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spk07: Good day, everyone, and welcome to today's Bank of America earnings announcement. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question and answer session. Please note this call may be recorded, and I will be standing by if you should need any assistance. It is now my pleasure to turn today's program over to Lee McIntyre.
spk04: Good morning. Welcome. Happy Monday, and thank you for joining the call to review Bank of America's second quarter results. I hope everyone's had a chance to review our earnings release documents. As always, they're available, including the earnings presentation that we'll be referring to during this call, on the investor relations section of the bankofamerica.com website. I'm going to first turn the call over to our CEO, Brian Moynihan, for some opening comments, and then I'll ask Alistair Borthwick, our CFO, to cover the details of the quarter. Before I turn the call over to Brian, just let me remind you we may make some forward-looking statements, and please refer to our non-GAAP financial measures during the call. Forward-looking statements are based on management's current expectations and assumptions that are subject to risks and uncertainties. Factors that may cause actual results to materially differ from expectations are detailed in our earnings materials and SEC filings available on our website. Information about non-GAAP financial measures, including reconciliations to US GAAP, can also be found on our earnings materials that are available on the website. So with that, Brian, I'll turn it over to you. Thanks.
spk05: Thank you, Lee, and thank you, all of you, for joining us today. This quarter, thanks to a great team here at Bank of America, we reported $6.2 billion in net income, or $0.73 per diluted share. We delivered on our fourth straight quarter of operating leverage. We grew revenue 6% while expense rose 1.5% for 4.5% of operating leverage compared to quarter two, 2021. We also saw a 21% year-over-year improvement in NII. These earnings generated a return on tangible common equity of 14% and return on assets of 79 basis points. As a reminder, when comparing our earnings in the second quarter of 21 to the earnings this quarter, in the second quarter of 21, we recorded two items of note. In that quarter, net income benefited by $2 billion from a tax adjustment for a UK tax law change, and that was worth 23 cents to EPS. We also released $2.2 billion in credit reserves during that quarter that benefited earnings by 1.7 billion, or 19 cents, in EPS. This would bring that quarter's reported EPS of $1.03 down in the low 60s, and that compares to this quarter's $0.73 per share. This gain is illustrated by the increase in pre-tax, pre-provision income, which would exclude those two impacts, and that was $7.4 billion this quarter, improving 15% in PPNR improvement from the second quarter of 2021. Let's go to slide three. Let's talk about some of the drivers of results. The organic growth engine at Bank of America that existed pre-pandemic is back in full place here, and you can see that in the second quarter of 2021. This reflects in net new checking account openings, net new consumer investment accounts, net new household growth and wealth management, very strong loan growth across all products, and good performance by global markets and investment banking teams, even given a quarter with volatile capital markets. Our expense management continues strong, and it benefits by the best digital banking platform in the world. Once again, we drove more users, saw more logins and usage, and that generated 20% more sales from the platform compared to last year. Our asset quality remains very strong, with net charge-offs in the second quarter of 2021 still 50% below pre-pandemic levels in late 2019 when credit was pretty good. Breaking down the performance by segment, I'd make a few comments. Our consumer banking segment continued to see good momentum as we grew loans at the fastest quarterly pace in nearly three years. We added more than 240,000 net new checking accounts in the second quarter alone. We opened new financial centers and renovated others and deepened digital engagement with both consumer and small business clients. And after considering the highly elevated consumer income tax outflows, payments of taxes, which is good for the government, we saw good deposit activity. In our wealth management segment, in a period of declining market values, where stocks and bonds had the worst first half in five decades, revenues still grow in that business 7% year-over-year, and we expanded our pre-tax margin. Our banking business with clients overcame those market values and weakness. We added more than 5,100 net new households across Merrill and private bank. Across our entire wealth platform, Merrill, the private bank, and our consumer investments team, Merrill Edge, client balances, including deposits, investments, and loans, totals $3.8 trillion at 6-30-2022, aided by nearly $150 billion of client inflows over the last year into those businesses. Our global banking team grew loans 5% in one quarter. That's 5% in a single quarter, 20% annualized. We also saw global treasury services revenue as customers utilized our services to manage their quality stand up well in the quarter. Overall revenue in global banking was impacted by the weaker investment banking fees that were available in this volatile market. Lower investment banking fees, and we also had marks as previously discussed on leveraged finance positions. Our NII improvements. nearly offset all those impacts, leaving revenue only modestly down year over year. We maintained our number three investment banking market share ranking. In markets, we had a solid quarter of sales and trading results, growing 11% from last year ex-DVA. Our macro FIC business, where we have been investing over the last couple of years, performed well, as did the equity derivatives while other FIC businesses felt the effects of spread widening and customers taking a more risk-off position. From a broader enterprise, Our P&L perspective, quarter two expense was down modestly from quarter one, consistent with what we told you on our last call. It is notable that we achieved that even as quarter two included approximately $425 million in regulatory matters that Alistair will discuss in a few minutes. As I said earlier, one of the reasons we continue to have good expense results and continued progress on digital engagement across the businesses. I commend you to look at slides 22, 27, 29 in our appendix where we set forth our digital operating results by lines of business. Overall digital sales continue to grow up 20%. Digital choice for payments continue to grow. Zelle transactions continue to out-distance checks written. Crossing over the last year, and the gap continues to widen. Erica is approaching 1 billion interactions since we started with it. Clients have filled out 8 million life plans. enhancing our asset growth and account retention. That's one of the fastest-growing product