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

Thanks, everyone. Appreciate you joining us. We're happy to have Bank of America back again, CEO, Brian Moynihan. Brian, thanks for joining us.

It's good to be here, John. Good to be here.

As always, we'll start off asking you your views on the macro. This time last year, we were talking about whether the Fed will be able to tighten and also engineer a soft landing while killing inflation a year later, we've hike 500 basis points. Inflation is still high, maybe coming down and unemployment remains very low. How do you size up the Fed's task from here? How much has been done? What needs be done in your outlook for the macro in general?

So I think if you back up this time last year, we'd have been talking about the Feds and battling the American consumer who had lots of money, lots of spending, getting wage increases, et cetera. And so they were spending double digit, so May of '22 without going back and look at over May '21, it's probably 10% to 15% in terms of spending going out. So if you look at that, through -- not quite -- don't have all of May, have end of -- nearly all of May. And that's across all means of payment and $4 trillion plus a year. That's only up about 3% this month. And so in the last 3 months, it's fallen from a 9% growth rate year-over-year to 3%. So the American consumer spending has slowed down. And when you go on the commercial side, you see that uses of lines is flatter now and that there's not as much small in demand out there. And obviously, the most rate sensitive things, homes and autos and stuff slowed down. So I think they've -- and you see all the inflation statistics tipping over. So I think they've largely done the task. And interesting enough, they've had the things added to the -- that we wish they wouldn't have happened, but they were, which is tremendous capacity taken out of the industry in terms of failure of -- 3 bank failures and disruption. And if you're historian you go back and look at what Paul Volcker did around Continental Illinois, he paused for a while in the middle of one of the biggest flights on inflation in 1984. If you go back and look at the press conferences, I'm pausing because I don't know the impact of this failure and the distress. And I think I would say at this point, that's where they are. They've done enough. You're seeing the signs that come over. The near-term data is saying even though employment is pretty strong, we can talk about that. It's still, wage growth is slowing, employment, new claims are up a little bit. You're seeing it start to come through the system and things like spending at restaurants, which creates a lot of employment because it takes a lot of people to run a restaurant. Is down to 3% year-over-year growth versus 17% 3 or 4 months ago. So I think they've won the war. Now the question is they've got to probably maintain and we don't have a drop in rates until March or April next year. We have a recession slight in the second -- third, fourth first quarter, negative growth. And it seems like that's setting up. And meanwhile, credit is strong. And meanwhile, consumers have money in their accounts. They haven't depleted them, but the tightness is causing them not to spend, which then slows down a major part of the economy.

Your point is what we're seeing on the spending is consistent with inflation coming down further towards that target?

Simply put, they have -- it seems like they've won the battle and on consumer spending continue to fuel inflation. And now you got to be careful you don't win the battle too much.

And just a little bit more on the savings levels. We're 2 years past the last COVID stimulus, but those actions still have a lingering impact on deposit levels. Just give us an update of how much of that pandemic surge is left in customer accounts?

Sure. So when we were looking around this a couple of years ago and we keep refreshing and trying to figure out what's the right way to think about aggregate deposit levels in the industry. And in our share that if we gain little share or lose a little share, et cetera. So simply put, as of the end of March, the industry was up about 31% since the start of the pandemic, and we were up about 34%. Let's back and unwind that from '14 to '19, the industry grew about a 5% growth rate for those 5 years from around $10 trillion, I think, around '14. And then -- from then to the beginning of '22, so after all the stimulus was let up to about $18 trillion. Now it's down to $17 trillion. And so it's dropped by 5% after a couple of years. If you do that 5% line up, you'd say there's another $0.75 trillion to get back on the trend line. And so you can have very interesting debates with economists about nominal GDP and real GDP and all the things. And you would have -- but if you really sort of say that trend reflected a rate rise period in '17, '18 and reflected an economy growing at low single digits and an inflation of 2% and what happened, you had a 5% growth rate of deposits in the system. It would seem that there's still another 5% to go. And so -- our job is to get our share out of that like we've done so far by outgrowing the industry, and that's what we're up to. But we don't -- you won't see our deposits. It would be much different than at a large banks, largely because we honestly don't have anything to do with the money. And -- so it's -- if you think about -- the consumer gives you deposits for 2 reasons. They want to transact and then they have excess cash. And we, as a company and banks, in general, have 2 uses for the money, to fund our core operations or to invest our excess cash. And so as long as you have enough transactional cash to cover the core operations plus, all the other cash is really discretionary whether you take it. And so chasing rate and then paying a rate that's equivalent to the rate you can earn is not exactly a great business. So we take our customer's money and put them in the market. And in fact, we do that for other customers of other companies. At other companies we raise money for them in the markets for their deposit base, and that's what we do. And so you'll see us perform like everybody else. But the interesting thing is I think the expectation of the industry of growing deposits off that 17% growth rate for a couple of years. The Fed can achieve its goals of taking on inflation without taking that cash out of the system, and they're doing it now. And then the question is, it's probably $0.50 trillion to $0.75 trillion left to go based on sort of broad estimate.

