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

Got it. And maybe just as we have this evolving kind of Basel III endgame finalization in sight, you've seen your kind of upward G-SIB surcharge pressure. Just how do you kind of think about capital in the new regime?

Well, I think -- so I think the upward pressure is kind of mitigated, which is good. And if they index, that's important. When they index from in the final rule will be important because that -- are we going to go back to 12 that was in the original statute. Are you going to pick 19 or you're going to pick 20 whatever period of time they do, and that they'll announce a rule and that will start. But the concept of indexing is critically important. And then the methodology changes for some of the stuff. But we've been below the add-on for the stress test for a long time, most years. So that's not really relevant. So we'll drop down a little bit. But at the end of the day, what we watch and what the rating agencies and other people who actually own the debt and think about companies, you watch the tangible common equity ratio and at you're getting to the point where you got to be careful. Can you go a little lower than that now with the amount of no-risk assets we have on the balance sheet? Yes. But remember, if you go back and think about 2008, tangible common equity ratios of 3% didn't fare well in the first bump in the night. And so we've looked heavily over time at what happens to banks that have gotten in trouble. And we've -- as part of a risk thought process, we think hard with our Board and others about what's the right tangible common equity because at the end of the day, that's what the rating agencies. They have their own risk-based methods and stuff. But at the end of the day, they also look at that. So you're trying to manage the dichotomy at 6%, we're kind of -- we're [ 607 ] or [ 605 ], whatever it was last quarter. You're kind of around the range where you got to make sure you maintain it. But you're looking at all that, but we don't really feel any capital pressure to build at all right now. It's -- we can return it all if we don't have good use for it.

Got it. Maybe pivoting back to the income statement. You kind of gave an overview of guidance at the onset. You talked about good loan and deposit growth. Net interest income has kind of been running at the upper end of that 6% to 8%, at least you talked to for the year. Is that still kind of the way to think about it?

Yes. So if you back up the net interest income growth we gave you estimates for the year back on Investor Day, and then that was multiyears and Alastair showed the charts and stuff. Everything has worked out. And if rates go up a little bit, that will help a little bit even on that. So we feel very good about that, not only in the percentage growth, but importantly, to get the 1% plus return on assets on a 6% tangible equity basis for the 16% plus ROTCE you had to make sure that you were also getting the balance sheet tightened back down as it came through. So the net interest yield part of that, I think I'm trying to remember off the top of my head, I think it was up 14 basis points second quarter last year, second quarter this year, which doesn't sound a lot, but that's 7% on the basis of 2%. So it was a big move, and we expect that to keep moving. So you're going to have larger dollar volume growing at upper single digit, we said 7%, 8% type of numbers and then NI yield growing 2%. And that doesn't stop -- that just keeps rolling in here because of the repricing dynamics of the balance sheet, the loan and deposit growth, which we're not assuming levels that we haven't grown at for many years now are growing at now. And then it just keeps compounding in. It's a wonderful thing. So even the loans from last year's second quarter, this year second quarter, $20-odd billion, $30 billion of loans, whatever it grew, you capitalize that out at a couple of hundred basis points of spread. That's a lot of NII in the future. So we're just running this virtuous circle of more, but the NI yield is picking up, which then makes -- showing the balance sheet is getting more efficient as the repricing goes through. And it's a multiyear context here.

I guess at Investor Day, you talked about a 2.3% medium-term net interest margin. With the Fed potentially Wednesday, 10-year note yield is now over 5% today. Does that make you feel more comfortable with that projection?

It does because the repricing comes in at a higher rate. The trick is you always have to remember when the rates are higher, lower, what's going on around you to make sure there's loan demand and other things. So -- but we feel -- it makes us feel better, yes. And the NII story has just been sort of relentless. You don't see day, week, month. We see day, week, months building into the quarters, and it just keeps going up, and we feel very good about it because it's coming off that core $2 trillion advantaged deposit base now growing, was $1.9 probably $1.8 it went up to $2.1 trillion, $2.2 trillion, came down and now it's back over $2 trillion and growing. But within that, we actually have more core deposits than we were back then, and we were pretty tight back then. So that NI yield then kicks off of that. So you start getting $2 trillion deposit funding advantaged and drive that. And then the loan growth at the end of the day, it's coming to commercial business in the areas where the yields are pretty good.