implementations we've had. It is also worth noting the strong credit quality. Most all of the asset quality metrics improved again this quarter. You will note, however, the charge-offs rose in quarter two, but this increase was largely due to some loan sale accounting and some other credit decisions due to the past pandemic issues. As I've done for several quarters, I want to make a few points about customer activity. Let's go to slide four. By our data across the 35 million core checking households plus we have in 60 million consumers in America, U.S. consumers remain quite resilient. I would offer a few thoughts as you look at slide four. In addition, I'll give you what we see so far in July in a moment. First, consumers continue to spend at a healthy pace. even as quite some time has passed since the receipt of any stimulus. Second, the overall average deposit balances for most client cohorts are higher than they were both last quarter and even rose in June versus May. They remain at multiples above the pre-pandemic levels. And importantly, we're seeing no deterioration in our customers' asset quality and they have the capability to borrow. Our customer data shows Bank of America customers spent the highest quality period on record in quarter two. At $1.1 trillion in total spending, that's up 12% year-over-year. This quarter also was the highest debit spending period on record for us. But as you think about more recently, just to give you the more recent statistics, in June 2022, spending was up 11.3% over June 2021. Transactions also rose more than 6%. For the first two weeks of July, the spending is up 10% plus, and transactions are again rising 6% plus. This is strong consumer resilience. We continue to see shifts in what people are spending on as the quarter took place, more on experiences, travel, and things like that, and a bit more on fuel due to increased prices and less on retail stores. In quarter two, we saw that higher gas spend as well as a continued recovery in the travel categories and a continued recovery in restaurant spending. On the lower right-hand chart, you'll note the continued shift in how people spend money. Check and cash volumes continue to come down and are replaced by digital alternatives. This continues to help on our cost structure. Regarding our customer equity, the average deposit balance of our customers remained at high levels relative to the year-ago and pre-pandemic periods. The large change for the mass market customers, they rose about 1% over June from May. The only area where we had any change to the negative was a small dip 1% for the most affluent segments of those customers. That reflects the tax payments made in April and the build back coming more slowly for those customers. In addition to this data, I would refer you to slides 24 and 25, which completes the resiliency picture. This shows you strong asset quality across our consumers. Also look at elevated payment rates on credit cards. That means people paying off their debt at a good clip. There's no real differentiation across the trends of customer cohorts, even for the very small portion of our card book that is in lower credit quality. So while all this is good news, it clearly makes the Fed's jobs tougher when you take these statistics and this activity and combine it with a low unemployment rate. I want to switch gears now and talk a little bit more about credit. We provided more information on credit this quarter, as would be obvious given the debate about a future recession. While others debate and discuss this potential outcome, we just continue to drive responsible growth at our company, and so we're prepared. So as you look at slide five, you can see how much the loan book has changed under more than a decade of responsible growth. As you can see in the top left chart, our loan book is quite well balanced now between consumer and commercial loans. Focusing on the top right chart, note that the consumer portfolio is even more collateralized with a greater mix of mortgage and less cards. In addition, much less second mortgage, and obviously second mortgages today underwritten clearly differently than they were in the mid-2000 to 2010 decade. And all consumer portfolios had much higher FICO's. In the bottom left chart, you'll note that more diversified commercial mix as well. And if you look at the lower right chart, you can see our results on the stress test and how they fared time and time again. When you go to slide six, we gave you a little detail on what we look like in the height of last crisis compared to where we are now. You can see the loan portfolio in 2009, when risks were at the peak for Bank of America, because this was after we'd closed the Merrill and the Countrywide Transactions, and the company was all put together. We give you those metrics, what they look like pre-pandemic, at the end of 2019, and what they look like today, and the changes we've made under that decade-plus of responsible growth. Given all these changes, 92% of our commercial loan book today is either investment grade or secured. And while there's not much difference in something like commercial real estate book, you have to look underlying to see the changes. For instance, the land development loans have decreased from $5 billion in 2009 to $200 million currently, and secured residential exposure decreased from $11 billion to $150 million now. We've also included a few slides in our appendix, pages 23 to 25, that highlight the consumer resilience and delinquency points, as well as the consumer lending statistics, highlighting this continued strong quality of all our originations. Take note of the FICOes on the newly originated activity there. So in the end, despite the worries of a slowing economy and other global issues, client activity remained good this quarter, and has improved quickly, and our customers' resilience and health remain strong. We recognize some expense from regulatory matters and still manage to keep expenses flat to the first quarter and in line with what we told you. We continue to drive strong operating leverage in a weaker capital markets environment. These earnings are delivering strong returns and delivering capital back to shareholders. In thinking about capital, remember, first, we use our capital to support customers and related loans, and we continue to invest in the franchise. Second, we are delivering capital back to you as shareholders. We now intend to increase our dividend in quarter three, which will have our dividend 22% higher than it was just 12 months ago. In addition, we retired shares this quarter. Third, we're going to be building capital given the new higher minutes received during the stress test. It will make our balance sheet even stronger. Along the way, we believe our expected earnings generation over the next 18 months will provide an ample amount of capital. which allows us to support customer growth, pay dividends, and use the rest to allocate between buying back shares and growing into our new capital requirement. And with that, I'll turn it over to Alistair.
