Bank of America Q1 2024 Earnings Call Transcript (2024)

Thank you, Brian. And I'm going to start on slide 4 of the earnings presentation. So, Brian covered much of the income statement highlights, and he noted the difference in our reported results and the results adjusted for the FDIC assessment. So I'm not going to repeat that. I'd just add that we delivered strong returns. On a reported basis, our return on average assets was 83 basis points and return on tangible common equity was 12.7%. And when adjusted for the FDIC assessment, our efficiency ratio was 64%, ROA at 89 basis points, and ROTCE at 14%.

So let's move to the balance sheet on slide 5 where we ended the quarter at $3.27 trillion of total assets, up $94 billion from the fourth quarter, and the bulk of that increase was in Global Markets to support seasonally elevated levels of client activity. Outside of the Global Markets activity, we'd highlight both the $23 billion growth in deposits and the $20 billion decline in cash levels. So with that increase in liquidity, you'll also note that debt securities increased $39 billion, which included an $8 billion decline in held-to-maturity securities and a $47 billion increase in AFS securities. And those are mostly hedged U.S. Treasuries added with yields effectively at cash rates. At $313 billion, our absolute cash levels remain higher than required. Liquidity remained strong with $909 billion of global liquidity sources, and that's up $12 billion from the fourth quarter and remains $333 billion above our pre-pandemic fourth quarter '19 level.

Shareholders' equity increased $1.9 billion from the fourth quarter earnings as they were only partially offset by capital distributed to shareholders, and AOCI [Indecipherable] changed in the quarter. During the quarter, we paid out $1.9 billion in common dividends, and we bought back $2.5 billion in shares, which more than offset our employee awards. As part of those share awards in the first quarter, we announced our seventh consecutive year of Sharing Success compensation awards, covering more than 95% of our associates, and further aligning their interests with shareholders. Tangible book value per share of $24.79 is up 9% year-over-year.

Looking at regulatory capital, our CET1 level improved to $197 billion from December 31st and the CET1 ratio was stable at 11.8% and remained well above our current 10% requirement. We also remain quite well positioned against the current proposed capital rules as our CET1 level is also above the 10% requirement, even when we include estimated RWA inflation from those new proposed rules. Risk-weighted assets increased modestly, driven by client activity in Global Markets, and our supplemental leverage ratio was 6% compared to a minimum requirement of 5%, which leaves capacity for balance sheet growth. And at $475 billion of total loss absorbing capital, our TLAC ratio remains comfortably above our requirements.

Let's turn our balance sheet focus to loans by looking at the average balances on slide 6. Average loans in the first quarter of $1.048 trillion were flat compared to the fourth quarter, and they improved 1% year-over-year as solid credit card growth was partially offset by declines in securities-based lending. Commercial loans grew modestly year-over-year. We experienced modest improvement in revolver utilization in commercial lending in the first quarter, and that's being offset for the most part by paydowns as larger client financing solutions are being met through capital markets access. And lastly, on a positive note, loan spreads continued to widen.

Moving to deposits, we'll stay focused on averages on slide 7. And relative to pre-pandemic Q4 2019, average deposits are still up 35%. Every line of business remains well above their pre-pandemic levels, and consumer is up 32% with checking up 38% driven by net new checking accounts added, as Brian noted earlier. Linked quarter, total average deposits remained steady at more than $1.9 trillion. The total rate paid on consumer deposits in the quarter was 55 basis points, and while the rate increased 9 basis points from the fourth quarter, the pace of increases continues to slow. The mix of low-rate and high-quality transactional accounts keeps the rate paid low. Wealth Management and Global Banking also saw a slowdown in the increases in their rate paid and slowdown in the rotation out of noninterest-bearing accounts in the first quarter.

Focusing for a moment on ending deposits and movement from the fourth quarter, this quarter we delivered good deposit growth. Total deposits grew $23 billion, and they're now $100 billion above their trough in mid-May of 2023. Consumer Banking deposits saw growth in both consumer interest-bearing and noninterest bearing. Global Banking continued their more normal pattern of deposit seen for the past five quarters and up more than $30 billion over the last year. Deposit growth exceeded loan growth for the third straight quarter and our excess of deposits over loans expanded to $897 billion, and that's nearly two times the $450 billion we had pre-pandemic. You can see that on the upper left-hand side of slide 8.

We continue to have a mix of cash, available-for-sale securities, and held-to-maturity securities, and this quarter our combination of cash and AFS is now 52% of the total $1.2 trillion noted on this page. You'll also notice the continued change in mix of the shorter-term portfolio as we again lowered cash and increased AFS securities that are mostly hedged and have similar yields to cash. Also, the held-to-maturity book continues to decline from paydowns. In total, the held-to-maturity book is now down $96 billion from its peak, and it consists of about $122 billion in Treasuries and about $458 billion in mortgage-backed securities, along with $7 billion of other securities. Lastly, a blended cash and securities yield of 360 basis points continued to rise and remained about 168 basis points above the rate we pay for deposits. The replacement of lower-earning assets into higher-yielding assets continues to provide an ongoing benefit to NII.

