Bank of America Corporation ($BAC)

Okay. Up next, we have Bank of America, and I am delighted to have with us today Jim DeMare, Co-President of Bank of America. Jim, thanks so much for joining us.

Thank you for having me.

So Jim, you and Dean Athanasia have been co-presidents for about 9 months now.

Yes.

So maybe to start, can you spend some time talking about your new responsibilities to drive growth across the lines of business and what are you most focused on where you see the biggest opportunity?

Yes. So Brian asked us in the fall to take the Co-President Roland, as he stated, it was to help the businesses run, I think, was the quote. And so over the last -- particularly the last 6 months, as we were kind of getting through Q4 of last year was to really take a look across our businesses. And we've really started to look at them in the light of 2 continuums. One is we're in the wealth continuum. I think in consumer investments Merrell to the private bank and then also on the business and banking side, just thinking about that continuum. So from business banking to commercial banking to corporate banking and really trying to think about those as horizontals, not only in terms of how we space outwardly to clients, client acquisition or as they migrate along that path, but also tech and ops, so we can drive synergies there and then have those dollars available to a -- and it's really it's a similar approach to what I pushed through in the markets business when we were looking at complex technology and operations platform and really turning around and saying, where are the synergies, where can we drive that cleaner, simpler, better and then drive value out of that.

All right. So there's a lot to dig into. Maybe let's start on the broader environment and get your thoughts on the capital markets and trading environment. What are you hearing from core and institutional clients and how is lending activity trending after starting the year so strong?

Yes. So I would say, generally speaking, not dislike what you're reading out there is there's more, I would say, concern and cautiousness than is what's reflected in the general level of activity. As decoding recently and saying, it's kind of what you see broadly, whether it's on the consumer side or on the business side, where the surveys, various surveys are reflecting considerably more caution than what we actually see in the numbers, whether that's consumer spending still mid-single digits increase off a little bit from where it was, and that's off the most recent data that we had out. And on the investing side and on the banking side, it's similar, similar in estates caution. But at the same time, the environment is pretty right. Corporate credit spreads are tight, even though yields are higher depending on where you are on the focusing on the U.S. for a moment, but U.S. interest rates up anywhere. 20 to 50 basis points where you are in the curve, corporate spreads are tight. That's obviously attractive for both M&A and general CapEx that people are spending. And then from the investor side, the equity business has been where there's been increased activity and I don't want to say euphoria yet, but there's a lot of excitement about technology, CapEx and what the future looks like, whether you're utopian or dystopian, that is a big focus.

So it sounds like there is some caution in the server, but you're not seeing it in the numbers and the numbers are fairly resilient?

Yes. I would say from a corporate perspective, again, still a lot of dialogue on M&A exact timing. I think everybody is wishing and hoping for a quick resolution in the Middle East. That being said, nothing really of any note being canceled, just more like what's the opportune time to do that. So we still feel good about that pipeline. And my understanding is, John was pretty promesse about the IPO market. So I'm not going to repeat myself on that I repeat him on that, but it's a pretty exciting time for the capital markets.

The other question we get is the IB pipeline and how it's refilling with record equity markets on 1 hand and then concerns around the geopolitical environment on the other. What do you think about the pipelines at this stage of the?

Point still remains plentiful, I would say, again, a lot focused on technology, broader technology. Obviously, there's large IPO pricing this week. There were a couple of S-1 filings over the last few days from some of the larger names that are out there in these market capitalizations between take conservatively $900 billion to upper $1.5 trillion plus. These are numbers that we've never seen before. And even if you think about the typical 5% to 10% that is placed off of that. Those market caps, these are larger than total company sizes that we were talking about not too long ago. So I would say, again, there, people are disciplined. I mean, yes, there's enthusiasm around the tech names, but I think away from the tech names, companies with positive free cash flow and good outlooks or what people are focused on.

Got it. So we'll dig down into global markets and the investment bank in just a second. But maybe just while we're talking about the co-president role and just given your role, which, I guess, capitalizes off of your previous position running global markets. I assume you still have primary responsibility for the commercial and institutional side of the business. It would be great to get your thoughts on the connections of those 2 businesses and how that makes be more competitive.