spk01: Thank you, Brian. And since Brian hit the highlights of the income statement, I just want to reiterate we saw good returns in the quarter with a return on tangible common equity of 14% and return on assets of 79 basis points. So I'm going to begin my comments on slide 7 and the balance sheet. And as you can see, during the quarter, the balance sheet declined $127 billion to a little more than $3.1 trillion. And that reflected an $88 billion decline in deposits and a decrease in our global markets balance sheet. We utilized a combination of cash and some rotation from securities this quarter to fund our loans growth given the decline in deposits. Our average liquidity portfolio declined in the quarter. reflecting a drop in deposits and lower securities valuation, and it remains very elevated at nearly a trillion dollars. For reference, that was $576 billion pre-pandemic, just to give you an idea of how much liquidity has increased over the period. Shareholders' equity increased $2.5 billion from Q1, with a few different components we should note. Shareholders' equity benefited from net income after preferred dividends of $5.9 billion and the issuance of $2 billion in preferred stock. So that's $7.9 billion flowing into equity. We paid out $2.2 billion in common dividends and net share repurchases. AOCI declined as a result of the increase in long rates and we saw that impact in two ways. We had a reduction from a change in the value of our available for sale debt securities of $1.8 billion, and that impacts CET1. Second, rates also drove a $2 billion decline in AOCI from derivatives that does not impact CET1. And that reflects cash flow hedges mostly put in place last year against some of our variable rate loans, and that provided some NII growth and also protected CET1 at the same time. With that equity growth, we saw book value increase in the quarter. With regard to regulatory capital, our supplemental leverage ratio increased 10 basis points to 5.5% versus our minimum requirement of 5% leaving plenty of capacity for balance sheet growth and our TLAC ratio remains comfortably above our requirements. Okay, let's turn to slide 8, and we'll talk about CET1, where our capital levels remain very strong. We have $172 billion of CET1 and a 10.5% CET1 ratio, which increased from the first quarter and remains well above our second quarter 9.5% minimum requirements. That 10.5% CET1 ratio is also expected to be just above our new 10.4% requirement from CCAR when it's confirmed by regulators at the end of August. And that new level will be effective for us on October 1st. I'll walk through the drivers of the CET1 ratio this quarter. 5.9 billion of earnings, net of preferred dividends, which generated 36 basis points of capital. And looking at the chart, you can see how we used that. We grew loans by 38 billion, and with a decline in our global markets balance sheet and some loan sales and other balance sheet initiatives, we were able to hold RWA flat this quarter. We returned $2.7 billion of capital to shareholders, representing 16 basis points. Third, this quarter, the movement in Treasury and mortgage-backed securities rates caused a decline in the fair value of our available-for-sale debt securities, and that lowered our CET1 ratio by 11 basis points. And we remained well positioned for that rate movement. as our hedge of a large portion of this portfolio continued to protect it from AOCI movements. So we ended the quarter above our expected minimum of 10.4% required October 1st, and we expect to build some additional buffer on top of that in Q3. Moving beyond the third quarter, we should just remind you our balance sheet growth last year means our GSIB surcharge and CET1 requirement will move higher by 50 basis points beginning in 2024. And I just want to make sure we repeat that for clarity. It's 2024 because I know others have different timelines for their requirements. Given our additional higher GSED minimum over the next six quarters, we'll work to move above that expected CET1 minimum of 10.9 by January 1st of 2024. and we'll look to exceed that with another 50 basis points of internal management buffer on top of that requirement. Okay, so now let's talk about the biggest use of CET1 this quarter, and I'm referring to loans on slide nine. As you review the average loan data, we just want to remind you that our discipline around responsible growth has remained tight. Average loans have climbed back over a trillion. They're up 12% compared to Q221. led by commercial growth of 15% and complemented by consumer growth of 8%. Each line of business and product segment reflected good growth and geographic and industry participation within that group has also broadened over the past several quarters. As we turn to linked quarter comparisons, I'll use ending balances, and the $25 billion linked quarter commercial improvement came mostly from new loans, and also included some improved utilization from existing clients. From an asset quality standpoint, 98% of the commercial loan growth was either investment grade or secured. Consumer loans grew $10 billion linked quarter, led by both credit card and mortgage, and also increases in auto and securities-based lending. And for the first time in years, home equity balances increased modestly. Card loans grew $5 billion from Q1, reflecting healthy spend levels, even as payments rates remain elevated. Within our growth, our average FICO was 771, as you can see on slide 23 in the appendix. And as we've done in the past, in the appendix on slide 32, we've provided that daily ending loan chart. that shows trends through the quarter and you can see both commercial and consumer loans balances are now back to pre-pandemic periods with really only credit cards still remaining 15 to 20% below that period. Moving to deposits on slide 10, across our past 12 months we've seen solid growth across the client base as we've deepened relationships and added new accounts. Some of the year-over-year growth was impacted by a higher level of tax payments across consumer and GWIM clients and businesses in Q2 of this year. Those elevated tax payments drove the decline in deposits from Q1. Year-over-year average deposits are up $123 billion or 7% and retail deposits with our consumer and wealth management clients grew $129 billion and we believe our retail deposits of $1.4 trillion continue to lead all competitors. Within the consumer balances, I'd just like to point out the small business deposits of $177 billion grew 14% year-over-year, and that reflects continued reopening of small businesses across America and the consumer spending supporting their growth. The average balance of these accounts is more than $40,000. On wealth management, we saw clients paying higher tax bills this year, and we saw some move deposits to market-based funds, much of which remained in our own complex. With our commercial clients, deposits were up modestly year over year, even as customer tax payments are higher this year, and some have recently begun to seek higher yields and use cash strategically for acquisitions and other operational activities. Turning to slide 9 and net interest income. On a GAAP non-FTE basis, NII in Q2 was $12.4 billion, and the FTE net interest income number was $12.5 billion. Focusing on FTE, NII increased $2.2 billion from the second quarter of last year, or 21%. And that's driven by benefits from higher interest rates, including lower premium amortization, and loans growth. NII compared to the first quarter rose $870 million, and that came in a good bit higher than the $650 million plus that we signaled on our last earnings call. The benefits of higher rates, lower premium amortization, loans growth, and the additional day of interest more than offset the impact of lower securities balances. Our net interest yield was 1.86%, improving 17 basis points from Q1 and benefited from the rise in rates loans growth funded with cash and a four basis point improvement from lower premium amortization and securities looking forward we want to provide the following NII guidance and we just have to provide a few caveats first we base the guidance on interest rates in the forward curve materializing and I'm referring to the curve on July 15th second We assume modest growth in loans and deposits. And third, we assume deposit betas reflecting disciplined pricing to achieve our growth. If those assumptions hold true, we can see NII in Q3 increase by at least 900 million, possibly a billion, versus Q2. And then we expect it to grow again at a faster pace on a sequential basis in the fourth quarter. And