Yes. So you're kind of pointing to this is an expected cyclical thing that -- and that is not an existential issue. It's just outflow that you'd expect to happen given what the Fed is doing.

Yes. And that's -- so that's -- and so why wouldn't it happen, the tightening conditions, they got to get that money out of the system. And frankly, it's sitting at the Fed or sitting in the RPP and sitting in money funds, none of which provide a lot of fuel to the economy because they're basically going T-bills and things like that.

So is it kind of a 2% to 3% deposit decline is what we're kind of looking ahead in terms of H8?

We'll be in line with that more or less. And -- but the good news is the core deposit franchise continues to grow and you sort of say, well, balances. But we had 1 million net new checking customers the last 12 months, 130,000 in the first quarter alone, 35,000 new banking relationships our GWIM business, lots of new logos in the cash management business, those are new companies doing business with us. And so you're having the most rate-sensitive stuff you're putting it into the market for the customers, but you continue to build underneath that a core customer base that is why you're at 34% and the new industry is at 31% till -- through last quarter. We'll see how we end up this quarter.

And you've been able to manage your deposit betas very well, 12 basis points paid on consumer deposits, 90 on deposits overall. How much harder is it getting to kind of keep that rates paid low. And in some ways, it could be viewed as a disadvantage and that the market is expecting reprice to happen and you're very low?

That goes back to what's the customer have the cash for and what you have for the use of cash. So if there's a customer's excess cash, they're going to want to earn more yield on it because it's investment cash. Think of it that way. And by the way, that's just not checking, that's checking plus the cushion. Your mother told you to keep a cushion, your grandmother told you, you have to keep that cushion. And by the way, a company does it too because they can't take the risk of a payment bouncing or check bouncing, whether small or large companies. So across all wealthy individual has the same thing, the numbers just get bigger. So you look across each space, you have the sort of core transaction cushion, and then you have the excess, which is really investment cash. And so the beta on the excess is always going to move because that money is -- your competition is us putting it in a money market fund for the customer. But the beta and the other stuff doesn't move because it's either noninterest to a large degree, or basically is -- quite frankly, there's money in motion that people really don't know they have in the broadest context. So they're in the clearing system, paying bills. And so even with a business that's running, running through, so doctors' offices, money is going out, money is coming in. If they get too careful and miss that cushion, they've have a problem, and that's what they're trying to avoid. So I think you should see us really handle our pricing decisions based on that. It will equal some number that you'll calculate on a cumulative basis relative to the Fed funds rate. It's not the way we actually do it. It's every product -- literally customer by customer, but every product and then how you -- the relationship works. So the preferred rewards business that require balances are x. If people take out those balances, they lose rate benefits, they lose other things. So there's a mixture of ways to get there and likewise in other areas.

And how about on the loan growth side, what are you seeing in terms of the industry loan growth? Things are slowing when we look at H8 and the loan officer survey. And so it's kind of also probably naturally expected, but just talk about what you're seeing on the loan growth side?

I think we're seeing consumers sort of flattish largely that's because mortgages are sort of dead a little better than the card, everything else is sort of floating around. On the commercial, like the line usage dropped about 1,000 basis points in pandemic, got back about half of that. And then I thought -- everybody thought well, they will just go back up, that's like, say, it's 42% to 32%. Everybody thought it would just sort of march up there. It sort of flattened out in the 36% range sort of in the aggregate to give you a sense. And that means going back to the inflation rate, that means companies are not seeing the need to draw on our lines and it's more expensive, they're being much more careful. So whether tiring, whether it's inventory builds or whether it's equipment purchases or whether it's facilities, whatever they do with the lines before they put permanent financing, you just see it. So loan growth will be flattish this quarter. And that's probably a little bit less than we expected, but generally in line.

And what about pricing? Are we starting to see some wider spreads? Is that contributing to the demand? And how fast can that be helpful as the book doesn't turn over that quickly, obviously?

Yes. So in the floating rate area, it moves with the market because it's floating rate, but the problem is the spread that you have kept, in the loan agreement, you can't change until you get to a point where you renew it or is redone. So that takes -- that's a multiyear process. But you are seeing better what we call putting on spreads. So new -- spreads of new originated middle-market loans and small business loans and even large corporate loans is wider than the old spreads. It just takes a while to turn them over. But it's in a good direction, and hopefully, the industry will keep its discipline.

Is that recent that the loans...

Yes, it really started probably, I'd say, towards the end of last year. As the markets got disrupted, you start to -- are able to get a little bit more spread. And as capacity from lending in the industry, again, was taken down on purpose by the monetary policy and the quantitative tightening, et cetera, et cetera. People are going to be more careful how to use their balance sheet and have to get paid on it in order to pay the deposit side pricing, which is increasing.

And looking out beyond this quarter and beyond just Bank of America, do you feel like industry loan growth is going to be flattish or very low for the foreseeable future?

