keep them dry. And that's our business. And so I don't have like, geez, let's buy less inventory here and not sell it. That's not what you do. So the question is $36 billion of our expense base is human beings and talented human beings. And how do you control it as you actually -- you want to pay them more and you want to have better benefits. How do you do that? You keep engineering out the work and bring the headcount down. And that's allowed us what you hear from the $15 and $22 an hour, we haven't raised the employee premium on people who make $50,000 since 2001. We never moved. We dropped it in half that year, we never changed not nominal dollars. They're paid the same as they're paid in 2001. You get it more well, you can engineer the expense down. You get less people in it, the benefits cost comes down. That's how you do it. And then -- so you always work on that. But it all comes down to people make a mistake that people cost you money, the work costs you money, people do it. And the work can be done by people, by machines or by the customer and how do you engineer that and you have to engineer the workout and then the boxes will fill back up with the people you need. And so maybe it's just slowing down the hiring because we are over-hired and we'll come back down, which we should be about 2 -- in September, we were 213,000, 214,000-ish. We should be back down to that relatively quickly over the next 3, 4 months. We'll start to engineer that down because that was sort of -- we didn't need that. But then the way then you make sure you don't make a mistake is we keep hiring the teammates to sell, the financial advisers, the private bankers. Right now, we're basically hunkered down, no managers. People in sort of functions that don't face a customer or core producers, call center agents and things like that. You got to keep your staffing levels there. But that's easy to manage.

Okay. I guess maybe another topic on just on deposit side. So I think we provided a lot of details during the earnings in terms of deposit trends. And I think the challenge when you talk to investors is you've not been in a 5% Fed fund for so long. And so that's the uncertainty, I think, more than like anyone having a slow view. Like what are your thoughts? I mean, I guess, even year-to-date, how deposit mix growth, how are these things standing?

I think not only is the rate environment an inverted curve and a nominal amount higher that's different, but it's also how the deposits got here. And the classic economic analysis and M2 and all the stuff you and your colleagues spend so much time analyzing. The reality is something different happened here, the Fed printing money. Now if the U.S. government went out and issued trillions of dollars of debt and turnaround and handed it to individuals. That's a dynamic that's very, very different. And so what happens there? The expectation is people, it's better down. It's not happened. Why? Because people are working and cash flow positive. That money was given to people rightfully so in a period of extreme uncertainty to help make sure that they wouldn't change their behavior during the pandemic. Well, guess what, the pandemic, U.S. opened up, the economy grew past where it was 12 months. It was growing again and 2 or 3 more amounts came. And so there's not only that dynamic of the rate structure, it's also a dynamic of extra couple of trillion dollars have floated in, in early '21. If you listen to the economists, was not clearly not needed to handle the thing, handle the pandemic damage. And then, by the way, state-level funding, state remittances and things like that. So that's all we're dealing. So our deposits are behaving as active we predicted they would this time. And that's a series of dynamics around corporations are tied their cash up and got more when they see that kind of rate -- higher investment cash moved. So when I gave the statistics before about the person before the pandemic and after, if you look at the higher people, it would be about $1 million in balances or $750,000 in balances prepandemic, they're down 25%, where they were pre-pandemic because -- and they went up and then they came down because they deployed the cash because it's not cash they need for the daily cash flow needs. So it really comes down to what the deposits are for, who has them and what they're doing. But also behaving like we saw not a hell of a lot different than the HA data then because we've got a big customer base. But it's exactly predictable, the NII predictions. It's just -- but it's a mind bender for everybody because it is -- you're trying to figure out these dynamics in a world where common view would be, this would happen or that happened. No, that's happening. A common view would be those deposits would be spent down, hasn't happened. The common view would be as the Fed raise rates, but you see this massive s**king sound on those things happen. Not much. And so that's where, I think, this question of where the money came from and how it was created, so to speak, and how it was delivered is different. And then the reality is, is that in times that the Fed has -- when they raised rates in '17, '18, '19 because of a smoother and slower, our deposits grew the entire time because there wasn't this excess amount, I can't cash it out to. And so we grew -- and so in the last year where rates got up to 2 and whatever it was and stayed there for a year, the total all-in cost of deposits is like 40 basis points against 2.5% or what it was that's 2 plus. Our deposits grew during that. And we didn't change -- no rates -- and that's more the normalized behavior effect. So what we're seeing is transactional deposits, not a lot of change. Yes, there ebbs and flows, right, people paying their taxes and bonus is coming in and out and monthly payroll, biweekly payrolls. Corporates are moving high-end balances and the consumer side have moved. You already know because 4.5% to 5% is not that much difference in moving. And then they'll settle in and then you have to grind out that core growth. Then 1 million new checking households has to come through and deliver through that. And that's what happened in the last rate rising cycle. So we watch it every day. We predicted, the team -- I make the team predict 12 weeks ahead every week and I make them compare how it came out versus it -- because we're learning. And that's -- I don't make the team, the team does it, but I asked them to do it -- start now, they do it. I don't. But you're trying to get them to learn the differences because a lot of the -- this is the way it should happen stuff. It isn't on the table because the dollar-denominated -- the amount of money that went into people's accounts, look, 6 or 7 or 12 states are giving rebates and taxes now and payments and things now -- the SNAP stuff stops and stuff that will -- so there's a lot of stuff going on that will play out. But they're behaving like we thought they would.

