Bank of America Corporation

Please stand by. Your program is about to begin. If you need assistance during your conference today, please press star zero. Good day, everyone, and welcome to today's Bank of America Second Quarter Earnings Announcement Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. Please note this call may be recorded. I will be standing by should you need any assistance. It is now my pleasure to turn today's conference over to Lee McIntyre. Please go ahead.

Good morning. Thanks for joining this morning's call for a discussion of our 2Q 2019 results. I trust everybody's had a chance to review the earnings release documents, which are available on the investor relations section of the bankofamerica.com website. Before I turn the call over to our CEO, Brian Moynihan, let me remind you that we may make forward-looking statements during this call. After Brian's comments, our CFO, Paul D'Onofrio, will review the details of our second quarter results. We'll then open up for questions. For further information on any forward-looking statements, please refer to either our earnings release documents, our website, or our SEC filings.

With that, I'll turn it over to you, Brian. Thanks, Lee, and good morning, everyone, and thank you for joining us to review our second quarter results. Many of you discussed, written about, and discussed engaged in debate about the perceived change in the forward environment that we all saw this quarter. However, what we saw in our client base during the second quarter of 2019 was solid consumer activity, pointing to a continued growing economy in the United States this year, albeit at a slower pace. In that environment, our company reported the best earnings quarter in the company's history. That is made possible through the hard work of my 209,000 teammates who are driving responsible growth. We reported $7.3 billion in after-tax net income and 74 cents per share. Both of these items increased on a linked quarter in a year-over-year basis. Revenue on an FTE basis was $23.2 billion and grew 2%. We increased our return on assets to 123 basis points. Our return on tangible common equity was 16.2%. And in the end, responsible growth continued to produce strong earnings, returns, and shareholder values. As we look at slide three, we start to highlight how we achieved these results. Revenue grew 2% and expenses were basically flat year over year. We generated operating leverage of more than 200 basis points. Our credit costs remained low and stable. So that resulted in year over year net income growing 8%. And during the past year, we bought back 7% of our shares. This reflects the model of combining solid operations with strong capital returns and then thereby driving strong core EPS growth. This quarter, diluted EPS grew 17% from the second quarter of 2018. All the way along, our capital and liquidity positions are very strong and continue to strengthen. Book value per share grew 10%. We also had important client growth and market share gains in our businesses. Client activity showed $75 billion of deposit growth, a growth rate of 6% year-over-year. We also had $37 billion of that deposit growth came from people, consumers. At the same time, we saw strong investment flows from those customers. Loans in our businesses grew $34 billion, or 4%. Importantly, we saw progress in other focus areas as well. A year ago, I told you we were continuing to drive to regain our position in investment banking. As a nice start, we saw market shares across many of the products in investment banking in the first half of this year. One example is IPOs. We were number one in volume for U.S. IPOs in the first half. Matthew Coder and the team have done a good job and offered a good start driving this business. All in, we're pleased with the results this quarter. We grew. We did it the right way. We stayed with our risk parameters, and we continue to invest heavily in our franchise, adding salespeople, more technology, increasing our marketing spend, and improving and expanding our physical plant in all dimensions. This result also led to the highest first half earnings in the company's history. So as we look at slide four, we show you the last five years' results for the first half. For the first half of 19, we generated nearly $15 billion in after-tax earnings. Compared to the first half of 18, EPS was up 16%, and you can see that growth has continued for the last five years. In those years, we have driven operating leverage. You can see that in the lower right. This year, we saw that operating leverage continue in the first half. This led to a 57% efficiency ratio. We used the excess capital beyond the need for growth and investments in our company to buy back shares, a trend which has accelerated, and you can see on the lower left here. Now, a primary goal of driving responsible growth has been to produce sustainable results, even if the environment changes. This requires us to drive operational excellence in all we do so that we can drive operating leverage, and we did it again this quarter. As you move to slide five, you can see we've extended our positive operating leverage streak to 18 consecutive quarters. In those 18 quarters, you've seen many different market environments, changes in interest rates, economic growth that sped up or slowed down, but we still managed to drive operating leverage for four and a half years successively. Generating operating leverage doesn't get any easier after four plus years. However, with that strong expense to discipline, we remain focused upon it. Now, one