That's going to be the economic path, honestly. And so I think we've always built our thought on loans to sort of outgrow the economy by a bit because you're sort of slightly gaining -- you're constantly gaining market share at a rational level based on the credit. And so I think if you have like we have, which is a recession predicted for the third, fourth and first quarter, even though it's slight, it's hard to predict loan growth in the face of that. And so we thought we -- where you had the recovery on loans from $1 trillion -- $1.40 trillion, starting on pandemic. It's surged because the borrowing then fell all the way to 950 or something like that. It's back up at $1.40 trillion. So you kind of recovered that's kind of through the system and that was sort of the 14% annualized growth type of numbers. So we're now over into single digits. And I think this quarter will be less, last quarter was consistent with that, I think we'll kind of fall back in a range of, say, 3% to 5%, 6%, we'll probably be at the low end of that range in the industry. But as the economy recovers and we have a recovery next year, you'll see a kick back up.

And just back on the pricing of deposits, are you seeing different behavior from small banks versus big banks? It seems like the bigger banks have been able to hold deposit pricing?

It really is mix, honestly, and what you need it for. So the idea of chasing balances with higher rates when you really don't have anything to do with the money. It's not exactly, and for the customer, it's better just to put them in the market-based instruments. And so think of our wealth management platform, $300-odd billion of deposits, still in there. If that number ran up in the pandemic, a lot higher than that because we had $80 billion of sweep sitting around, the $175 billion, now it's back down to $80 billion, all that money we just pushed into the market because we just couldn't use it. So I think I would say I need that money to fund my corporations. I'm an institution. I have to pay up. And that's -- so I think -- so I don't think we're seeing as much in a way. But we're -- look, we're not above for customers and relationships, we'll pay for deposits when it makes sense at the customer level. And then on the corporate side, pre-prices like that. So it's really a mix of where you are in terms of the customer segment.

So bringing that all to the P&L just a little bit. For net interest income for Bank of America, you talked about in the next quarter, you'd be down maybe 2% from the first quarter, given all these dynamics with loan growth and deposits. Is that still the outlook? Any tweaking on that?

Not substantial. I think we're fighting to hang on to that but not by much. It's just -- it's a dog fight, plus or minus 100 or something like that. And it's largely, frankly, just due to the little bit less loan growth, deposit growth, the industry, a little more disruption. All that stuff is a little hard to get precise across $14.6 billion, plus, minus 2%. So -- but we're doing everything we can to maximize and optimize it.

Yes. So if you did come in at that level that you were targeting a $14.3 billion or whatever for the -- what's the path for the kind of -- given your outlook for the rest of the year, you leak down a little bit like going forward, how do you...

We've studiously ignored you when you asked that question before because the answer is, it’s really hard to predict until you see everything settled in. And is the Fed going to overshoot or they going to undershoot. And so we're trying to give you the feeling of what we see and then sort of look at it 1 quarter in advance. And in a few -- a year or so ago, we went the other way. We said it was going to be down at a session like this. It turned out it was back up. So it's got a volatility around a quarter. It's not like it's a $1 billion difference, it's $100 million, $200 million difference. So we said it would sort of drift at this lower level in the low 14 type of level and bounce around. And whether that's up or down is really going to depend a lot on the environment around us. But it's -- the good news is it seems it's coming out largely what we said, and that's good news.

Yes. I guess just bigger picture, kind of a generalist audience, just the positioning for rates for many years, if you were positioned to benefit from rising rates. And how should people think about that front?

We're balanced. We test up and down 100, up and down 200, we stress test it and all that stuff. But we're balanced. And so we've sold a lot of hedged securities just put them into cash because it effectively is simpler and yields more and stuff. And so we're pretty much balanced equal up and down. I think right now it's -- and it will be like that because the nominal amount of rates and how fast they move. And then we still have a lot of 0 interest rate deposits that they get squeezed whenever it come down, and $300-plus billion in consumer alone plus the rest of the franchise. So it's a big amount of money that doesn't move at all up or down. It's when rates come down a little bit, it hurts you and rates go up, you can make money on it.

Yes. And just one more on deposit mix. And one of the kind of concerns for investors is that for the industry, the mix of noninterest-bearing is high relative to the last time rates, were this high and consumers just slow to kind of mix out of noninterest bearing. You mentioned the cushion in your mom and grandmother want you to have cushion but...

That's -- so it's really different for each business because the sort of transactional amount, which is the checking balances plus the cushions that may have in the money market in the consumer environment or they may have some sweep accounts in the wealth management environment or they just have in the balance sheet of which we're doing. So starting with a commercial bank, you have -- people have to pay you for their services. They're also got to cut you a check. And so that required amount when rates went from -- the earnings credit went from x to 3x, can be 1/3 of the size. So that piece is down to more traditionally where it is. And of the noninterest-bearing, that's like half it, the rest of it is that cushion and then the amount above that is the money that's with us that is more rate sensitive and we manage that. So I think it really depends on the customer and what you're using it for. But I think a lot of the movement of money in our platform is done in a sense that we had -- in '22, we had $70 billion in taxes paid, and this quarter, it's more back to -- this year, it was more back to normal. There's some timing between the things. The money has moved to get rate largely is there and what's left is sort of in the commercial bank, especially, it's bouncing around the same level for months. And so what's left is probably the higher end in the consumer business with people to keep tidying up and figure out where they are and et cetera, and what's a little bit left might be in the wealth management business. It's been pretty flat for a while, which means that the money is moved. So the stuff that's noninterest-bearing today is probably there because it wasn't movable back then and probably still isn't movable. And now the way we drive that, though, is to get 130,000 new checking customers each quarter, one after another and then deeper relationships on the wealth management side and the new logos, and that keeps that cash building, which adds all the deposits, including noninterest-bearing.