And then maybe kind of shifting to fee income. You mentioned investment banking pool down 10% year-over-year, down more than 10% for the third quarter. Maybe just talk to kind of where in the underperformance you see? And then kind of looking out what pipelines look at? Is this kind of more of just a seasonal slowdown and we expect another good 12 to 18 months looking out?

So just backing up more philosophically, we've got as many investment bankers as anybody else. They're doing a great job. We focus a lot on the middle market connectivity of those investment bankers and how we go to market in the field. We started really around COVID, we had 60 or 70 people concentrated on the middle market. What happened was we realized we had excess investment banking. If you remember those days, it was pretty quiet. So we basically pushed a lot of them to help us cover in the middle market. We're up to 250 people, and we're growing that. That's about 1/3 of the business between -- in the it's all kinds of things. It's not only debt capital markets, little -- some equity capital markets and M&A, but it's also beyond that, it's also rates and currencies, people buying hedges, floors and ceilings and foreign currency and all that stuff. So it's a great business for us. But as we look at the current pipeline, the current pipeline is very strong. And so -- and last year, we did about [ $2 billion ]. This year, [ $1.618 billion ] is what I said earlier. That's a good quarter for us in some ways, but the pipeline is strong and part of it is just getting the deals through the system. Now the only question is if rates go up a lot, will that slow down some of the financing demand. And right now, we're seeing it solid and the pipelines are staying full and the deal has got to get financed and get done. It just may start to restructure on some of the pricing and stuff like that. But the activity is extremely high. People are trying to get stuff done strategically across the world and also trying to get stuff done. There's just -- in the U.S., especially, there's a fair amount of movement from generational aspects of people selling their businesses as the world gets a little bit early and the population is frankly aging in the U.S. So there's more people selling businesses just to get out. And that's that middle market thing, which is great or recapping family business to take some money off the table.

And even I guess if trading is flat year-over-year, it probably still makes 2026 a record year and a very big number. Just how do you think about that business looking out in terms of -- it was kind of flat to down for many years. We've now had 4, 5, 6 years of kind of growth.

Yes. These guys do what they're supposed to do. We get -- this will be the 17th straight quarter of growth. So we're in a dog fight for it. But that's a lot of years. And what we started on about a decade ago was getting the infrastructure set and dropping the breakeven cost that's under Tom Montag and Jimmy and now Sue and Dennis. And the idea was you had to bring that cost structure down to be more precise and then build out from there, and they dropped it by almost $1 billion a quarter. We started making good money, got the returns up. The returns now is a debate, are we going to get [ 14 or 13 or 16 ] in a quarter, not [ 8, 9 ]. There was a time when people would say we ever get over double digit. And so that's all good. And so I feel very good about the business. We're built out in all the trading venues. We continue to add capacity in places where we see opportunity to support the clients in the room here and elsewise in terms of their investment strategies. We continue to work on the funding structures and things, more structured notes to fund itself and so it can grow. But we've got about a $600 billion balance sheet, about $1 trillion in that -- in the last 6, 7 years in that business, and we will continue to grow it where we see share opportunities that we gain is really in the fixed income area in up until the recent past. And now the equities have had strong performance. So we feel good about that. It's -- there's 57 regulators touch that business to be in a global business for that 57 different regulators. And they're not always consistent in their points of view and the capital calculations are different. We were in a management team meeting this morning, we're talking about the calculations in Europe are slightly different. And so it's not an easy business to do, and there's only a few of us can do it to scale. Now when you have it, the interesting thing is your middle market U.S. based from both research around the world plus execution around the world, if you -- a middle market company has their supply chain and needs to do trade finance and currency conversions, et cetera, they need to know about what's really going on in Vietnam, Thailand. You can bring India if we can bring people to them. And so it's a big competitive advantage, but it takes a little work. It's a lot of -- about $1 billion of systems development work a year between that and the capital markets area to keep it current good products, good services and everything you can create a new co and do it tomorrow morning with some AI and stuff. It's a lot of data. I want to say [ 3 billion ] trades a day we post, we have to submit to the regulators. It's a lot of data, a lot of execution. The team does a good job. And it's a scale business. We make good money, and we expect it to continue to grow.

And then you mentioned, I think wealth management fees up 10% to 15% in the quarter. Just how do you think about that in terms of what the market gives you versus Bank of America's advantages and just the outlook there, particularly in light of evolving AI and the like?