Sure. I think it's one of those things where if you're not -- if you don't have both those capabilities, it's difficult to imagine how powerful they can be. I mean we talked about it during Investor Day, and we've talked about it. Time and time again, but a pretty powerful position to be in to have the banking -- traditional banking relationship also with the capabilities of a markets business. Why? It's pretty straightforward. But for those that aren't as familiar with it, I mean, obviously, many companies are international foreign exchange, whether it's hedging or payments, we can be there for them. Interest rate hedges also a big part of that business. I think people often overlook those 2, much more familiar with that capital markets, equity capital markets and that kind of IP and advisory work that you have there. But when you look at rates, foreign exchange hedging, plus payments, it's pretty powerful. And I think there are only a few of us that really have global scale and capabilities to execute on that. And I think it's really or appreciated.

Got it. Okay. So let's dig down into the Global Markets business. The trading business, you've seen consistent growth across the past 4 years. And you spoke about diversification, it's highly what are the most important drivers of this consistent growth?

I think the diversification -- well, I would say a couple of things. There's things unique to us, which I think the diversification. Again, unless you have it, it's difficult to imagine how powerful it can be. I always used to say that this may of some of the people in the markets business, whether markets go up or down, spreads tighten, widen, whatever it may be. we're less concerned about that. Obviously, a rising market is more favorable. But when you have the capabilities and the diversification across client types, a hedge fund is going to respond differently than an insurance company or a traditional asset manager. Similarly, you may have clients in could be foreign non-U.S. clients or U.S. clients that want to access Asia markets, for example, or European markets or South American markets. And so as long as we have top-tier capability across the business, we're going to earn the business and we're going to see it. So as opposed to someone who may be highly U.S.-centric or only a macro product or a micro product or boutique it's much more volatile. The highs may be higher in terms of what they earned during those periods. But the diversification without question gives us the ability to to serve clients and to continually drive rate.

So one of the investor questions has just been around you're getting more volatility out there in the market, and that's driving the sales and trading businesses higher. But I guess what you're saying is that the diversification helps the online business as well.

Yes. I would say for us, as a company, yes, that is a big driver. I think the -- the size and the structural changes in the market are also strong contributors. And I think, again, depending on how long you've been in the business, from 2010 up until well, let's say, 2010 through 2015 when new rules and regs were being put in place, and we were all trying to digest the cost of being in these businesses, we were also doing -- meaning there were higher capital charges, there were higher liquidity charges, so on and so forth, not surprising. But when you were in an environment that was heavily influenced by central bank policy and we had quantitative easing, you had suppressed rates, you had suppressed volatility and you had suppressed growth. So those all keep a damper on what the opportunity could be. Where are we today? I mean, we barely got over 3% rates for a 10-year period. and we've been above 3%. The size of the markets themselves have also grown materially. If you look at outstanding debt for -- whether it's corporate bonds, sovereign debt, you can kind of mortgage -- U.S. mortgage agency debt. All those are larger markets growing and not to mention the equity market, has grown considerably in the -- not only in the price in aggregate or market value of the indices, but take a look at the volumes. I think we were doing like billion a day in trading volume in equities pre-COVID, I think we got up to 11 or 12 we're between 15 and 17 a day today, more volume, larger markets, more volume, higher prices and getting a piece of that is valuable.

And then you mentioned structural changes in the market as well. How are you thinking about that?

So structural changes there, meaning because capital requirements increased for complex products and also with movement of products towards exchanges or swap facility -- swap exchange facilities, for example, for interest rates, more of activity of the banks today is in brokerage houses are in level 1 and level 2 assets. So those that are liquid, observable and higher trade volumes I don't even hear anybody talk about Level 3 assets anymore as a part of their balance sheet, which from 2010 to 2019, you spent more time than not talking about what your Level 3 assets were. So when you think about it, it's -- and again, part of Dodd-Frank and other, there's just been that shift towards facilitation of activity, more product being traded on exchanges, growth in market, and it's a pretty strong flywheel.

That's less capital drag as well. Yes. Okay. And then just to round out that discussion when we think about fixed income financing and NII revenues within the markets business, -- are you leaning into the FICC financing business? And what -- how does that drive the NII?