the way we think about those NII increases, given the expense discipline that we have, is we expect the majority of that to fall to the bottom line for shareholders. Focusing on asset sensitivity for a moment, as you know, we typically disclose our asset sensitivity based on a 100 basis point, instantaneous parallel shock and rates above the forward curve. And on that forward basis, asset sensitivity at June 30th was 5 billion of expected NII over the next 12 months. More than 90% of that is driven by short rates. That's down from 5.4 billion at March 31st, largely because the benefit of higher rates is now already factored into our baseline of actual NII after we grew to 870. Now, given that the yield curve is projecting 125 basis points of rate hikes over the next couple of meetings, We thought it was also appropriate to provide the disclosure again regarding asset sensitivity on a spot basis. And on a spot basis, our sensitivity to a 100 basis point instantaneous rate hike would be 5.8 billion or 800 million higher than the forward basis at June 30. Okay, let's turn to expense and we'll use slide 12. Our expenses were $15.3 billion, up a couple hundred million, or 1.5% from the year-ago period, and down modestly compared to the first quarter. I want to focus on the more recent comparison versus the first quarter. We had higher expense for regulatory matters related to certain issues, and those offset the seasonal decline from the first quarter, elevated payroll taxes, and revenue-related incentive costs. Let me pause for a moment on the $425 million expense we've recognized for regulatory matters in the second quarter. A little more than half of the amount relates to fines to resolve regulatory investigations relating to our administration of prepaid unemployment benefit card programs in certain states and that we announced last week. The balance of the expense relates to an industry-wide issue and it concerns the use of unapproved personal devices and that has not yet been fully resolved. As we look forward more broadly on expenses, we continue to invest heavily in technology, in people and in marketing across the businesses and we continue to add new financial centres and renovated old ones in expansion and new growth markets. To help pay for those investments, we continue to look for opportunities to simplify our processes and reduce work, driving our costs lower to self-fund our new investments. Our headcount this quarter includes roughly 2,300 summer interns, and we hope they will consider us to be a great place to work and join us full-time next year. This is the most diverse group of talent we've seen yet. Absent the addition of those interns, our headcount was down a little more than 700 associates, and we, like many other companies, are doing many things to tackle challenging labour market conditions, and we're meeting that challenge pretty well so far. Turning to asset quality on slide 13, I want to repeat what we've said now for many, many quarters. The asset quality of our customers remains very healthy. And that's true in both consumer and commercial. So net charge-offs of $571 million increased $179 million from Q1, driven by loan sales and some other credit decisions that we made as opposed to core credit deterioration. Absent those losses, net charge-offs were down modestly compared to the year-ago period and up slightly from Q1. Provision expense was $523 million in Q2, driven by the charge-offs, as we had a small reserve release of $48 million. That release includes builds for loan growth, it includes builds for a dampened macroeconomic outlook in the future, and the builds were offset by continued asset quality improvement and the effect of reduced pandemic uncertainty. On slide 14, We're highlighting the credit quality metrics for both our consumer and commercial portfolios, and a couple of things are worth repeating again this quarter. Consumer delinquencies remained well below pre-pandemic levels, and you can see the decline in reservable criticized, and NPLs saw a modest decrease, driven both by the loan sales mentioned earlier and other improvement across commercial. Turning to the business segments, let's start with consumer banking on slide 15. and the consumer bank earned $2.9 billion on good organic growth, delivering its fifth consecutive quarter of operating leverage. Strong top line growth of 12% driven by net interest income improvement was more than offset by increase in provision expense resulting from the prior year's much larger reserve release. And while reported earnings were down, pre-tax, pre-provision earnings for consumer grew 26% year over year. which highlights the earnings improvement without the impact of that reserve action. Card revenue was solid and increased modestly year over year as spending benefits were mostly offset by higher rewards costs. Service charges were down nearly $200 million year over year as our previously announced insufficient funds and overdraft policy changes were in full effect by June. The third quarter will reflect the full run rate going forward And we believe these changes are helping to improve overall customer satisfaction and further lower customer attrition. Expense increased 2% as much of our increased salary and wage moves in the quarter impact consumer banking the most. And as revenue grew, we improved the efficiency ratio to 54%. Reduced costs associated with continued shifts in client behavior to digital engagement is also allowing us to invest in higher marketing, more technology and higher wages for our people. We also continued our investment in financial centres, opening another 19 in the quarter while we renovated 157 more. Notable customer activity highlights included 240,000 net new checking accounts opened in the second quarter and marking the 14th consecutive quarter of net new consumer checking account growth. This led to a record 35 million consumer checking accounts with 92% of them considered to be their primary account. Additionally, small business accounts are enjoying the features of their business advantage rewards and showed growth of 5% from last year. We also grew investment accounts 6% year over year. And not surprisingly, the market impacted customer balances negatively on the investment side. At the same time, over the past 12 months, we've seen 21 billion of positive client inflows. Lastly, once again, we opened over a million credit cards in the quarter, and we grew average active card accounts and saw combined credit and debit card spend up 10%. And as you saw earlier, we had solid lending activity with continued low loss rates. Our 43 million active digital users signed on this quarter a record 2.8 billion times, with our Erica users up 30% year over year, and we captured over 123 million total client interactions in the second quarter alone. You can see all the other digital metrics and trends on slide 26. Turning to wealth management on slide 16, you can see we produced strong results, earning 1.2 billion and producing 16% year over year growth. Revenue growth was 7% as NII generated through our banking assistance for these clients more than offset modest declines in assets under management fees from market impacts during a challenging quarter. Clients and advisors recognized this value of a holistic financial relationship across investments and banking. And doing that at Bank of America differentiates both Merrill and the private bank and it helps to diversify and differentiate our earnings in this business compared to other brokers. Our talented group of financial advisors coupled with powerful digital capabilities allowed Modern Merrill to gain nearly 4,500 net new households. We also gained 650 more in the private bank this quarter and that's a very solid showing by both given the complexities of serving our clients in challenging market conditions over the past 90 days. We added $25 billion of loans over the last year, growing 13%, and marking 49 consecutive quarters of loans growth in the business, and that is consistent and sustained performance. Assets under management flows and deposit growth were little more muted this quarter as clients paid taxes, impacting the quarter-to-quarter comparison. Year-over-year, our deposits are up $17 billion, and overall investment flows were $78 billion over the past four quarters, with total flows of $110 billion. Expenses increased 2%, driven by higher employee-related costs, and resulted in operating leverage of 6%. Turning to slide 17 and global banking, you'll see the business earned $1.5 billion in the second quarter, down $918 million year