Yes. So I think if you step back most broadly from -- what we have uniquely at Bank of America is a continuum from first-time investors from Merrill Edge all the way through the highest, richest families in the world with the Private Bank and Merrill. And what we did is build it so it could go womb to tomb, so to speak. It could start with people and work there through the entire life, and that was the principle. So Merrill Edge is $600-odd billion and it's growing about 10% accounts a year. The average account is $100-some thousand versus $2,000. These are good core investors. We work integrated in the model in terms of its presentation in the digital space and how we sell it to clients and stuff. And we have 2,000-plus people in the financial service centers that can sell it. And so it's a good product. And then you build into Merrill and the Private Bank, which are more traditional financial advisory-led businesses -- the combination gives us the largest trust business in the world in trust and estate execution. We do a ton of art lending and airplane lending and stuff that's unique. We do -- we administer a lot of trust, which means we help administer assets around the world and all kinds of things, oil and gas and stuff like that, which is pretty wild. And it's a great business. And so the idea was to get Merrill to grow its net new assets better because the private bank was fine and Merrill Edge was fine. And the reason why Merrill is just so big. When I say they're up 10% to 15%, that their revenue line from their brokerage and AUM fees is $5 billion a quarter. So it's 2 to 3x the investment banking fee rate and near the trading. So you've got to get to grow, and they're doing a good job, Lindsay and Eric. But we're recruiting again, and we stand out recruiting the dealers got crazy and everything, but we're recruiting exactly what we want in the 600 offices we have in the 97 markets we have because our view is we have a competitive advantage because our Merrill teammates working in a market with our consumer teammates, our business banking, which is $0 million to $50 million segment and our middle market teammates, $50 million to $2 billion is a unique aspect. And that's worked, and it continues to work, and it continues to give us a way to acquire. And then our -- the work we do even with some of these companies going public to gather assets through their entire employee base, not just the C-suite, so to speak. The team has done a good job. But it really comes down to a little more recruiting, so the adviser population grows. The productivity we have is second to none. And what you saw in the second quarter is you saw, I think, 300 or 400 basis points GWIM's profit margin was that maybe more. And you're seeing that come back up to the traditional 30 as the value of the loan and deposits kick in. It is a bank of size, $280 billion of deposits, to give you a sense. So it's as big as most of the banks that we'll be presenting here. And so it has the same dynamics. So as NII picks up in the franchise, they get a good chunk of it. And the lending side is a very strong lender. So -- but the key is just more advisers and deploying more advisers. Now AI, we talk more generally about it. AI is important to this business on the ability to assist an adviser to do even more and more for the clients and potentially handle more client interactions and less sort of day-to-day work for both the financial adviser or the PCA, the private client adviser and the people that work for in the portfolio management process. This will have a big impact. It just got to be done carefully crafted, but we still believe a human is the most important adviser we got. And so we -- remember, Merrill Edge is all automated. If you remember the days of robo advising and all the stuff, we have, I don't know, $35 billion, $30 billion in that. Other people got out of business already because itself got investing. You put in your parameters. It balances all the time. It uses very low-cost structures. But that's $30 billion. The whole business is trillions and trillions. So it's not -- people want somebody to help them and because it's hard stuff. And that's -- but you can make that advisory structure more important. So it's a great business, and you'll see it continue to grow and we'll continue to invest in it. And the team running it between Katie and Lindsay and Eric do a good job. And then Merrill Edge is sort of a hidden gem because it just keeps producing and growing and keeps delivering. And I was on Jim Cramer's show the other day, and I was on the floor of the exchange and somebody asked me when the last time I rang the bell was it was now $0 trades in 2005 or '06. This is not a new concept. We took equity trades to 0 at old Bank of America back then because we just didn't have that much revenue lose and we figured it would do it. So the idea is you're not going to make money charging 0. So the question is how do you make money in the advisory side, even that...

Makes sense. I guess on the expense side, you tried to move us away from looking at expense growth in terms of dollars or percentage and more focused on operating leverage. You started out the year at 200 basis point target. July, you raised it to 300 to 400 basis points. Is that still the right way to think about it?

