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

Okay. We're ready to get going. Thanks, everyone. We're very happy to have Bank of America back today, CEO, Brian Moynihan. Brian, thanks so much for coming back.

John, it's been many times. Good to see you again.

Great. Well, I think we'll start off like we always do with your macro view. It's been almost a year since the last Fed hike. Unemployment's good, but inflation a little sticky. What's your recent Bank of America data telling you about the health of consumer?

So a couple of things, I think, would be of interest to your colleagues here. Number one, if you look at what we talk about a lot is the spending, the money moving through the consumers' accounts, which is $4 trillion-plus a year, which is money moving out in the economy: cash out of the ATMs, checks written, settle payments, debit and credit cards. And if you look year-to-date, that's growing about 3.5%. So that number doesn't mean a lot. Most of that has a context. If you looked at it May of '23 versus May of '22, it'd probably been like high single digits, maybe even double digits. So it slowed down coming through the summer of last year and sits at a level which is about where it would be in a very low-growth, low-inflation environment economy, sort of where it was at [ '16, '17, '18 ], actually a little bit under that. That would be more a 4. And it's being -- so that's one, it's aggregate level. The growth rate has slowed. It is still growing, but it has slowed. It's consistent where it was when we had more of a normalized environment around us. And the way people are spending money is consistent with what you read about, which is it's on experiences. It still is being driven at the margin by travel, entertainment and things like that. And other things have moderated, except for insurance payments, which we can see people pay insurance. And so it's good. And so that's good news. And if you go and -- but it has slowed down. And I think it sets up the question, we got to keep the consumer in the game in the U.S. economy because it's such a big part of it. And they get a little more tentative. And that is due to everything going on around them. Goods are more expensive, they're shaping the spending. They're going to 3 grocery stores instead of 2 is one of the stats we see. Interesting part as it relates to inflation is the rental payments by our -- that checks out for rental payments, they're now tipping over and the growth rate is slowing, which if you listen to inflation experts, they'll say they had to see that tip over to fuel inflation was really on a downward path. So that's where we're seeing our consumer. Our general estimates are that inflation takes until the end of next year to get to control the economy basically bounce around a 2% growth rate. So it's a trend. There's no soft landing of space, it lands a trend and bounces around 1.5% to 2% all the way through next year. It doesn't reaccelerate. It takes cuts -- 4 cuts next year, 2 cuts a year after and 1 this year is kind of what the core economics team has. But overall, you see the consumer activity is okay. But the commercial...

Yes. And how about on the commercial side, what are you -- how are the clients adjusting to this environment?

I mean there -- the cost of borrowing has gone up, so they're careful. And so the line usage has moved up a hair, but it's sort of sitting there. So if you think about the path we've been on prepandemic, small businesses and middle-market companies, we use in lines in the low 40s percentage as an average amount of usage as 100% they could borrow. It fell to 30%, it's back up 35%, 36%, but it's not really going up anymore. And so when you talk to our commercial customers, they're basically saying, "I'm making money. I'm fine. I'm worried about every possibility you can lay out, the wars, the China trade war, elections," they can say it. But everything's okay, but I'm -- therefore, because it costs me more money to borrow, I'm being a little less aggressive. And so again, they're okay, too. So I think in some ways, the war on inflation has been being won and isn't over yet. And both of our customer bases have a lot to do with how the American conforms are both saying, "You know what, I'm being careful slowing things down. Still growing, still feel good about my overall business. But I'm not hiring as much. I'm not buying equipment as fast. I'm not making a commitment to software purchases as fast." All that's sort of moderated. And then on the other hand, I'm not laying off a lot of people. I'm not -- I'm trying to manage this business carefully. And I think they're good managers, and that's what they're doing. And -- but by the way, when you think about that in terms of our bank balance sheet, the credit risk then is in good shape. And so you're not seeing any vagaries and credit risk across the portfolios, broadly speaking. We talk more about that. But -- so that's where you'd start to see evidence of stress, and we don't see it on the consumer side for sure, and we don't see it on the commercial side either.

Okay. So let's leave the macro a little bit. This is called Strategic Decisions Conference. And for years that you've been coming here, you talked about the organic engine of strong account customer growth. So let's just talk about a little bit about how you strategize for compounding that customer growth across all your different businesses. Maybe we'll start with the consumer bank. You've had 21 straight quarters of new checking account growth. And this quarter alone, a lot of good new checking accounts, credit cards. What are the key drivers of this? And what's your differentiated kind of proposition to consumers that helps that?