over year, and driven by the absence of a large prior period reserve release and lower investment banking revenue. As you know, it was a tough comparative quarter for the business as the industry investment banking fee pool declined 50%. And while we acknowledge that's a big drop, we just want to remind you that before the pandemic, our quarterly average for investment banking fees was in the range of a billion three to a billion five compared to the billion one we put up in the second quarter. So we view this level as temporary and we believe it can rise back to more normal levels in the next few quarters when economic uncertainty becomes more muted. While the company's overall investment banking fees declined, we held on to our number three ranking in overall fees and we maintained our market share through the first half of the year compared to 2021. At the same time, we saw very strong loans growth. Ending loans grew $18 billion linked quarter and are up 62 billion or 19% year-over-year. That loans growth and higher rates drove net interest income growth, which was able to offset the drop in investment banking fees, leaving revenues in the business fairly flat year-over-year. Also impacting revenue was half of the firm's $300 million leveraged finance valuation marks The market turmoil and abrupt slowdown in the second quarter sparked a downturn in the leveraged finance markets, causing a number of the deals across various market participants to get marked down. Some of those deals have been funded and we're working through any remaining exposure to get them through the market. The provision expense increase reflects a reserve build of $143 million in Q2 compared to an $834 million release in the year-ago period. And finally, we saw expenses increase by 8% driven by higher personnel costs and a share of the noted expenses for regulatory matters. Switching to global markets on slide 18, and as we usually do, we'll talk about the segment results excluding DVA. Second quarter net income of $900 million reflects a solid quarter of sales and trading revenue. It was another quarter that favored macro trading, while the credit trading businesses faced a more challenging market environment with widening spreads in the face of increased inflation fears and recession beliefs. Focusing on year-over-year, sales and trading contributed $4 billion to revenue, improving 11%. FIC was up 19%, while equities was up 2%. That FIC improvement was primarily driven by growth in our macro products, while credit traded products were down. We've been investing heavily over the past year in several of the micro businesses identified as opportunities for us, and we were rewarded for that this quarter. Our strength in equities was driven by good performance in derivatives and offset by a weaker trading performance in cash. Lastly, also impacting revenue was the other half of the firm's $300 million in leverage finance markdowns. Year-over-year expense declined, reflecting the absence of costs associated with the realignment of a liquidating business activity, partially offset by that share of the regulatory costs. Absent these impacts, expense was relatively unchanged. And the business generated an 8% return in Q2, impacted by both the elevated leverage finance marks and regulatory matter expense. Finally, on slide 19, we show all other. which reported a loss of $318 million declining from the year-ago period driven by the prior period $2 billion tax benefit from that UK tax law change. Revenue is roughly a couple hundred million higher than Q2 2021 due to the absence of some prior period structured note losses. Expense increased as a result of the regulatory matters and the realignment of liquidating activity last year to all other And as a reminder for the financial statement presentation in this release, the business segments all are taxed on the standard fully taxable equivalent basis. And in all other, we incorporate the impact of our ESG tax credits and any other unusual items. For the quarter, our effective tax rate was 9%. That benefited from two things. First, ESG investment tax credits, and second, roughly $300 million of discrete tax benefits that apply to this quarter. Excluding those tax credits and discrete items, our tax rate would have been 26%. And with that, we'll jump into Q&A, please. Thank you.
spk07: And if you would like to ask a question, please press star and 1 on your touchtone phone. Again, that is star and 1 if you would like to ask a question. You can remove yourself from the queue at any time by pressing the pound key. We'll take our first question today from Glenn Shore with Evercore. Your line is open.
spk09: Hi, thanks very much. So I'm looking at all your credit metrics improving on a modest reserve release in the quarter and everything you said about responsible growth. It's all great. My question is, how do you balance making sure that you're not looking too much in the back you know, the rear view mirror and see where we came from versus what we're going towards and, you know, people's obvious concerns about the go forward in the economy. And maybe within that, let's just talk about what leading indicators you'd look at that drive, say, if you thought about putting up a CECL reserve on the go forward. You don't sound that concerned, but like a lot of, you know, obviously people looking at recession here. Thanks.
spk05: Thanks for the question. Remember that the reserve methodology is a forward-looking methodology, and in our core scenario is weighted, you know, part to the baseline, part to the adverse. It ends up, just to give you a sense, with unemployment rate this year in the actual reserve setting scenario, not an adverse case, but the actual one we set the reserves with was 5% unemployment within the next five months. So 300.6 to 5%. So there's a conservative aspect to how the reserves are set. And so basically the high quality of the loan book is not only what we talk about and show you all the stats and you can assess and look at, but also you can look at the stress test results on a relative 10% unemployment overnight, yada, yada, yada. you know, and you see all the different statistics there, and you see that page, page five or six or whatever it is of the slide, you can see us lower than everybody else. That's because, you know, many, many years of responsive growth, and while we showed you those pages, comparing the different points in time. And so I think, You said something. Our reserve is not set looking backwards. It's set looking forward based on the books, based on the CECL methodology. We even do a comparison to where CECL Day 1, as we call it, what happened then. And it's consistent. It's consistent. It's just that the credit quality book continues to improve, honestly.
spk09: I love the Seinfeld reference. Thank you. Maybe just one follow-up. On RWA, you didn't seem to need to do much. I appreciate the comments you made on the prepared remarks. So the question I have is there seems to be a much higher intent across the street to mitigate RWA for obvious reasons. Everybody's capital requirements are going up. So the question I have for you is how do you balance doing more of belt tightening versus using your okay relative capital position to continue to grow while others are tightening the belt. Thanks so much.
spk01: Thanks, Glenn. So obviously, we're in a little different place in that we have the capital already. And we feel like over the course of the past several years, we've been quite disciplined around our WAs. It just remains important for us to stay at it. So, you know, you saw us do a couple things this quarter. We sold a portfolio of loans that were non-core. We've changed a little bit in terms of some of the 20% risk weighted assets in our securities portfolio are rolling off. We can replace them with 0% risk weighted like treasuries with essentially the same yield at this point. So you saw what we did this quarter. We grew loans, we built capital, we created some RWA flex in the background, and we think we can do the same going forward.
spk09: Thank you. Appreciate all that.
spk07: We'll go next to Jim Mitchell with Seaport Global. Your line is open.
spk03: Hey, good morning. Maybe just if I look at the – you're still projecting relatively healthy asset sensitivity, even with the forward curve at a high level. So it doesn't – I think when I look at the comparison versus the spot, it implies not a real big degradation in betas, in the forward versus the spot. So can you discuss how you think about deposit betas as flood funds gets above 300 basis points? Thanks.