We'll just shift gears to talk a little bit about your capital markets business. Just maybe some comments on the environment. The investment banking landscape has been challenged. Any changes that you're seeing deal activity or just overall comment kind of on what's happening in investment banking?

Matthew Koder that runs the Corporate and Investment Bank, so corporate bank and treasury services and the investment banking have done a good job. So we've moved up to number three and that would make you feel good except for we went from $2 billion in revenue down to about $1.2 billion to $1.3 billion. Right now, that we see this quarter coming in $1.x billion sort of in that same range. The good news is it's not moving around down much. It's just sort of bumping along that level. And oddly enough, if you went back about 4 or 5 years ago, you'd say, that was a decent level of investment banking fees in the second quarter of the year. It's just that we've had this major move in fee pools in the industry. So we feel good. We still -- by all the external data, we're still sitting at number three, the teams out there are firing away and doing a good job. So I think we're probably consistent with that sort of low ones, and that's been sorry bumping on the -- so I think that's where it is. When you ask them what's going on, the amount of activity and discussions and -- with our junior teammates, they're fully deployed and busy because we were redeploying them to other parts of the company, doing some different stuff. And now people are saying we can't do that anymore because we need them all because so many pictures are going on. So there's a lot of activity. Your question with the result and deals and stuff. And there's people lining up -- equity raises and there's people lining up other stuff, it's just -- you just got to get, I think, a notion that the tightening pretty -- stopped or the incremental from here to there will be small enough that people can sort of adjust it, and I think it will come through. But we actually gained share as the world came down. We kept more flat. And on the sales trading side, frankly, I think we'll be flattish this quarter, which it may be very strong performance. Jimmy DeMare and the team have done a great job of sort of stabilizing that business and keeping it a little less up and down than some of our comparisons. And that then holds us in good stead. So -- whether we end up exactly flat or not, I think it's kind of -- right now, it's down a little bit, but the next month is typically a little stronger month for us. And so think about flattish, and that's a pretty good for us.

Yes. I mean we've heard from a couple of folks this week with double-digit declines expected in the second quarter in sales and trading year-over-year. So that would be quite nice outperformance. Is there things about the mix that you'd point to or?

Part of it is the mix, but also we are now compounding in a multiyear investment in that business, expansion of balance sheet, expansion of RWA, expansion of capital deployed, hundreds of millions of dollars of technology like $500 million, $600 million just in that business per year. All that's compounding in the sales capacity. And Jim and the team have done a good job, and Sofia in the equity side and Jim and the team on the fixed income side -- fixed income. And now if you looked in the products, mortgage and things like -- mortgages and some of the other stuff are performing better, and that may favor us over some others. But the reality is they've done a good job.

Yes. I mean a few years ago, you mentioned you weren't allocating enough to that business and capital and you've increased that, you just have the investments. Are you at where you want to be now?

Yes. I think -- we probably -- yes, I mean, they've still got capacity left from where we said. So it's not like they're constrained on a given -- we watch the RWA, but that's like meaningless in the grand scheme of things, I think you'd give another $5 billion or $10 billion of RWA capacity. And so they've done a good job, but they have capacity left to use. And so they will use it when they think there's opportunity. And I think Jim had a very strong approach being balanced about that, not just trying to grow the balance sheet, to grow the balance sheet sake, but grow where we had advantage. And then thinking in the markets around the world. And frankly, they've avoided some of the pitfalls and some of the ups and downs, and they've done a good job. And so they could take more but to use it fully, the capacity we already said, they could take, they got a little room to go. And then we could give more because we have the capital to do it. And returns on that business, if you look across all our businesses, it's always going to be lower because it's so capital intensive. But as you optimize some of the business mix, we used to struggle to get it to double digits and now sort of sits above that all the time. So you're more comfortable that it doesn't dilute the ROTCE of the whole company. They're actually contributing -- doing a better job at getting up near the edge. So therefore, they're not dragging it so you can have -- put more capital. For a while, it would have dragged down the returns too much to do it. Now the returns are better.

Yes. So talk a little bit about expenses. You've had in operating leverage, good success, generating operating leverage over the years. I think you're 7 quarters consecutive now with positive operating leverage. I assume that gets a little tougher with the environment. So I know you're pushing the team to manage cost and headcount this year, and you've kind of set a bogey for $63 billion in expenses or so. Just talk a little bit about how you're managing that with the investments you want to make and driving the headcount to where you want to get to.