So I think -- so if you think of Bank of America, we have general consumers, wealthy consumers, small, medium, large businesses in the markets business. And what makes us a bit unique is these continuums which link the businesses together from a person opens their first account to becoming John McDonald making tons of money and investing and things like that.

I wish. Oh, we wish.

Yes. And so the idea is that continue as a value add. So as you think about running the business, you're thinking about short term, you got to grow the organic growth in the long term, how do I knit it together. So in the consumer business, at the end of the day, in the mass-market retail business, which is 60%, 70% of the activity, about 20% of the deposits and profit. That is about managing costs and a great customer experience, and team has done a great job. And basically being very fair to the customers, so no overdraft checking, low balance accounts, short-term loans for $5 that they can borrow in a couple of times a year and pay back over 90 days, so things like that. And that's gone on. And you can see that, and that's very stable. But they provide the start of that continuum because that's -- our children opened their first bank account to then go to college and become successful. That's the college student open their first bank account on their own type of thing. And so that goes in the preferred business, which is the upper part of that, completely different revenue model, acquire the accounts, grow them. Merrill Edge becomes important, and that's going. So if you look at it more broadly, what's the thing? Optimize the cost, especially around the mass-market movement by pushing people to see the wonders of digitization. So whether it's Erica or whether it's Zelle or whether it's the ATM network or whether it's all the other things in the mobile app, which is now the dominant way people interface, where there's 1 billion-plus digital interactions a quarter by our consumers, to give you a sense. So it's a big thing. You keep pushing that to keep the cost and then you invest the benefits of that into the customer experience and then you grow the upper part of that customer base, and that is your million net new checking accounts every year in [ 20 some 5 ] years of it. And underneath that, you're optimizing everything you can.

How about the importance of branches? We've heard from yourself, from Aron Levine, Dean about your financial incentive strategy, and you've been on offense in terms of growing. How important are branches still to driving organic growth?

So half the sales are digital, which means the other half are not digital. So you need both. And that's the magic of having. But the configuration of branches in 2007, after LaSalle transaction, we ended up with the peak number branch of 6,000. We're down to about 1,300 or so now. In that dynamic, there's a second dynamic, which is the branch size went from probably an average colleague size of 5 to 10. And then what the people did went from service to sales and relationship management. And so that -- so even though it looks like you're down 2,000 branches, and there's a massive change underneath that. And so that's what the team has been optimizing, and that allows us to invest in the future. So what are we doing? If you look down the top 100 markets, and we plan to get to a top position in all those markets, and that's a lot of work ahead of us. The first thing we had to do is go to market as we went in, and that started about 8, 10 years ago now where we build out in Minneapolis and Denver and places like that. Then -- and you had to keep that going first, the top 30 markets you weren't in and then the top 50 and then beyond, and we're completing that task. And then at the same time, you had to densify where you weren't dense enough to get the branch part of it. And then you had to undensify where you were too dense, I mean, get rid of branches where they're too close together and didn't provide the capability and you couldn't get ahead of the customer. And so in that period, 6,000, 4,000 branches, 100,000 people plus to 60,000 people, probably 25,000 service-oriented teammates and branch like 10,000, you have sales-oriented teammates from 5,000 up to 10,000 or 15,000. You put that all together, and what you have is a business which is 3 to 4x bigger transaction-wise, balance-wise, et cetera. And the efficiency of it has gone from 300 basis points of cost of deposits. In other words, cost of operating all the retail consumer business over the deposit base, it's about 140 or whatever it is today. And the customer score has gone from 60% to 90% -- 60% to 85%. So you're seeing the Top 2 Box score lift. That's an attrition go down, and that's the magic the team has done a great job with. But branches are critical to that because at the end of the day, half the transactions where we open those million check accounts are going in the branch because whatever personal proclivity they have, the idea is we don't want to make them decide. Is it more efficient one way? Sure, but not for everybody if they can't get it done, so you want to do.

Yes. One of the debates this week has been whether banks have kind of cracked the code on pairing wealth management with mass affluent and consumer. It feels like BofA has done that. The growth in Merrill Edge suggests good progress. What's kind of the report card there? And what's the longer-term opportunity for you there?