spk01: Yeah, so, you know, we talked about the last time we were together, we talked about the fact we're looking backwards to 2015 to 2019. And you saw what our deposit beta was at the time. It was in that sort of low 20s percent. And we said we hope to do better. We have done better than that so far. Now, just as a reminder, Generally speaking, we think about how we price so that we grow deposits. That growth last year was 7%. We're expecting growth this year, we said, in the low single digits. But we're going to have to see how the rate structure develops. We've been pretty clear on that as well. and we're going to be competing in the market with others, so we just have to watch that develop over time. The core operating balances, consumer, we continue to add there over time, and if we're seeing any kind of runoff, Jim, it's really only in the very high end of wealth management, and it's in the non-operating balances in commercial. So we're keeping a tight eye on it, but our NII reflects what we think are reasonable assumptions around deposit pricing.
spk03: So just to clarify, you – oh, go ahead.
spk05: Just look at page 10, and you can see – if you look at the upper right-hand corner and see the size of the non-interest-bearing and interest-checking, which is different than money that moves. And you think about that even in the wealth management deposits on the lower left and then in the operating deposits in the commercial book. We just have a lot of these deposits that are money and movement in the household, and we've gone through this discussion a lot a few years ago, and so they're very incentive rates only because the money is always moving and it's just the average collective balances in these households as opposed to money that's for investment purposes, which will move, and you saw it move. a little bit in the wealth management business this quarter, and some of the corporates will continue to position them for more investment-oriented cash, for lack of a better term, and so we'd expect that to occur, but I think history is some guide here, but also, at the end of the day, we've grown a million new checking accounts year over year, You know, that brings in more and more stable core checking balances, which don't move around much. And so think about all that. We've been through it before. And as rates go up, you know, the stuff that moves due to rate is relatively modest. And we have a huge bucket of non-interest bearing that sits with us.
spk03: Right. So, I mean, clearly you guys have a high quality deposit base. So I think the implication is even over 300 basis points, you think betas can stay sort of in that, you know, well under 50% range.
spk05: We tell our team to price consistently so they can grow faster, slightly faster in the market. They've been growing a lot faster in the market because of the stimulus and stuff like that. But even the market, they were growing much faster. But that's what we tell them. And so we don't do things that are defranchised.
spk03: Right. And then on the capital side, just trying to get a sense of how quickly you want to get to a buffer and how to think about a buffer on your – whether it's 2024 minimum or 23, can you still do some buybacks between now and then?
spk01: So we already have a modest buffer relative to what we expect at the end of October. And then we've got obviously future capital generation and we've got some balance sheet optimization we can do. So we feel like we've got a lot of flexibility. So we feel like we've got some ability to do some share repurchase. And then in terms of where we end up, I'd say, you know, go fast forward to January of 2024. That's when we get the next 50 basis points step up. So we've got to generate that 50 basis points over the next six quarters. So we think we'll have some ability to do a little bit of everything.
spk03: Okay, great. Thanks for taking my questions.
spk01: Thank you.
spk07: We'll go now to Mike Mayo with Wells Fargo. Your line is open.
spk08: Hi. Well, thanks for the NII guide. I guess my question – well, first, we're going to be here – it's probably January 18, 2023, two quarters from now. We'll be on the earnings call, and we'll see if your guidance is correct or not. And I know you don't want to give guidance that you don't need, but you just got it for almost $2 billion in higher NII in the next two quarters, implying an $8 billion uptick in the annualized run rate for NII. I just want to make sure I heard that correctly. And then on your definition of majority of that should fall to the bottom line, how do you define majority? Is that 50.1% or is it more than that?
spk01: So I'll answer the question. Um, yes, I think you're right. We said 900 to a billion this quarter coming up and then at least that the following quarter. So, yes, you're right to think about that as a couple billion. We'll get a little more precise with fourth quarter as we get to, obviously, a quarter from now. And with respect to falling to the bottom line, I'd say that's going to be the vast majority, but I'll leave that to Brian.
spk05: Yeah, I think, Mike, you know, we're bouncing around $15 to $15.5 billion of quarterly operating costs, and you can look backwards and see that that's been fairly constant in Yep, and so you'd expect that to continue. And so the vast, vast majority falls to the bottom line. It's how the business model, and you know, Mike, as well as anybody, that that revenue comes through the businesses that don't need to add people or activity to get the value of it, i.e., the consumer business and the wealth management business, commercial banking business. And you saw that year over year. And, you know, as much as... it's a strong projection going forward. We captured like $2 billion last year's second quarter, this year's second quarter, and I think a lot of it fell to bottom line on Apple's basis.
spk08: I mean, just as one follow-up, I mean, look, you've changed the firm since the global financial crisis when the company over-promised and under-delivered, and you've really gone out of your way to under-promise and over-deliver. And so when you say crazy, like vast, vast majority, Don't you want to hedge a little bit? I mean, you have a lot of inflationary pressures. You're hearing talk about it's harder to hire people, harder to retain people. You have rents. You have all sorts of things happening here. And you're saying vast, vast majority of the additional revenues should fall to the bottom line. Any hedging at all you'd like to give here?
spk05: I think, you know, basically, I don't look at the quarter-to-quarter linkage expenses at 15.3%. And I, we told you, was up, what did we say, 650 last quarter, turned up 850. So we exceed our estimates. That's why we stay to the next couple quarters, because we've got a pretty good line of sight to those, Mike. So we feel pretty good about it. The question that you asked, all of you kept asking last quarter, is how do you do this and keep investing in franchise? So we increased marketing. We added people into places we wanted to add people and took people out of the places we didn't need them so much. We continue to add new branches into many cities and towns that we didn't have the branch structure in and reposition. In other words, we invested this quarter $800 million in technology code development that got implemented. And so, you know, but it's – this is – you know, the confidence in the next quarter, frankly, is, you know, it's already three weeks in almost, and, you know, it's pretty well set up. So we feel pretty good.
spk08: All right. Thank you.
spk07: Our next question comes from Betsy Gracek with Morgan Stanley. Your line is open.
spk00: Hi, good morning. Good morning, Betsy. Good morning, Betsy. Two questions. First is just on the investments that you're making in expanding your market share and capital markets activities. You know, you've obviously made a decision to do that, and it's panned out. And I wanted to understand at this stage, given – you know, the higher STD that you have, will you still be leaning into investing and, you know, looking to take more share in the capital markets-related businesses?