5 minutes left. One, just on capital deployment. I mean we think last year was interesting. We built a fair amount of capital over the back half of the year following the stress test. Can you just remind us in terms of capital deployment priorities and when you think about potential for changes in regulations, like how do you approach capital management, capital return in that backdrop?

So our basic principles remain about maintain a 50 basis point buffer to the binding minimum, and that binding minimum can change based on different attributes. And so that's kind of the strategy. And why -- we used to have 100, we went down to 50 largely, as you get bigger, bigger numbers, the volatility around that as you get higher capital levels is less, honestly. And so look, they've got to finish Basel, et cetera. You got to get through another stress test with a set of criteria that look, in some cases, pretty much the same; in other cases, the GDP drop would be more quick, et cetera. So we'll see how that plays through. And it's not even our models. It's the Fed models, and we don't know what those models, they've never allowed us to look at those models, so we can try to predict them. Everybody can look at them at the end of the day, it's our models would show that our portfolio has handled those types of scenarios pretty well. But we'll see what the Fed model shows, and we'll see how they do it. But the base will be 50 basis point buffer, maintaining capital to grow the business. So loans are growing and RWA is going up. We maintain capital to do that for the investment made in the markets business. We have RWA targets by each of the businesses. And you basically then -- they hit those targets and you have the capital ratios. We ran a 11.20, 11.2. We got to get to 11.4 to be 50 basis points above the new GSIB buffer coming in next year. We're doing 40 basis points of earning capital quarter. You pay out, I don't know, 14, 15 basis points in dividends and then the rest is there to finish up that growth. So you'd expect us to cross over that level relatively shortly, not this quarter, but probably next quarter with a chunk of this quarter. And we're buying back stock as we speak today because the trajectory is strong, and that's how we run it. In terms of last year that we got a surprise on the high side, we'll see what happens this year. But you just absorb that and go on. But the #1 priority for capital is to grow the business organically where the RWA demands are needed. The #2 is to continue the dividend and grow it sort of modestly. Then #3 is to buy back stock. And we're always doing all of them honestly. It's not like you do 1 and then the other and the other. There's all 3 are going on literally as we speak. We increased the dividend a little bit each year to push it up, keep the payout ratio in the 30% or below level, importantly to make sure you never have to cut it. That's a principle we talked about 15 years ago and it's still true. And we basically walked it up to stay at that level. You have 70% left. What you need to grow the business? What do you need to -- and then everything else goes back to shareholders because, at the end of the day, we don't need -- we don't want the capital sitting around the balance sheet waiting. And you just keep adjusting to it. And look, our industry is well capitalized. There's no question. The industry has tremendous liquidity. There's no question. During the pandemic, this industry actually ran to the fire as opposed to it was forced to run away from it. The idea that -- you've had administrations, 2 administrations go, 1 administration go, even then, the industry has plenty of capital. So we got to be careful because what seems like an easy decision to keep raising capital levels, you forget this reality. So when I told Congress when we got the chance to talk to them last year, and somebody said, what does 100 basis points mean. You basically -- it sounds small, you got to realize there's a 10% increase in nominal capital, which is $16 billion of capital, which you multiply times 10, it's $160 billion of lending capacity. You're going to see a lot of companies in the next 3 days, ask how many have $160 billion loan book, right? It's a massive change. And that's just us, and you take it across to what the industry could be doing, lending lines and supporting growth. And that's where you have to have a balance in this. And so you can always say out here, it'd be safer. But that's an easy decision. So I think -- but usually cooler heads prevail and things can work to.

Do you think there's a good appreciation of that within that portion?

I think there is, and I think it's becoming more -- plus there's a competitiveness question for us versus other countries. You look at the pro forma largest banks in the U.S. and look at their asset to -- equity assets ratio and their common equity assets ratio and look across the world. You're saying, wait a second, you can have institutions the same size and half the capital meets the requirements. In other countries, you're saying that can't be, you can't be counting the beans in the same way. So the gold plating and the standard that stuff really changed. America's capital bases are much bigger as a percentage of size than other countries. And that's one of the things you got to square before you adopt the standard. And that's -- otherwise, the industry becomes uncompetitive, and this is one of the most competitive industries they have in the country. You want -- you believe in America, you ought to remember that this industry is strong. And that's why we're sitting here looking at an economy which is bigger than anybody else's. Actually pre-financial crisis now, the U.S. economy has gone up, $13 billion, $14 trillion to $20 trillion. European countries is basically flattish. And so I always say, which do you want as outcome? You want banks and things that can support that kind of economic growth, and that's why banks are big because the economy is big.

We ran out of time. So I'd like to end it there. So Brian, thank you so much.

Thank you.

Thank you.