So we -- at the end of the day, our company has in its $60-odd billion expenses, $36 billion in comp. And then of the other $20-odd billion -- $25 billion or so, it is basically a lot for the buildings and a lot of the computers that the team works on. And so it's all about the people count. And so what happened during the pandemic is we went into pandemic, I don't know, 205,000, 207,000 and pushed up as high as 218,000. And some of that was considered investments here. Some of that was just, frankly, the ineffectiveness of things going on and in some of the specialized programs, we had to put people against and all that stuff. That's all coming out of the system, and we're redeploying those people. When I talk about reductions in heads, it's not layoffs, it's actually moving people in the company around and we have a very -- Sheri Bronstein and team run a very disciplined process to redeploy. So we -- Alastair said at the earnings call, we'd be at 213,000 at the end of the quarter and we're there and that looks like it's well in hand. Now in a broader economic sense, just to give you a sense, May last year, we hired 3,000 people. May this year, we hired 600 or 700. Think about that in the market in terms of us and all these other employers doing it. That's the softness in the labor market. So even the statistics ADP, you happen to have the ADP economist talking to group this morning, and she said, look, it's a small employers that are adding people. The big employers are relatively neutral manufacturing stuff. So it's kind of interesting. And so you'd say what's -- how does that all work? And how that all works is the attrition has come down dramatically. And so we were targeting to reduce the heads in these areas we didn't redeploy. So if we'll hire 600, 700, we'll have like 1,300, 1,400 leave the company, part filtration, part for retirements, part for leaves of absence, whatever reasons and that gets your headcount down. So we've engineered that down. We close to -- we'll get to 213,000 plus the intern we can exclude because they come in this month and go out next quarter and it's great 2,500 -- 2,600 talented kids showing up to -- we're a people company, and we're doing it. And then you work in -- your operational excellence work. We invest hundreds of millions of dollars a year in the efficiency of the platform. And you're working on real estate at the margin, we haven't -- continue to shed real estate $130 million in 2010, $60-odd million, keep shedding real estate, compacting people. But you take part of that and redeploy it into -- we've probably got a $500 million a year in marketing over the last couple of years. We've gone up just last year, this year, probably $400 million in technology initiative expense to almost $3.8 billion. And then that had grew probably from $3 billion a few years ago up. And so we're trying to redeploy it and even on people, we went from 600 business bankers. So I think $50 million in revenue size companies up to 800 over the last 24 months. We kept adding them and that positions us well in a current environment. So we're always trying to add where we need it and take out where we don't, and that then allows us to manage expenses. But look, we -- the expenses grew during a pandemic inflation, all these other things, and we got to flatten and back up. We think we should get 7 quarters operating leverage this quarter, and we plan to keep doing that. It gets a little trickier as NII flattens out and you got to bring expenses back in line. And we think that's just good discipline, honestly. And meanwhile, we're investing a bucket load in the company. I mean the digital capacity of our company, we talk about AI or something. Erica just went through the fifth year. It is an AI predictive language technology thing that has 150 million, 160 million interface with consumers every quarter. So believe me, we've been applying that technology elsewhere in the company, and we're bringing in the new technologies and trying to make ourselves more efficient. And these have great things down the road, but near term, you can use it in ways that can help you today, and that's kind of interesting. And then just the general reengineering of growing of look at every process, what can you take out -- look at every...

A lot of runway there, right?

You're not trying to take it down, you're trying to keep it flat while you're investing, and that's -- we're able to bring it down a lot from, say 15 -- to '14, '15 and '19, we said we'd be down. You guys all thought we were crazy, and we showed you how and we did it. The reality is that if you look across that period of time, the company's expense base across the last decade is basically flat, which is kind of interesting when you think about all the activity that goes on and the trading businesses, the numbers of trades through the roof and the wealth management business, same things. So we've been able to engineer out a lot of costs and the digital has helped us across the board.

Where is it from here? Like is it kind of still the branches and you've been structuring kind of cancel checks around or?

But the good news is Zelle is now past checks written in numbers, which is kind of interesting. So Zelle transactions initiatives, past checks written. And it's -- my guess is we'll exceed Venmo's volume just on our own Zelle overall, and the industry exceeded it by a lot, but just on our own in relatively short order. And on top of that, it will actually exceed the amount of transactions taking out cash out of the ATMs. And that's kind of an interesting question, which is now you're starting to see this thing become a core way and we've got it in a small business environment and stuff like that. So it's everything -- we still have 14% of checks deposit at the branch. The good news is checks are down 25%, '19 to now. So the more we take people quit writing checks, the less they go into the branch to be deposited. And so you just work in a system and hard and hard and that's all on the retail side. So branches, I think over the last year came down to 300 or something like that. And yet, if we just deployed a new branch literally today, in Minneapolis -- we're deploying. And so in Columbus, we deployed, I think, 15, 20 branches up to 5 billion deposits in Columbus from scratch 3 or 4 years ago, 100 million size branches that we put -- deployed in the last few years. And that's a pretty efficient system. So you never want to give up on that opportunity. Meanwhile, you're taking them out of places where the density is different now. It's everything.

And how -- talk a little bit about that, how it's driving customer growth. I think you had 130,000 new checking accounts in the first quarter. That's a long stretch of new account growth. What are the biggest drivers for customer growth? Is it expansion into new territories? Is it just being in good market -- just maybe some combination of things?