So yes. So an interesting point on that, we had been in that business for as long as I can remember in varying kind of forms. I joined the firm back in 2008. And I think once we got out of the financial crisis and the economies, we're starting to kind of rebuild and reenergized. We had done various forms of that activity. So we've been in it for a long time. Consumer receivables, mortgage, warehouses, those types of things, some credit extension. But I think the part that is misunderstood or maybe underappreciated is, if you take a look at the economy, the U.S. economy between pre-COVID to where we ended last year. I think we've had aggregate nominal GDP growth of 37% or 38%. And that's a considerable number. And if at the same time, Bank Capital was going higher. It wasn't coming down. By default, to achieve economic growth, which the U.S. economy credit, is part of our philosophy as an economy, that credit extension is part of economic growth, the growth has to come from somewhere, right? So when we looked at the business, we just looked at it and said, "Hey, these are assets we have expertise in decades long, clients we've been dealing with for a long time. We're going to focus on client selection, and we're going to focus on collateral and having robust structures, and we feel comfortable with it. I wouldn't say that we were going after something more aggressively or less aggressively during that period. But those -- I think those stats I provided give you a good sense of the economy was growing that there was always this discussion around what's occurring outside the banks versus what's inside the banks. -- nonregulated -- nonbank financial institutions grew and we were part of that ecosystem. So it was a little bit less about -- we always stick to our guns, so to speak, on what we view as what's the return that we want to achieve, along with the other criteria that I mentioned. So opportunistically, things get more attractive for us, and we'll look at that more closely. But I wouldn't we didn't lean out, we didn't lean in. It's a core part of the business, and we just follow it accordingly.

Got it. So while we're on the topic of the markets business, let's bring it a little bit more near term in Brian provided an update a couple of weeks ago. I think you mentioned markets was trending up for the 17th straight quarter at up 15% or so year-on-year. Where are you seeing the more strength there across facing equities?

Yes. First, I'd say, I think we're going to be a little better than that. It's been a couple of weeks since he spoke. As I mentioned, with interest rates on an upward trend, while credit spreads and the like have remained firm a lot more of the activity and revenue has been coming from the equities business, and that's what we've been seeing, I think, in general for the industry, probably for the last 12 months. Within that, there's a lot of desire to access Asia in the Asia markets. That's been a high area of growth. It delivers strong returns when you look at it. And so I would say equities, broadly, APAC has been a considerable part of that. When you get into the fixed income businesses, it's mixed. Some of the macro businesses are doing better than others. The same goes for micro. So growth has definitely been equity-driven.

And then any specific color on the investment banking side. I think Brian mentioned it was in pretty good shape this quarter.

Yes. I would echo it's in pretty good shape.

All right. Anything across M&A, ECM, DCM.

It's going to be a good quarter. We're continuing to see the activity. There's deals that have been announced not to get into any of them specifically, but activities remains robust.

All right. Perfect. And then while we're on 2Q, it seems like a pretty good environment for banks. And I know Brian touched on some near-term guidance points recently as well. But maybe you could cover those near-term points for investors that might not have got those comments a couple of weeks ago.

Yes. So overall, I would say, was constructive, showing the growth where we indicated we were going to have the growth starting off with operating margin. We had guided 2% to 3% is kind of a target for operating margin. We got close to 3% for Q1. I think we're talking north of 4% for Q2. So I think that's a good indicator of kind of where we where we're seeing things trending. We've talked a lot about NII and NII and repricing of assets and part of that pulling straight through to the bottom line and not occurring additional expenses on that is what's helped driving that. And so from a numbers perspective, I think we were saying 1.8, right? Yes, $1.8 million on investment banking and NII guidance, we're sticking the same.

Got it. Okay. So on the operating leverage side over 400 basis points in the second quarter. Yes. All right. Perfect.

And I think it's important on that to note, there's a lot of discussion or comments being made is that at the expense of investment, it's not. We view everything as there's -- we're always looking to grow where we should be growing and in a way that we should be growing, and at the same time, expense management and managing expenses accordingly so that you can make the right investments is the real philosophy for us. I mean tech investments are significant. We've talked about them. Our annual tax spend and how much we've been putting into specifics, whether it's AI and other. We want to keep driving that efficiency cleaner, simpler, better, reduce systems, bring synergies and then use those dollars to plow back into tech investment.

Right. So given the strong momentum you have on the revenue side and the operating efficiencies you're generating on the expense side, there's enough room for both investment spend and positive operating leverage. And then I think you spoke about 200 to 300 basis points of operating leverage for -- that was a full year number for 26.

Right. And within that, we obviously talk about it regularly. But in I bring it up, it's topical since I was talking about Asia equities, variable expense there, the BC&E is just part of being in the business. And so we do have vacillation and expenses, that's a function of variable expense, and we're very focused on maintaining the right balance, keeping fixed costs low, so we can generate this operating leverage when the environment -- whatever environment that may be and whatever business it is, but it gives us that opportunity to continue to drive value.

All right. Perfect. And let's pivot over then to the Global Corporate and Investment Bank. At Investor Day, you laid out a lot of growth opportunities. I think you pointed out that you have a medium-term target of 50 to 100 basis points of investment banking market share gains. So let's start on the investment banking side. Where is the biggest opportunity for share gains? And what is the business doing to drive that growth?