Well, the distinct advantage we have is when historically, pre-Merrill transaction at '09, you had a wealth management business that had sort of a bank-level brokerage business and then you had the Private Bank and you had a hole in the middle. So Merrill obviously fills that hole. 600 offices, you're [ in all the cities ], your financial adviser force second to none, et cetera, et cetera. But you had to also not be unmindful if there's a hole that can also exist, which is the investor starting before they get interesting to the financial advisers of private banker. That's what Merrill Edge does. It's now at $450 billion to $500 billion in assets. It started a -- we all talked about robo-advisor at the time. Its product is called MEGI. It's up to $20-odd billion or something like that there from scratch a few years ago. Digitally oriented, investor-oriented average account size coming on is $60,000. So this is not geared to people -- this is geared to people who are serious about their financial planning. But if you look down that list of 3.5 million or whatever odd customers it is, it's growing 10% a year. Those customers are the G1 customer of the future. Again, that continuum. So we can see it and we can do it, can also use it to service. So like for us, we give stock to -- as part of our annual awards to all our employees. So they all have Merrill Edge accounts. We do that with other employers so they all have Merrill Edge accounts. And therefore, you're starting them off and then you work them over time. And so it makes some money. It does a great job. It has a significant amount of deposits attached to customers of that business that came to that business. But at the end of the day, it's that continuum filling in, so it continues to grow. So it's -- the $4 trillion customer assets we have in wealth management, about 10% of it is in there.

So that graduation strategy is working?

Yes. And it happens more than through the Merrill Edge. It happens through the whole franchise. So one of the things that we work hard on is the entrepreneur is in the Merrill to do business with this company with us vice versa in the Private Bank. And so there's a lot of referrals that we count and goal in the market and celebrate their success and talk to all those market presence to help that local team out, the local banks while they have these global resources. And Merrill Edge fits into that. But it's also the people side of that, too, the financial advisers, private bankers, middle-market bankers, business bankers in all those smart consumer teammates. There's literally hundreds of thousands of leads that go from that consumer business to Merrill to figure out if they can do it. And right now, if you put it all together, that happens about 9 million times a year with about a 40% success rate, which people just don't move their accounts for kicks, you have to bring them something in, so it's pretty good right now.

So Bank of America is a global company. I'm not sure investors fully appreciate that roughly 15% of your revenues come from international sources. So can you give us some perspective on your international businesses and where you're investing for growth there?

So if you think about the business in international are really, obviously, the markets business because it's a global business to support the investors and bring in sites around the world and the research platform supporting that and the execution capability supporting that in all the major markets in the world. So that's kind of an obvious thing. You can't be a local capital markets player to be the scale size. So we're [ 1/3, 1/4, ] of the business going to go for global corporate investment banking, same drill. These are multinational companies. They operate around the world. They're trying to buy companies in all these different jurisdictions. You're trying to help them do that. They have cash needs across the globe. So we do that. That's corporate banking, investment banking and transaction services, GTS as we call it. And even the middle market, we do a fair amount, but it's much, much more directed. So obviously, in the North American side in Canada and Mexico, integrating middle-market franchises there, they're in the supply chains. We just -- we're doing it more in Europe now. The stability of the economy is the integration of world supply chains, the ability to understand the auto suppliers all over the world to supply into that might be family-owned businesses, wonderful businesses that we support. So we do that. And then for the private equity firms and their buyouts, the ones we do business with, which are a lot, but we also are trying to help them when they're buying a $0.5 billion company or $1 billion company as opposed to the biggest deals. And so we got a lot of room to grow on that. And then the cash management that's all together, we're making hundreds of millions of dollars a year investments in cash management generally to have that digital capability in CashPro and everything. But on top of that, we're driving the international piece of that heavily because the enablement for real-time payments in India, the enablement for -- we do. Some stuff we are the most of, like the bank notes program to all around the world is something we do that market share is very high. But other stuff, we have a lot of room to grow for corporates and moving money. And so we're building out that cash management. So it's 15% of our revenue, it's growing. It's in the GCIB space and larger corporate space. It is $100 billion in outstanding loans. So it's a big business now, and we'll keep investing in it. And Matthew Koder and Bernie Mensah runs international, Matthew runs GCIB, and Jimmy runs markets. Jimmy DeMare runs markets. They've done a great job. But we're very precise on where we're going and why and which clients so we can make sure we keep the risk where we want as we drive the business.

Any thoughts someday of taking the consumer show on the road internationally and...