Yes. So we're -- at the top 30 markets, we're top 3 share in multiples of the other competitors in the top -- we've been looking at this for years, building the franchise to cover more markets. I mean we looked at the markets we were in, we start picking them up. And so that's helping on the one side, then the work we do with young people, we're attracting young people and young people 10 years ago are not so young. So we've been doing this for many years to -- and we -- in the 16- to 25-year-old -- 24-year-old segment, we open accounts twice the rate of the population. And so we're gaining share. And that doesn't mean a lot of balances, but that's the future. And then you're working hard in the wealth management business, so 35,000 banking products deployed in the last quarter in that area. Meanwhile, 13,000, 14,000 new customers loaded in that business, a record in the first quarter. And then in the commercial business, it's the same sort of drill new logos are, I think, up 40% in the first quarter or something like that over the last year. So you're just driving it all these places. So it comes from every single thing. But remember, digital now is in the consumer space is well over 50%. And so that's where the -- advertising has gone deployed to drive the digital engagement and the acceptance in all our consumer products, you can do it digitally. You can take on digitally. That doesn't mean the branch is not [indiscernible] because people bounce in and out of the process. So that's helped us because that's really a 24/7 limitless acquisition vehicle, and so we drive activity there and volume. So the team has done a good job. And so it's a little bit of everything. I mean, it really is -- Merrill Edge is growing strong and record net flows, and it's getting to become interesting in terms of numbers of customers and $375 million, $400 billion of AUM and aside from the wealth management platform. But most importantly, it's the customer of the future starts there and moves to wealth management. And that continuum, we have is very unique. And that's -- and that we have that in the personal business. We have it in small business, we have it in large businesses. And so we have where we can follow customers our whole life, so we can take on that 16-year-old and not have to be too worried about what happens as they go to college and stuff because when they come out the other side, no matter what their career path or even if they never go to college, we can have them as a customer for life and that's a powerful model, and that's what we're just keep materializing them.

And you're seeing that migration from the folks that come in with self-directed and progress up?

Yes. I mean the numbers that we count the -- we call them referrals between the businesses and the hundreds of thousands a year are looked at those that really need the personal service are brought out, and that's a smaller number. But meanwhile, we're also deploying that product set into the wealth management client base because a lot of individuals have a direct account. And so we've keep suiting that up at the same time. And then behind that is the 401 (k) platform and the bank of work platforms and things like that, and it provides vehicles. So these are all -- we have 8 lines of business, and we have these huge vehicles, whether it's the cash management business, whether it's the wealth management platform across the businesses or whether it's deposit business across platform, whether it's merchants is growing, it's still going to be -- we're 5 or 6 in the business or something we got to push up a 401 (k), same thing we're growing and we're 6 in business. Those are places that we have, but it's the integration of franchise that allows us to materialize on it. So it's a part of our products that we offer through cash manager opposed to stand-alone merchant acquisition business, for example.

In terms of credit quality, are you seeing anything in consumer delinquencies outside of expected normalization? Maybe just talk about what you expect for a path on consumer credit?

One thing that we've all found and trapped in is we go back and compare to '19. In 2019, I think it was like a 40-year low of credit costs in the industry and our company. And so -- and we're still not back there yet. And so the credit quality is still very strong. And so everybody is like, well, can't stay as strong -- but it is in the delinquencies. And so from responsible growth across many, many years now, and we have underwritten standards, which I looked at through our own stress testing, through the Fed stress testing, through the model designs in the consumer space, especially enough commercial underwriting. And it's -- but it's not normalizing because normal would have been to a higher level. It's basically reverting to where it was in pandemic, which is a very low thing. And I think that's kind of a debate. As we look at it, remember, our reserves today are set on a 60-40 waiting to base case and adverse. The base case now has the recession because that's -- that's the blue chip economic thing. It has a mild recession. So you kind of look at -- so unemployment in -- are waiting, I think it reaches 5% or something like that. So -- which does not -- in many people's models individually but do all the average to get there. And so it's very conservative. We're not seeing any delinquency pickups of any sort. We are prime. And so that's the behavior we see is among prime customers. And so we feel very good about it. And it's just -- you keep managing it well. But what we did in 2014, '15, '16, '17, '18, '19, '20 will serve us well. There's really not much you do right now because the portfolio is set. And we've stressed it and we feel very good about it.

And on the commercial side, commercial real estate office is not a big exposure for you, but can you just talk about how you see the office environment playing out for banks in general and just really comment on your exposure?