spk05: Yes. They're largely, as Jimmy DeMar would say, it's the so-called growth plan that we talked about starting almost two, two and a half years ago was implemented. And in order to increase the size of balance, you can see a little bit on page 18, trading-related assets, but he'd have to go back a quarter, a year before that and see if it increased. And so he's built the balance sheet up to the size he thinks is relevant. We built the product capabilities out. He continues to hire people in certain areas. And so we feel pretty good that we're pretty well built. It's just that we've done it in market times. It got pretty interesting pretty fast. And, you know, that being said, if you look at the trading revenues sort of, The first half of the year over the last three years has been relatively stable at $8 billion or something like that. So he's done a good job. They've built it up. And so it doesn't need another big chunk of balance sheet on top of that. It's really in pretty good shape now. And so its relative size of platform is pretty well set.
spk00: Okay. And then as we think about the capital ratio and the buffer, I think you had been running with a hundred-fifths buffer, and should we now expect that you're going to be running with 50-fifths over?
spk05: Yeah, you should, Betsy. Just frankly, as it gets larger and larger, you know, it gets to be a little bit – you don't need quite the buffer. And so 50 basis points is to the – when you think about it, we get to 1-1-24, put 50 basis points on top of the required nets. We're trying to end up.
spk00: Okay. All right. Got it. Thank you.
spk07: We'll take our next question from Matt O'Connor with Deutsche Bank. Your line is open.
spk10: Good morning. Just to follow up on the expenses, how are you thinking about costs in the back half of the year? I think you had full year guidance out there around $60 billion. Obviously, you had some higher red costs this quarter. How are you thinking about that?
spk01: We haven't changed much, Matt, in terms of the way we think about running the company. Brian mentioned already You look at the last six quarters, we're sort of running the place right around $15 billion either side. So we still feel like that's the right place, that $60 billion flattish year over year. And then I just make sure you back out and add that reg matter. That's all. The core remains the same. Okay.
spk10: I just want to clarify on that. That's helpful. And then within credit, I guess... What types of mortgages did you sell that generated those losses? And then in all other consumer, you had higher losses and you did mention there were some other actions that you took and I was just wondering what those were. Thanks.
spk01: So on the resi mortgage side, we sold an old portfolio of residential mortgages that we put in some number of years ago. So this allowed us an opportunity just to exit that. We do that periodically anyway. But in this case, it was about $3.3 billion, I want to say. And we did have a loss. So you see that loss running through. But just so you're aware, it was largely offset by a gain somewhere else. So I wouldn't think about it as much of an economic loss. But it did temporarily inflate the charge-offs, which is why we called it out. And then there were a couple other things in there that related to write-downs around pandemic and stimulus and offsets with overdraft. But, again, not what I would consider to be anywhere near the core consumer credit portfolio that we run.
spk10: Okay. And some of that overdraft noise shows up in the all other consumer charge-offs, right?
spk01: In this case, yes.
spk10: Okay, perfect. Thank you.
spk07: We'll go now to Erica Najarian with UBS. Your line is open.
spk06: Hi. Good morning. I just wanted to keep on Mike's theme of under-promising and over-delivering. So I'm going to try to ask the NII question another way. Alastair, one of your peers has started to frame NII with regards to an exit rate in the fourth quarter. So, you know, as I'm just thinking about the rate sensitivity and the forward curve and your comments about loans and deposits and deposit repricing, You know, obviously you're alluding to $13.5 billion by third quarter. Is it possible by the fourth quarter relative to everything that you're seeing going on in the company right now that the exit rate for NII could approach $15 billion?
spk01: Well, I'd say it's too early for us to tell you that right now. So one of the reasons that we're comfortable giving you next quarter's guide is we have a pretty good sense or where loans are, deposits are, what we think the growth will look like, etc. The further we go out, the less we control. So, you know, we try to give you that spot sensitivity and we try to give you the forward sensitivity so you just get a general sense. And then, you know, what we're comfortable saying right now is it's going to be in that $900 to a billion for Q3. And Q4 is just a little early to say with that kind of precision. So we just wanted to say we think it will accelerate again in Q4. So that's as precise as we want to be right now, Erica. And it's less about under-promising and over-delivering. It's more about there's just a lot going on right now in the markets generally, and we prefer to be more precise about it. That's all.
spk06: Fair enough.
spk01: Fair enough. And I think all we're trying to convey, though, is we think the fourth quarter is going to be higher. in the third quarter increase. I think we'll be able to give you more sense for that based on the rate structure and what we see in deposits and loans over the course of this quarter when we meet in three months' time.
spk05: Eric, this isn't Vainglory to give you specific NII guidance. We're just trying to make sure you see the leverage in the platform for a quarter or two. You guys can take that extrapolate based on your own economic projections. But it's meant just to give you a sense of what we see in terms of loans, deposits, and the pricing dynamics, et cetera. In the near term, we're more sure. Just like last quarter, we said it'd be $600 odd billion. It turned out $380. It's because we're careful what we think and what we give you.
spk06: Got it. And my second question is a follow-up on capital. I guess the first is, are you working to actively reduce the stress capital buffer and maybe remind us where you think the pain points were for this year's test that you think you could address for next year? And second, you know, should we, what is the pacing of buybacks like from here as you build towards that January 1st, 2024 new higher minimum.
spk05: On the second question, that's going to be dictated by LOB's use of the balance sheet. Our number one goal is to keep them in the market winning every day and let the capital support that. That's what we do because what they're doing is providing good returns and stuff. That requires us to be driven by, frankly, loan growth more than anything else in the near term because the market's business will bounce around but won't move much. In terms of the progress test, the losses and stuff were pretty good. The operating expenses, that's more continuing to point out the differences between how we run the company, etc., and we'll continue as we look at the next year's test fashion. There's not a lot we can do on the loan book and stuff. It's the best in the business as dictated by their results. So it's going to be more on convincing on operating expenses and operational losses and things like that over time.
spk06: Got it.
spk07: Thank you. We can go now to Gerard Cassidy with RBC Capital Markets. Your line is open.
spk02: Hi, Brian. Hi, Alistair. Hi, Jerome. Hi there. Can you guys share with me, if you look at your deposits at the end or the average deposits in your fourth quarter of 19, I think they totaled about $1.4 trillion. Today, you have $2 trillion. And granted, consumer has grown very nicely, as you pointed out, Brian. I think it's up $358 billion over that time period. Can you share with us your color or your guys' outlook on as quantitative tightening goes into full speed of $95 billion or so a month, how do you think that could affect your balance sheet as you look out over the next 12 to 18 months?