I think I'd hold us to 200 to 300 only because this quarter was such a quick adjustment on the fee side. But at the end of the day, if you get the NII growth we're supposed to get in at 60% of the revenue and keep the expenses that will go up like on the wealth investment management business. If you look year-over-year second quarter last year this year, the [ $1.2 billion or $13 billion ] we had in expense growth, $400 million of it was just the incentives in that business. So that's good news. And then another $400 million was BC&E and related stuff in the markets business, which was good business. And so the rest of it was about a 2% or 3% growth rate. But we have to be able to grow the expense basis for inflation. We keep managing headcount down, pay people more and invest more in technology in the physical plant, updating it, making it better, data center environments, all those things. That, for a while, we could keep taking it down, then we hit the bottom in '19 and said, we're going to have to go to operating leverage and 200 to 300 basis points is what we should hold ourselves. If the capital markets kick back in, we push back. But I think right now, I'd look at us to get in that same range. And we should -- this quarter will be difficult just because of instantaneous change in the rate of growth of fees year-over-year. But the fourth quarter, we should back in the saddle. And this happens like over the last many years, we had 5 years straight of operating leverage, and we had 13 quarters. And then we had -- this was our fifth or sixth. So we would have been back on the street, but it usually happens when you have this quick turn to the market. It's just hard to get underneath it for a quarter.

Understood. Maybe just talk about how AI can maybe impact expenses and the bank overall. You guys all report earnings the same day, so not everyone goes through your materials, but I know Slide 20 of your earnings deck really stood out to us over 300 approved AI and machine learning use cases, 114 live generative AI applications across the country -- across the company. Just maybe talk to kind of the opportunities and the risks. And you talked to this kind of 55% to 59% efficiency ratio target over time. Is even something better than that conceivable?

Yes. So I think -- so this weekend was a lot about the risk in AI, and that largely is around agents just left to operate, and we just don't do that. That was a decision we made early on was, wait, we are responsible for everything goes on with our customers. And so our teammates that use in the investment banking function that do pitch books with a spreadsheet that's been helped by AI own -- and when they get demonstrations, they all talk about, they own every cell. And they have to -- and that's why the practice of AI has gotten so much better to annotate every cell coming into the spreadsheets, so you can find it and double check it. So you have to be accountable for it. So the risk for us was really the risk of letting -- start getting answers without humans checking to make sure the answer was right, both just common sense, but also literally making sure it's right to -- that was one risk. And then obviously, the cybersecurity penetration risk. And both of those, the team is working, and that's a cost pressure, frankly, in the current term is just building the amount of patching we all had to do across the industry. And then so the debate this weekend is more about agents and what can they do if you let them go and operate and how they operate and some of the stories about the Hugging Face. But for our sense, we're trying to control the risk. Now you flip it around, what's the reward of this. We're now probably $130 million, $140 million of implemented things at a cost of $400 million, generating a benefit of $800 million, and we're in a process of capture spending that money and getting those costs, but they're all agreed to and being going in the system. And we think that's doable. We're down -- we've been able to manage the headcount very carefully. So we're about 210,000, 9,000 people a day. We're 212,000, 210 in the beginning of the year. That's just all managing attrition, 8% 8.5% right now, times 200,000 plus people. That means you got 1,000-plus month, all you do is hire 1,000 versus 1,300. You got have 300 people. So we're always managing the headcount because at the end of the day, our teammates have got to use AI to make our company better and make our clients a better experience. And there, we went out and asked for thousands of ideas from them to help do it to help make their jobs easier. When you look at our employee scores over the time, we're topping out where on the general scores are great. The only thing to improve upon really is make my job easier. And this gives us another tool, but the teammates will know how to do that. So we're doing that. So you're seeing the applications being done. We deployed across all the teammates have access to AI. We haven't had an issue because of the way we negotiated the license and stuff in terms of tokenomics and all that stuff. could be an issue downstream. The coders, the 18,000 coders we have on our payroll use it and have saved 10%, 15%, and that we're just deploying into more work. We're deployed across all the different businesses in general. We're seeing the audit team and the legal team and others using it. And how we -- each idea is costed out to the degree to say, I spend X, I get back Y, and here's the payback and et cetera. But importantly, the way you think it from a macro basis is, are you seeing the revenue of the company grow in the headcount in the company march down. And that's the productivity, and that's what you're seeing go on. And now we're not laying off anybody. We don't have to do that. All we do is just manage the hiring carefully, and we can manage into this. And so it's been a pretty effective thing. But we're about 130, 150 use cases implemented, not theoretically about 50 a quarter coming on -- we expect to double the expense budget for it next year. It's deployed all 209,000 people have access to it. The range of things they have access to keeps increasing with the specialized models are needed, we've got access to those models. All the general providers you hear out there, they're providing AI embedded in their core offerings to us. platform offerings, we're taking advantage of that. But it's good. But we have -- we own the answer. And so you have to do it carefully from both the teammate to make sure the teammate gets is able to make their work easier else you just not gotten anything out of it and from the client to make sure the client doesn't start getting wacky answers. That Erica that you see, which we started developing 10 years ago, which is an AI thing, deployed 7 years ago now, [ 20 million people, 200 million times ] last quarter, only does 700 intents. And 701 now you hear about intent management that's prompt in the different words. Nobody know what the hell we're talking about. We said we're talking about intents and Erica. It started at 200 got to 700, but it's only 700 because it has to be absolutely right because the tolerance to get a wrong answer is no. If you do the math on how many inquiries go through that each quarter and what it would cost you if you had a human answer that inquiry, either a chat, an e-mail or a phone call or branch visit, you would come up to about 10,000, 12,000 people. But it has to be exactly right where you're going to need 12,000 people tomorrow. And that's the care that you have to take because we don't need new regulation in our industry because we're already really good. We make a loan, it discriminates. -- we're liable that. I don't care what machine you made to do. If you give a wrong answer to a client, the client is going to walk out on. If you come to one of these clients and show a presentation has mistakes in it, they're going to let you have it, and they should. And so that will gate its application in some ways. But the reality is it's already having a pretty good impact, and we expect it to have more. But we've done it with the idea generation and idea cost and the way we did the dot-com area, the e-com build-out, the way we did some of the digital stuff, the way we did New BAC, it's a very disciplined process to make sure that you're getting the value out of it, but also that you're getting the teammates to drive it, not a top-down idea.