We're $73 billion in real estate and 18, 19 in office, and it's 2% or whatever the portfolio. It's 50% LTV at origination, blah, blah, blah and it's a quality and it's this stuff. The interesting thing is as we -- when a loan goes into reservable criticized, it gets downgraded, you have to reappraise it today, and we have really appraised those loans and those appraisals store 70% LTV today in last -- not literally today, but in the last 6 months or so. And so we feel very good about our portfolio. That being said, when I talk to -- this is one of the most interesting topics when we talk to people in the business just in the Midwest, the other day. I'd say more than anything else it's sort of not -- when I hear the experts talk to me about it and listen and try to sort it all out. it's more recent buildings, a office space versus not a office space, which cities, where the building is. And so it's a very complex outcome, against the basic backdrop that people are squeezing real estate because of all the dynamics that went on and the learning about location of work questions. And so that's going to be a downward pressure. But on the other hand, if the building is a great building, you see them leased up and fine. But in our portfolio, we just -- we basically made a conscious decision from 2009 financial crisis to push commercial real estate into a place where we really wouldn't have to worry about it. People say, what's your reserve level is to this or that and you say, wait a second, it's a quality of portfolio. So you can -- you don't have to worry about the top 30 banks. You can literally look at this every single year, they've been stress tested under a set of criteria you can look at 30% down, 40% down, and the output is 9 quarters of losses. And you can see them. So there's no mystery. And that's a lot of the banking system. Interesting enough, it's not a lot of the commercial real estate loans on bank assist because they tend to be in a more midsized banks and down. So I don't think this is -- this will be an issue, it will be a concern, it will be a fight and we'll never convince the outside world, it's not until it's over type of things. But on the other hand, for us, it's not much -- it's nothing. I worry about other things more. But -- and I can see why people are concerned about it. But overall, even the experts say it's a very nuanced question. People are just lumping it all together, and that's going to be the interesting question is how that nuance plays out. And then you have half of it is not in the industry and then you have time, right? So everybody thinks all comes due tomorrow and this stuff rolls out over time. And so we'll see it play out. But for us, it's just not that big a deal.

Yes. It's a slow movie to play.

Probably. And it's fairly transparent for the top, I don't know, 30 banks or whatever do the stress test, I mean, you can go look at the data and compare year-by-year.

So overall, I mean, you sound pretty good on credit like in terms of like projecting a recession, but you think you'll have a very manageable credit cycle associated with that from everything you've seen now.

If it's a slight recession because of the quality we play in, because of how we manage our portfolios, it should be. We're up to $1 billion of credit cost a quarter now. It was $1 billion pre-pandemic. Charge-offs are 800-ish and they were almost $1 billion every year. So it's in that level, but that was pretty good times. And then -- so I'd say, yes, it's going to -- it will kick up and required. But the reserve methodology now, CECL is different. It's because you put up so much. We're sitting at probably twice the reserves we had going -- 3x going to financial crisis. So they need to build reserves on a trillion dollar loan book is much different. And it will be more volatile because of the way CECL operates. But it's -- we feel generally pretty good. And frankly, the whole industry because the stress testing, the work that's going on for the years, I think is a much more solid industry, and that's why it'll take -- getting through this all to do it. But if it's the recession that's predicted by the blue chip indicators not, it looks like the industry should fare well.

Yes. Bank stock, investors are pretty anxious and beaten down a bit. But so on the credit front, things sound pretty good. So it's really the concerns on the earnings front related to just funding costs normalizing and coming up and then just the lack of balance sheet growth?

We're in a twist. I mean, we're in a place that inverted rate curve unusual, fast rate rise, inflation that was highest, it's been in years. How's all this run through the system, you had fair at these different business models. And so you can see why people and then you have a recession predicted and banks shouldn't do okay in a recession. But against that, you've had years of positioning the companies generally across all the -- especially any institution of any size is examined and stress tests and stuff. So I think that countervail it. And we just -- but we just went through the most pretty unusual environment. So it's -- there's still work to do. There's still pluses and minus, ahead of us. There's still a recession to get through. But you watch these companies and you watch the industry and by and large, it's got a lot of capital, a lot of reserves, and we just got to manage through it. Meanwhile, you're seeing the signs of slowdown coming.

And can you talk a little bit about your capital position, preparing for likely higher capital rules for everyone in terms of some proposals coming out? And just kind of how you're managing growing capital and distributing capital?

We've been pretty consistent with the idea that we're in 100% of earnings. You try to keep a dividend within -- below 30% that then the other 70% you've deployed in share buybacks or capital growth. Capital growth is always the first priority. And so we've been pushing the dividend up constantly against that earnings stream. And so that's given us a lot of flexibility. A chance to go in and buy the stock back when we had excess capital. Last year, we all got surprised in the stress test, and we hope and believe it should not happen again. And so we -- but we instantaneously hit that capital level. We're sitting at 11.4% plus last quarter against a requirement, all things being equal, which should be a 10.9% beginning the first of next year. And so we already got the cushion on top of what we have. So we feel pretty good about that. We build 20-odd basis points a quarter in capital. And all of us took it easy on stock buybacks this quarter just with all the stuff going on. And so we bought back what the employee issuances are and so we'll build a lot of capital this quarter, and then we'll see what happens and work through it. But when you're heading into a recession, when you're heading things, you just got to make sure the capital is there. So there's no question about it, and we feel very good. But -- but the principle will always be the same. The dividend will go up some. They keep raising the dividend consistent with the earnings. And as we bring share count down, you can deliver the same amount of dollars of dividend payments to equal, more dividend growth and then use the rest of it to support the business and/or buy back stock. The reality is the demands on the business in terms of capital other than the calculations that come out is, are not different. There's been -- the loan book is $1.40 trillion, and it was $1.40 trillion a few years ago, and we got better loans and we have more space even to take loans off and put on more core loans. We still have a $10 billion left ever, believe it or not from the financial crisis. It still runs down. We've got consumer real estate, we could securitize if we wanted to, to make room. So we got plenty of capacity to lend. So you really come down to the markets business we talked about, how much RWA are there. The commercial I'd run though is you've got to be careful because the competitiveness of the American banks and middle market companies competitiveness in a worldwide supply chain can be hit by the capital requirements in America being gold plated and higher than other parts of the country because these new rules would apply. It's -- they're not tiered. It is the basic calculation. You can have other rules. And so we got to be careful about making our banking industry's cost of equity coverage so high that our cost of capital to our midsized lenders that participate and fight in the world, multinational companies have new capital markets. But the midsized people supply in the auto business or the renewables energy business or the farm, whatever it is, the Americans will be disadvantaged. And I think -- it's often been said about Basel that trade negotiation or bank regulatory negotiation. And the answer is it's probably a little bit of both. So I think we got to be careful how this plays out for the good of America.