Yes. Great question. I think one of the things you're going to start to hear more regularly while we've done it, but the theme will be, I think, more consistent across the firm, nice to say in the markets business, doing more with the clients that we have today, comply that to customers. And if you think about across our businesses, whether it's consumer or various banking businesses plus investment banking markets. You start to see some of that play out. So when you look at our investment banking business, we've got M&A top 5 player, I think it's like 5.3%, 5.5%, something like that for market share. If you get into investment banking, overall for corporate, you get to a number where we are fourth. I think that gets us mid 6% market share, low 6% market share. But the really powerful thing is if you start to look at where we have relationships, corporate banking relationships that IB business grows materially. So we're -- I think it's like 300 basis points higher approximately where our market share with those clients. So that puts us up to like #2. So if you look at clients that were doing corporate banking and investment banking, we rank much higher further exaggerated in the commercial banking business. We have 12% to 13% market share and we're #1 with our clients there. And so it's nuanced. But once we have those relationships and the trust is built and then we have the capabilities, that flywheel just keeps running. And so that's a key component or a key part of the strategy. And then we had talked about other synergies that we had during Investor Day around international growth opportunities, banking, markets, payments, investment banking markets and payments, and that's a pretty powerful combination for us as well. We're -- for those businesses, we have about 40% of it when you look at -- it comes from international on a top line basis. Again, doing more with those clients that we're already doing business with. I think we had it on the market side. It was something like 95% or 96% of the clients we're already doing business with. We wanted to do more. You look at that -- it's about 40%, I think, for corporate clients, so there was the opportunity to increase that there. And when you bring those capabilities together, markets, banking, investment banking and corporate banking, it's a pretty powerful combination of capabilities. And again, building trust with clients and the ability to execute opportunistically when they need us to. And at the same time, day-to-day in the regular course of business is important. So 40% of the combined Global Markets and Investment Bank, Global Corporate and Investment Bank business is international.

Yes, I think that's the number that we. Got it. Yes. And when -- I guess, within that business, you outlined some of the opportunities that you're seeing in the near term. But as you look out over the longer term, where do you see the best opportunities there?

Well, they're pretty -- for international I mean it's a pretty staggering number. I think we cover like 80% of the Fortune 500 companies. It's an incredibly high number. The U.S. number is even higher. It's like 95% or 96% of the Fortune 1000. But we've talked a lot about -- for the most part, it doesn't mean that there's modest expansion in a country. But for the most part, it's in the regions we're already operating in. So obviously, and where there's more opportunities. So clearly, with higher interest rates in Japan and with the change in regulatory environment, there's a newfound enthusiasm for companies and non-Japanese investors to invest there. So I mean that just comes to mind is 1 that we have a lot of conversations about -- I mean, obviously, we're cover Asia well in Europe and Latin America as well. And obviously, in the Middle East, there's likely to be once things are resolved, that there's going to be a great need for lending and capital markets activity to rebuild a lot of the infrastructure and other that's been destroyed.

And as you get more of that market share both in the U.S. and internationally, is there anything more you need to do on the hiring side?

We're always -- we're -- I think we're pretty religious about reviews and performance and how we're doing periodically. We do make those hires. I can't say that right now, we're focused on one specific area, but we build in the flexibility in our planning such that, yes, we're going to staff up accordingly where we need to be. Candidly, I think the economic growth that we're seeing in the deal activity has caught many firms by surprise, and that's why it's been such an active environment for recruiting.

Got it. Maybe touching on private credit. We saw the $25 billion direct lending balance sheet allocation announcement. And as you think about some of the opportunities for banks to take back some of the loss share, whether it's from private credit, given the leverage lending guidance has been withdrawn. Where do you see the opportunities there?

So Again, there is a significant need for capital for all this investment that's taking place predominantly broadly defined infrastructure, digital infrastructure, power and broadly energy. And I think that those are the areas that you're going to continue to see it. The candid response on this risk appetite, some of it was limited by what the rules and regs were, and some of it is just simply limited by what risk appetite is and where we where we want to deploy our balance sheet. You live with loans once you make them. So we're very thoughtful about what it can look like through a cycle. That being said, the demand -- the size and scale of the financing that's being done is well beyond anything that can be handled in the loan market for banks. And that's why you're seeing the expansion or kind of regular access into the bond markets, which is why the bond markets were created in the first place was just that there was limited capital and balance sheet available in the regulated banking system. So the $25 billion that we communicated, that was our way of saying that we're continuing to remain involved. We're going to be there for clients and some of this may not meet what our kind of traditional profile of lending is, and we do have some capacity to deploy that when we think we need to. The reality of it is now most of the activity or a great deal of the activity you're seeing is more for investment-grade type credit demand. So I don't -- and obviously, the private credit sector is going through a kind of repositioning and a recalibration, but a lot more of the demand we're seeing today for lending is much more on the investment grade.