We have 3 questions left in about 3 minutes, so we'll go quick. Credit quality, quick.

[indiscernible].

Higher rates, AI build-out, private credit, anything keeping you up at night?

No. We don't see -- consumer were prime business, delinquency rates and stuff basically -- came down, went up a little bit, came down and flattened out and good. Commercial, 3 or 4 years ago was all real estate, blah, blah, blah. That's all the way through the system. Office building is never going to be used again, guess what? And so that's all -- anything -- that's pretty much the system. So we feel very good about the commercial credit, the ratings, the upgrades, downgrades, et cetera, in the consumer credit. And so we feel very good about it. And -- but we, in our industry and we in our company manage leverage carefully. We don't overlend and that's been -- that's holding us in good stead right now.

I'll combine the last 2 questions and kind of maybe tying everything together, but we had this big Investor Day last November. you laid out a goal of 16% ROTCE within 2 years, 17% to 18% within 3 years and the potential to do better over time if the environment helps. Just how do you feel about that journey today? What do you think needs -- what do you think Bank of America needs to do to operate at kind of a high-teen level of returns and kind of the KPIs you laid out, any ones you're kind of behind on that you need to do better at?

Well, from the ROTCE, we hit it last quarter. So then the question was people were saying, well, can you get to the -- from the 16% to 18% faster. And as I said then and I'll say now, we're letting it all flow through. We're not like saying, oh, because we're at 16.2%, we can invest more. So the way we're operating the business is the same dynamics whether -- and so we've hit the 16%. We should continue to make progress. Frankly, as the net interest income keeps growing and becomes a bigger part, it's gone from a low of about $10 billion to $16 billion plus. That's $6 billion a quarter. That's a lot of efficiency because the amount of work doesn't change a lot. So as that grows, that compounds up. So we feel very good about that path. And so if you think about it, the 1% ROA, we're operating at over 6% is 16%, and we're there. And then the idea is just you tighten that balance sheet to come back to the NII yield, that will push up. So we feel very good about that. We hit the high end of the efficiency ratio. This quarter will get bumped around, but it will be around the top end of those ratios. So we feel good about getting that. That's just literally just maturing the NII again through a lot of that comes from that just operating the company well. The net new asset was the one that the team put the biggest leap on the table in the credit card growth. The credit card growth, actually got 4%. They said 5% last quarter. So they're making good progress. The net new asset -- the key is to be focused on the fees, the net new fees you're generating and that they're already hitting everything you said the gross assets, non-paying assets is a trick because we're losing -- we always have a lot of conversion of the brokerage. So Lindsay and Eric and the team are working on that. But we feel good about all those targets. And because we wouldn't tell you unless we had a path to get there in our current plan, and we're hitting it.

Perfect. On that note, please join me in thanking Brian for his time today.

Thank you.