We looked at that a decade ago on an online basis. And we decided that if we worked our tail off with a reasonable market share in the jurisdictions that matter, we could get $60 billion, $80 billion of deposits. It's like a bad quarter if we -- a bad year-over-year performance in consumer in the normal times. I mean now we get deposits all over the -- you run around circles. But if you looked at it, you say, "So why would I waste my time doing that when I'm not in Cleveland, Columbus and Cincinnati and Indianapolis and Minneapolis and Denver? Why wouldn't I fill out the franchise and spend my efforts there?" Because our market share in consumer is we've got a $950 billion in deposits or whatever it is. We're still only about 13%, 14%. So there's a lot to take, an efficiency that is incrementally extreme. And so we looked at it. We always will keep looking at it, but it's not something -- in doing it, we don't really add value on a branch-based business in country X. I don't know what's -- because it's so local. And so I don't know what we really bring to it. On digital, we have great digital capacity. The question is, can you make it meaningful enough to make a difference instead of investing that money? One -- theoretically, one set of rules, one set of regulations, one language and Spanish too, but you can then get lots of leverage.

Yes. And you mentioned the U.S. retail share being in the low teens. And JPMorgan talked about that yesterday, and they have aspirations to get to mid-teens, maybe 20% over time. Is that something fully in the possibility for you as you think about your share aspirations?

I think we've moved up over the last decade or so, probably 2 to 3 percentage points. And there's multiple ways to play against that, right? One is just being a good competitor in the place which we're already pretty sizable. But there's a lot of markets where literally, we have a lot of room to go. So if you look in some of these markets, we've gone from literally not being in there in the retail business. We may have had a Merrill teammates there, we may have had a private banking or commercial teammates there, take Pittsburgh. We bring in the branches and suddenly, we move up in deposits and we move ourselves up the chain. And the idea is not to stop. Let's keep going up. And so going back to why we focus on that is there's lots of room. And there's a lot of companies that deal with the mass American consumer base that have a lot higher market share in their line of business than their products and services than we do. It just takes good organic attitude and growth. And so we're sitting at a 14% share. That's usually measured by deposit balance. Our reach to customers is actually much higher than that, and sort of filling in all that is part of the challenge.

So we talked a little bit about digital. But just if we look at that, you've got a lead position clearly. You made a lot of progress in retail and digital. How much runway is there still? And what are the runways for financial benefits from digitization across consumer and commercial from here still?

I think it's still high because go to half -- 10 years ago, the sales of the products weren't enabled. Now they're enabled. Now we're at half-half, other half. And you're saying, "If half the people can do, why aren't the other half doing?" So what's the change? What's going to cause them to change? Some it's personal preference. That's going to be a while. Other people just knowledge, not knowing exists and they can do all that stuff. So there's just a lot of room to go. And so you take retail wire sending and now you can go on and send out a wire, that -- remember, that process to do that was a time consuming for the person, it costs money. It costs money for them and we charge them a fee. And now they can kind of do it a lot faster on their own.

It's a pain. It's a pain.

Yes. But it's simple now. You just go...

Yes, it's easy.

And so as we think about just a lot of room to go from efficiency, from a sales and then information flow, and we are supplying lots of information. So that 1.2 billion digital interactions a quarter plus and growing at 10%, 15% a year is just a lot of information where we can have an intimacy with the customers and do offers with Bank of America deals that very few people know exist. But it's a major -- it keeps growing and growing, and we can offer that to our clients, the commercial clients to provide benefits to the types of deals we can do that we just did with Starbucks announced where we use our brand, their brand to generate activity. These are -- but it's all digitally, we can't do that. It's not a branch pay. So it's just a lot ahead of us. And then you bring it into even wealth management, even though 80-plus percent, I think 85% of the customers digitally interact with, it's probably 15% of their interactions. And so the question is what else can you do? So signing document is critical, got that delivery of performance review. All the stuff you can do, you can keep adding that on. And so even if something as mundane as depositing a check, right now, 10% to 15% of the checks are still deposited physically at the branch, 85% aren't. And of that 85% round number split half to the mobile app and half through the ATM. And you're saying, Basically, can't we get all those mobile ATM -- all those ATMs to go to the mobile app?" And checks continue to decline, which is good because the other payments are more efficient, more effective, more secure. The question is, what's the holdup? So we spend a lot of time saying, "What's going to get John McDonald to change his personal behavior and how do we serve him the advice that would help them do that when they're ready?" And we don't ever try to force it, but we basically make -- educate people. And so Erica I read probably got 14 other sessions talk about AI going on at any given moment. Now Erica is a natural language processing, algorithm-driven model based on questions, and it now is 18, 20 million customers using it, growing 25% usage 5 years in. Every one of those would have been a phone call or a text or something. And so there's just ways that we can continue to drive the digitization. Even though you'd look at it and say, "Well, it's pretty mature." It's not -- it's mature, but it's not mature across every possible segment. And then the new offerings are not even found yet.