And your expectations will find out sometime over the summer or with some proposals about what regulators want -- investors are worried that regulators just feel all banks need more capital.

Yes. I think we'll see what plays out. I don't have any insight on timing that you don't have, honestly, John. And -- but I think the points that the industry is making and we're trying to make very appropriately with humility and care is that if you look at around the world, this industry has the strongest capital, especially because of the SCB, especially because of the gold plenty, and it's just really, really different. And so you should be careful what you do next. That doesn't mean they're going to -- the regulators will do what they define how they'll work. But it probably means that we're pretty engaged in the discussion. So it will come out at some point and there'll be another round to talk about it again.

Just a couple of quick ones in the last few minutes. What impact do you expect from the liquidity drain coming from debt ceiling resolution and potential treasury issuance or this are all potential?

Yes. I mean, well, the number one thing is the Senate's got to pass this, and they have a process which takes a little longer, and hopefully, Senate Schumer and Senate McConnell can bring them together fast because now the deal is cut, we got to get done to remove this potential, which is just -- it is hard to understand what happens. And as a company distributes a lot of social security payments and a lot of other payments in 2011, we were getting the file to send out the money, but the money wasn't coming in. At some point, that's got -- that causes a little bit of a problem. But -- so I think that's number one. And number two is then the treasury then has to issue effectively, they run at an expense base is going along, you just couldn't issue the money to pay for it, so the cash drain down and have to restore that. Well, they do that all at once a months, I think is probably them thinking about themselves of funder. And so it clearly has an impact, but it's not impacted, in some ways it shouldn't have been planned for, in the sense that this is the budget that was approved and the deficit was approved. It's just we had a fight about whether we're going to try to go backwards. So I can't get people both inside the government outside of the government tell me whether this should be a concern or not. And so my guess will be bumpy until everybody is convinced it's not a concern, but we don't think it's a huge -- there's a lot of money already at the Fed and in the overnight repo and in other places that will then come out of -- there's $2 trillion in the overnight repo facility, could be redeployed by more direct securities. So the money can move around and cover it up, but it's not -- it's $0.75 trillion or whatever it's going to be. So it's not a small amount. And so we'll see it play out. But I think it's probably more of a capital markets question, it is a general economy question.

Maybe the last one here from the audience is, Warren Buffett is a large shareholder of your company. He's a big fan of competitive moats and competitive advantage. So what are Bank of America's competitive advantages versus your biggest peers?

Our competitive advantage is the -- in each of the businesses, the core transaction relationship, whether it's a company, whether it's a wealthy consumer. And those have different attributes. Mass-market consumers just a bank account, while the people is the wealth management business and corporates, cash management capabilities. But that deposit-taking capability is just -- is that we think we're 14% of retail deposits and growing. And we're similarly in wealth management, that is a very big competitive advantage that we have that is defensible in all things. So it's hard to recreate. It took 230 years to get here. It's not like you can get here overnight. And yet when -- if we were here 5 years ago at this conference, it would have been all about fintechs and neobanks are going to destroy, well, guess what, we're still here, and we have more digital -- we have 66 million customers, 54 million on our digital every day. We're a bigger digital company, 1 billion-plus digital interactions every quarter than most of the companies out there, not just banks. And we got an AI platform that's doing 150 million transactions, interfaces a quarter and stuff. So the boat is around that. And then behind that, the other moat, which is a little more subtle, is this continuum question, which is, a person be born and the rest of life, they could be a customer. And there's never a piece of the business that we aren't the best in, and that is a competitive moat. And we see that over time. And well, all that will come on this management team's watch. At the end of the day, we are -- we've run this company in that way now for a good period of time. So what you're seeing is that's coming to fruition from the company that started a small business customer went public from the individual that started that out of college now is an entrepreneur or one of your teammates you're paying a lot of money to or something like that. So it's -- that's a competitive advantage. It's just the depth of the franchise, the services you provide and the fact that it takes physical, digital, risk management, technology and that moat plays out, and that's why we've literally been gaining share in these businesses slowly but surely over time. and then you're a big compounder that way.

Great. With that, we'll leave it there. Thanks, Brian.

Thanks, John.