Let's turn our focus to NII performance using slide 9, where you can see on a fully taxable equivalent basis, NII was $14.2 billion. Good deposit growth provided a strong start to the year for NII, and as Brian noted, NII of $14.2 billion increased by $100 million from the fourth quarter. Now that compares to our expectation and guidance of a decline of $100 million to $200 million, and that would have resulted in NII this quarter of $13.9 billion or $14.0 billion. So we did quite a bit better than we had originally expected. The improvement in quarterly NII in Q1 compared to Q4 included the benefits of higher-yielding assets and improvement in Global Markets NII, partially offset by higher deposit costs and one less day in Q1 than Q4 '23. Deposit balance activity more generally also aided in the beat versus our expectations.

As we look forward for Q2, we expect some modest impact of lower deposits in Wealth Management as clients make their seasonal income tax payments, and we expect Global Markets NII to decline, mostly seasonally, a little bit as well. So, we expect second quarter NII could approach $14 billion on an FTE basis. And further, we continue to expect that Q2 will be the low point for NII, and we expect the back half of 2024 to grow. And compared to our guidance last quarter, we're obviously growing off a larger base of NII after having outperformed in the first quarter.

With regard to that forward view, let me just note a few other caveats. It includes our assumption that interest rates in the forward curve at the end of the quarter materialize, and at the end of the first quarter there were still three cuts expected this year starting in June. Our forward view also includes an expectation of low-single-digit loan growth and some moderate growth in deposits as we move into the back half of 2024. And given our recent deposit and loan performance, we continue to feel good about these assumptions. Turning to asset sensitivity and focused on a forward yield curve basis, our sensitivity to the plus and minus 100 basis point parallel shifts in the forward curve at March 31st remains well-balanced.

Okay, let's turn to expense, and we'll use slide 10 for that discussion, where we reported $17.2 billion expense this quarter, including the FDIC assessment. Adjusted for the assessment, expenses were $16.5 billion, and the increase over the fourth quarter included a little more than $400 million in seasonal payroll tax expense, as well as higher revenue-related costs and, to a lesser extent, annual merit increases and other annual awards like Sharing Success awards provided this quarter. $16.5 billion was just a little above our forecast for Q1, which we made last quarter, and the increase is driven by better-than-expected fee revenue across Wealth Management, Investment Banking, and Sales and Trading. And as Brian said, that's a trade-off we're more than happy to make, bringing more earnings to the bottom line. And while expense is up almost 2% from last year, we simply remind you inflation is up by more than 4%, and we've increased our investment, and we're paying for the revenue growth, so we think it represents good work by our teams. As we look forward in Q2, we expect a decline from the Q1 level as we typically see about two-thirds of the Q1 elevated payroll tax expense come back out, and the remainder of the year expense is expected to trend down. Continued digital engagement savings and operational excellence initiatives should help us offset other cost increases for people and technology through the back half of the year.

Turning to credit on slide 11. Provision expense was $1.3 billion in the first quarter, and that included $179 million of reserve release due to a modestly improved macroenvironmental outlook as the baseline consensus expectations improved from the fourth quarter. On a weighted basis, we remain reserved for an unemployment rate of nearly 5% by the end of 2025 compared to the most recent actual 3.8% rate. Net charge-offs of $1.5 billion increased $306 million from the fourth quarter, driven by continued credit card seasoning and commercial real estate office exposures as swift revaluations from current appraisals and resolutions drove higher charge-offs. The net charge-off ratio was 58 basis points, a 13 basis point increase from the fourth quarter.

On slide 12, we show you the credit quality metrics for both our consumer and commercial portfolios. Consumer net charge-offs increased $115 million versus the fourth quarter from the flow through of higher late-stage credit card delinquencies. We included a credit card delinquency slide number 28 in our appendix, and we're encouraged by the trend of delinquencies because the late-stage increases slowed and early-stage delinquencies improved as well. And that leads us to believe we should begin to see consumer net charge-offs start to level out over the next quarter or so. All of this is still well within our risk appetite and our expectations, and it's consistent with the normalization of credit we've discussed with you in prior calls.

Commercial net charge-offs increased $191 million versus the fourth quarter driven by commercial real estate losses and office exposures. On office losses this quarter, we recorded charge-offs on 16 office loans: four were a result of sales activity, i.e., final resolution; seven were from losses that we expect on exposures that are in the process of expected resolution in the course of the next 90 days; and the rest we took as a result of refreshed valuations.

We're using a continuous and thorough loan-by-loan analysis, and we're quick to recognize impacts in the commercial real estate office space through our risk ratings. And that's resulted in several downgrades in the last few quarters. As a result of these quick actions and our downgrades in categorization, we've also refreshed the valuation of our reservable criticized properties, and we've taken appropriate reserves and charge-offs in the process.