What are some of the other use cases for AI for banks in general across consumer and commercial? And then where are we on kind of that adoption and realizing some of the benefits today I can offer in terms of efficiencies and revenue growth?

We're early on because what's -- as I look at the providers of this, what the realization they've come to, which is the right one for people like us, as you think about how AI will be delivered in our franchise, a lot of them are saying, "I will take a model which is more tailored and put it on your premises on your data that will get the benefits of all this education learning we have but doesn't have you susceptible to proving which data helped you make the decision, i.e., not your data or some other input, which has a benefit of not being sold or inclusive, you run out of power, trying to have it operate." And we can train it and make it specific to -- effectively, that's what we do with Erica, but these will be much more sophisticated models. So that's coming out. So that's a standalone. And we think there's high value on that because it stops issues of data exfiltration and where its model and how it's decisioned and things that you can do by doing that. We know that because we've seen that, Erica. It's just that most of the really avant-garde people pushing out saying, "No, I'll just give you a license and your teammates can use it." So that's going on. The second thing is the major software providers are betting in the software. So all the major companies are sitting there saying, "I can bring AI embedded in my software so we're going to get the benefits of that." That might be Salesforce and the Salesforce management process, that literal relationship management process. It might be Workday and the other process. It might be the general ledger and the -- so there's information flow and stuff. So that's going to come.

And that's all early still?

Yes, that's all early, just coming at us like literally as we speak. And then the third element will be sort of the stand-alone public models and how you use them, which really is probably further out there. And then the fourth element is using the coding-type platforms, which are part of that public, available. We already do that. I think we have 1,000, 1,500 people coding on it every day, and we're building that literally as we speak. And they're finding efficiencies and effectiveness. They're also finding difficulties with it because how efficient is it, the people's personalities to write code, we're working through that. So what we're using it, obviously, Erica, obviously, code, we already use a lot of -- all our credit decisions are and consumer made automatedly. It's not with one of those models, but a model we developed over years and years. But we think there's high hope ahead of us for internal efficiency, software development. And then these models, like the thousands and thousands of filings we make, just checking them so we don't have to redo work. It's all about eliminating work and not having to redo it and being able to check at a pace and find things and help do things that will make a human more efficient. And you still would have a human touch in front of it, a lot of stuff. We can't file a piece of paper and say, "Oh, the model got it wrong for some regulatory report." So you need an interface, but you can save a lot of work before that. And that's what we're trying to do. So laws, rules and regulations, pulling them together, there's new models there, which would be interesting to help you more quickly take all that stuff that goes on, all the jurisdictions we do and put it in a way that people can read it and understand it. And they're going to be experienced people. So they're going to know if it's out of whack. But you're not necessarily saying I'm going to make the decision to do something with that. You're going to help. And so I think very early stages, we've seen it work. I mean we've seen it work to -- we're 2 billion interactions on Erica. And it took 4 years to get the first billion and about 5 quarters to get the second billion, and it's growing to 20%, 25% a year. The customers like it, we like it. And that's a very constrained, narrow case that if you start to get broader, you'll see.

Yes. So as you get more comfortable with that, the way that digitization has created efficiency the way Erica has AI more broadly should continue to do that?

And ultimately -- remember, we started -- when the management team was put together in 2010, we had 295,000 people. We went up to 305,000 people. We have 211,800 people as of last Friday. The company is bigger, the amount of activity is bigger, the complexity of the market-facing business is higher, the amount of loans. You pick. Yes, almost 100,000 less people. And it's pretty interesting. And that's just with old technologies coming through. Wait until some of this stuff comes through.

Great. Okay. Let's go back to old-school stuff, talk a little bit about deposits. How are deposit balances kind of mix or pricing performing so far in the second quarter? Things kind of playing out as you'd expect? And what are we seeing in terms of deposit growth?