spk01: Well, we're obviously curious with that trajectory as well. We haven't seen any great shift yet in deposits yet. This second quarter was largely just a return to the normal second quarter seasonality we see. We didn't see the last two years because there was pandemic cash inflow, fiscal monetary stimulus. And this quarter was probably a little more elevated. You saw the headlines talking about tax receipts this year were bigger than normal. So we felt that. But we haven't seen a great deal of impact from QT just yet. And it feels like our customers still want to hold a pretty healthy deposit balance. So I think it's natural to think about, go back to Q419, you think about the fact that the economy is bigger. You think about the fact that the monetary base is bigger. So there's probably a floor, but we'll be watching things from here in the same way that you are.
spk05: You know, Gerard, we can't really go Widdershins against the market here because At the end of the day, that growth affects the monetary accommodation, the fiscal stimulus, et cetera. But remember, as you're thinking about that 1.4, 1.5, and today 1.9 to 2, you do have to remember that it's three years with inflation and the economy is bigger. It was a $21 trillion economy back then. I think it's $25-ish now. So you've got to kind of not only put your normal growth rate, which you mentioned, but you also got to add to that sort of the size of the economy and our market share, because our deposits reflect the economy moving in and out of the system and across different money movement from consumers to businesses, businesses to consumers as paychecks and stuff. So I think I'd be careful just saying, oh, let's go back to normalized growth rate off that. You have 2% GDP and 2% 3% because you're missing that there's a step up in size that we picked up and kept and we grew market share. So it'll be higher. We know that. But there'll be some impact to monetary tightening or else it wouldn't occur. It wouldn't be the way the Fed actually controls the economy to some degree.
spk02: Okay, very good. Very helpful. And as a follow-up, your loan-to-deposit ratio I think is around 50% today. Is there an optimal level you think you can get to over the next two years, and then do you fund that primarily by drawing down liquidity on the balance sheet? What's your guys' view on that?
spk05: Yeah, Jard, we don't manage that number. We manage the liquidity resources. Leave that aside. But we have a deposit business that generates deposits from customers, not from pricing and not from going in there. sort of broker deposits or secondary markets. These are all core deposits coming in from core customers. So that dictates our overall size. And then we turn around and make loans to the customers based on the credit standards and capabilities we have in their demand for credit. And that turns into a trillion dollars of loans. And so it's not a number of Alistair or I or others at the top of the house say if that number is 62, it's good, and if 50, it's bad. It's just it is a result of running the customer franchises. The amount of liquidity we have, that is much more planned, obviously, and planned by the microsecond every day. And, you know, you can see that our ratios and stuff, you know, over the course of time, you run far in excess of what we need, and that will come back down. That's probably going to be more apt to come down as part of the monetary tightening process and things like that. But that's, you know, basically what we're doing now to manage the capital of all this is taking, you know, rwa lower 20 rwa assets and moving them into zero rwa to help that and give the rooms the business more room to grow the core loan book but we never managed to a precise number we let the businesses operate and then we balance the interest rate risk and the capital capital questions and the liquidity questions at the top of the house but it works pretty well right now and if you very good quarters if you just look at the last two quarters you sort of see
spk01: as the loans growth has continued to return, as the securities have matured and prepaid, we've just taken some of that liquidity and put it against loans. Because remember, that would always been our first choice, even in pandemic. It's just that the loans growth wasn't there. It's back. So we're using those securities and replacing them with higher yielding loans.
spk02: Very good. Thank you.
spk07: We'll take our final question today from Ken Houston with Jefferies. Your line is open.
spk11: Hey, thanks, guys. Just a couple follow-ups on the balance sheet. So, you know, just following up on the deposit side, Alistair, in your prepared remarks, you talked about modest growth in loans and deposits from here. So I'm just wondering, should we be thinking about when you talk about modest growth in deposits, that off of your period and balance when you think about that after we get past this tax seasonality?
spk05: Think about period end because that's where we are. We've seen the deposits in the first few weeks of July have been relatively stable. But you've got to go off period end because that's what you've got. There's some fluctuations as you get the month end and all that stuff, as you well know, but that's where you start from.
spk03: Yeah, for sure.
spk01: And Q3 and Q4 seasonally tend to be the place where we build deposits.
spk11: Yep. Okay. And then... On the loan growth side, again, obviously putting up very strong results as is the industry, especially in commercial and in card. Can you just talk about what you're thinking in terms of how loan growth looks in the second half relative to the last couple quarters and any changes you're just sensing, good or bad, within the customer base and across the various loan buckets? Thank you.
spk01: Well, not a tremendous amount of change. We've had good loans growth. We anticipate we'll see good loans growth again. That said, obviously, you know, full year, we're kind of at 12%. We said we thought that we'd have mid to high single digits. That's kind of what we're still expecting is mid to high single digits. There are a couple of places where, you know, for example, our mortgage pipeline is down just with higher rates. I think it'd be natural to think that in some areas where other areas like securities-based lending, as rates go up, that might damage some loans demand there. And it feels like business leaders may talk themselves into less confidence. So that may dampen loans growth. But as of right now, we think it's still in that kind of mid to high single digits.
spk11: Got it. And then just one clean up, last clean up here. Premium M was about a $300 million helper to $0.6 billion. How much more improvement could you see? And is that built into your expectation for third and fourth quarter?
spk01: Yep, it's built in. It'll keep going down, obviously, as rates go up. But it's not a linear relationship. It's more curved. So our expectations are all built into our NII guidance.
spk11: Understood. All right. Thank you very much.
spk05: Seeing no more questions, let me just close by thanking you for your time and attention. As you think about Bank of America for the second quarter of 2022, as we said earlier, the pre-pandemic growth engine has kicked back in. We're mindful of the debate about a future recession, and we have prepared the company across the last decade plus through responsible growth to be prepared for that. But as we see our current customer base, we are not seeing them slow down in terms of their activities. So the story is one of organic growth with operating leverage, driven and using our capital wisely. Thank you.
spk07: This does conclude today's program. Thank you for your participation. You may disconnect at any time.
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