Roughly one-third of our office exposure is now categorized as reservable criticized. And importantly, the pace of the increase in reservable criticized exposures has slowed each quarter since the second quarter of last year. So we believe the losses on these office properties have been front-loaded and largely reserved. We expect the losses to move lower in the second quarter, and we expect a notable decline in the second half of the year when compared to the first half of this year, absent any material change in expected real estate prices. In the appendix on slide 29, we've included a current view of our commercial real estate and office portfolio metrics as we usually do.

Okay, let's turn to the various lines of business and offer some brief comments on their results, starting on slide 13 with Consumer Banking. For the quarter, Consumer Banking earned $2.7 billion on continued strong organic growth. The reported earnings declined 15% year over year as revenue declined from lower deposit balances compared to the first quarter of '23. Credit card loss normalization also caused year over year provision expense to increase.

As Brian noted, customer activity showed another strong quarter of net new checking growth, another strong period of card openings, and investment balances for consumer clients, which climbed 29% year over year to a record $456 billion. That included market appreciation and also very strong full year flows of $44 billion. As noted earlier, loans grew nicely year over year from credit card as well as small business where we remain the industry leader. Expenses were flat year over year, fighting off inflation, merit increases, higher minimum wages, and new and renovated financial centers and technology investments. So holding expense flat reflected very good work by the consumer team. As you can see on the Appendix page 20, digital adoption and engagement continued to improve, reaching a record of 3.4 billion digital logins in the quarter and it showed good year-over-year improvement. Customer satisfaction scores at near record levels illustrate the continued appreciation of the enhanced capabilities we provide.

Moving to Wealth Management on slide 14, we produced good results and that included good organic client activity, market favorability, and strong flows. Our comprehensive suite of investment and advisory services, coupled with a commitment to personalized wealth management planning and solutions has enabled us to meet the diverse needs and aspirations of our clients. In the first quarter, we reported record revenue of $5.6 billion and a little more than $1 billion in net income. That net income was 10% from the first quarter of '23. Business generated positive operating leverage and grew revenue faster than expense while improving the pretax margin year over year.

While overall average loans were down year over year driven by the securities-based lending, it's worth noting the strong growth we're seeing in custom lending and ending loans in the Wealth Management custom loan book are up 6% year over year. As Brian noted earlier, both Merrill and the Private Bank continue to see strong organic growth and produced good assets under management flows of more than $60 billion since the first quarter of '23, which reflects a good mix of new client money as well as existing clients putting money to work. Expense growth here matched the revenue growth, otherwise fighting off higher investment costs and inflation. Let me also highlight the continued digital momentum here. As an example, Merrill has 86% of its clients now engaging with us digitally and 80% utilizing eDelivery. 76% of their eligible accounts are now opened digitally, so the cost for us to open is half and the customer cycle times are improved greatly.

On slide 15 you see Global Banking results and the business produced earnings of just less than $2 billion, down 22% year over year, as improved investment banking fees and treasury services revenue were overcome by lower net interest income and higher provision expense. Revenue declined 4% and driven by the impact of interest rates and deposit rotation to interest bearing and that impacted NII. The diversification of our revenue across products and regions continues to reflect the strength of this platform, and GTS and investment banking fees are good examples.

In our global treasury services business, some of the NII pressure from higher rates on deposits is offset by the fees paid for moving and managing the cash of clients, and that continues to grow with existing clients as well as with new client generation. As Brian noted, investment banking had a strong quarter and at $1.6 billion in investment banking fees, this quarter was the strongest quarter in seven years, absent the pandemic 2020 and 2021 periods. An increase in provision expense included the commercial real estate net charge-offs I discussed earlier, as well as a larger reserve release in the prior year period. Expense increased 2% year over year, including the 35% lift in investment banking fees from the first quarter of '23.

Switching to Global Markets on slide 16. We'll focus our comments on results excluding DVA, as we normally do. Team had another terrific quarter with $1.8 billion in earnings, growing 7% year over year. Revenue improved 6% from the first quarter of '23 and return on average allocated capital was 16%. Focusing on sales and trading, ex-DVA, revenue improved 2% year over year to 5.2 billion, which is the highest first quarter result in over a decade.

FICC was down 4% while equities increased 15% compared to the first quarter of '23, and the decline in the FICC revenues versus the first quarter was driven by a weaker macro trading quarter that was partially offset by better mortgage trading results. Equities was driven by strong trading results in derivatives. And year-over-year expenses were up 4% on continued investment in the business.

Finally, on slide 17, All Others shows a loss of $700 million driven by the FDIC assessment. Revenue declined year over year, reflecting higher investment tax credit deals, and expense, adjusted for the FDIC assessment, was down $113 million, driven by lower unemployment processing costs. Our effective tax rate for the quarter was 8%. And excluding the FDIC assessment and other discrete items, it would have been 9%. And further, excluding tax credits related to investments in renewable energy and affordable housing, our effective tax rate would have been 26%.

Thank you. And with that we'll jump into Q&A.