Got it. On I guess, the wealth side, you mentioned the well Continuum in your opening comments.

Super excited.

Yes. So maybe talk about that. Where is the -- where are the opportunity across consumer investments, Merrill, the private.

Dean and I spent a ton of time on this. It's really -- I think it's a highly differentiated platform. We talk about consumer investments when we talk about the consumer business. But when you really think about that across the continuum consumer investments plus what we say, Merrill and the private bank, it's just incredible. We're offering investments and investment advice to traditional consumer bank clients. Obviously, they meet a certain profile. But we have that channel, and that's an acquisition channel, and that's going deeper with clients that we already have a traditional banking relationship with. Then you move over into Merrell. We've got, obviously, financial advisers. It's very powerful in terms of acquisition, but it's also powerful for those clients that want more high-touch advisory role, but we also have digital capabilities that's about. It was predominantly used as the investment interface and product for consumer, but growth does occur in the digital space for the industry, and that's an area that we're focused on, not only for consumer, but for Merrell and for the private bank. And then you get into the private bank, again, another jewel. And when you really all these businesses, they're durable as they are today. However, there's areas where they can all grow, right, for Merrell, where it's I don't know if we disclosed the numbers, but it's the majority of it is coming from the earnings, top line and bottom line come from investments. Lending is a lending and banking. We do talk to those clients about that, but that's where there is a bigger opportunity for us, not only on the investment side, which people think about, but lending and banking. And when you see those relationships, again, like we were talking about on the corporate and institutional side of the business, it really drives a powerful flywheel. The private bank is almost the reverse, predominantly lending and trust services with less on investment, and we think that there's opportunity for growth there on the investment side. And we just think that there's growth opportunity really across the board. And we've been unified in that approach for tech dollars, for operations capabilities, again, that's another part of the flywheel where we need to drive that efficiency, make it easier. And then this way, we can have both external and internal efficiencies that we can just drive.

So maybe a tangental topic that's come up more recently is around funding costs, cash sorting, consumers and wealth management clients maybe using a little bit more AI to move their deposits around. What are your thoughts on the risk to the banking industry at all?

Like any new -- any innovation that's talked about, we spend serious time having discussions and analyzing it. I mean, yes, this is a more advanced version of when you could first pull up, I forget what the company was. But you can look at different borrowing rates for mortgages when someone just decided to aggregate them on the Internet and turn around and say, here's your menu of what you can get for a mortgage rate. So we're focused on it. We're not you can't dismiss anything. I do think we're -- for a certain profile of customer or client, that's beneficial. We're not seeing requests for broad adoption for that yet, but it's obviously on the menu of things that we think about and are focused on.

All right. Perfect. Maybe let's end on the capital side. The trading businesses saw a sizable increase in balance sheet in the first quarter. Can you talk about maybe the trade-offs as you think about the deployment of excess capital? And how should we think about which businesses get more or less capital here?

Yes. So I think there are a few ways to look at it. I don't think that there's a simple answer. We're always trying to optimize capital and financial resources. So capital is the 1 that's the most easily observable and reported. You obviously have liquidity, you have balance sheet and you have some others that are of less consequence but are all part of the evaluation process. So what we really try to do across the company is to turn around and forecasting, as you know, can be difficult. But have the flexibility to move capital around when we can and to go back to the markets business and our discussion on what those balance sheets look like. It's highly liquid. -- securities where most of the balance sheet is deployed once you exclude the loans in that pure lending part in the markets business. So you have balance sheet, capital and liquidity that's scalable that we can adjust up and down, and we have to be very cognizant of what the rest of the company balance sheet looks like. So we try to match what clients need, where those opportunities are with looking at what the returns are by business. Obviously, some businesses have much higher capital returns because they use a lot less capital. So yes, the markets business always is a larger user and we have lower returns there. So there's optimization not only within the markets business to continue to drive that higher, which we grew a couple of hundred basis points higher over the years that I was running a continuous focus on driving continuing to drive that higher.

And do answer the question? That does. And just to follow up on that with the new rules that we have, does that change anything in terms of how you're thinking about capital allocation?

The process isn't changing.

Got it. Right. Fair enough. With that, we're out of time. Jim, thanks so much for joining. 1

Thank you. Appreciate it.