of the things that you don't see here, and you see in our results, is the improvement we're starting to see in some of the categories, especially consumer fees as you go through the quarters, the last four quarters. Over the last decade, we faced service charge headwinds in consumer from reductions in accounts and other fees-related accounts for many years. This was based on our consumer strategy to strive to have the best-in-class franchises. We're at lower fees because of the changes in overdraft policies, but also, most importantly, the drive we've had towards being the core relationship bank for the American consumer. Now, in the recent past, we're offsetting those rate of fee reductions by increasing the growth in the actual accounts, the number of accounts we have that are primary household relationships the past few years. We have much higher retention than we've ever had, and we're improving client satisfaction to levels that hasn't been seen before. But most importantly, that focus in relationship debt has resulted in 92% of our households with primary and with an average balance of $7,000 plus. In card income, we're seeing the consumer debit and credit card spending at a 5% plus level year over year. This seems consistent with us to a 2% plus growth U.S. GDP environment. We're still fighting the headwinds of the reward impacts that go on in that business, and you see that in us and our competitors. But at the end of the day, we're providing great value to consumers. And at the end of the day, when you look at the total relationship from those consumers, it's great economics to our shareholders. Now, next couple of slides, we're going to do something we've done in each of the earnings reports for some time. But we're going to add a piece to it. We always have talked to you about our consumer banking digital usage, which you can see on slide six. But importantly, on slide seven, we'll talk about how that impact is now being driven across our corporate and global transaction services business. So first, let's start on side six with our consumers. Each quarter we've shown you these charts. In the second quarter, in the broadest context, we had 2.4 billion interactions in the second quarter alone with our consumers across all our channels. To show you how dominant it is by digital, 2.3 billion of those interactions were digitally or automated-based. This explains why we have to be and are excellent at both high-touch and high-tech. If you looked at our digital-only clients, meaning customers have not used a financial center in the past year, we have 30 million consumer customers across our platform who are primarily digital, who have more than $400 billion in balances with us today. Their entire relationship is managed digitally, and a balance in activity continues to grow strongly. That's not our business. Our customers want both physical and digital access. This is why we continue to invest heavily in enhancing our number one ranked digital platform while at the same time enhancing our best-in-class financial centers. And again this quarter, you see the interaction of those two in the lower left-hand side of the slide with a record number of appointments that were set up. 580,000 times a person took their mobile or digital device, set up an appointment to come into a branch in a quarter. And you can see that on the lower left. to better serve the three-quarters of a million customers that come into our centers every day. This quarter, we added another 17 financial centers to help drive the growth in our consumer business. We've renovated 45 more, bringing over 1,200 that we've renovated in the last few years. And we remain on track to not only hit the three-year targets we established 18 months ago of adding 500 new financial centers and the targets we established to renovate over 3,000 of them. We also are adding many more relationship managers in these new centers and refresh a lot of centers to bring them up to our modern high-touch environment. Now, one of the things that we hear a lot about is the millennial customer and the Gen Z customer. Our digital capabilities are one of the things that attracts millennials to our platform. Today, in our customer base, we estimate that we have 16 million millennial customers. Those are customers between the ages of 25 and 41. These millennials are very important for our growth, and they hold nearly $200 billion in deposits and investments with us. It's a powerful platform to all segments of the U.S. consumer population. Now, turning to slide seven, while many of us focus on the consumer digital trends, I think it's also important to recognize the significant activity of the digital transformation in our commercial space. Over the past decade, we've been investing continuously in our global transaction services platforms. And on slide seven, we start to show the digital capabilities as part of that investment. We focus on making the business easier, faster, cheaper, and more secure for clients and make it more convenient to access and be in business 24 by seven. We now have nearly 500,000 cash pro online users with double digit growth and mobile usage attached to that moment. Payment approvals by these users were 123 billion in the past year, doubling year over year and growing very fast, obviously. One of the latest enhancements, the type of thing that shows the innovation we have, is to have mobile tokens delivered through an Apple Watch to help corporate treasurers process payments. At the end of the day, the people who work with our companies, in our companies, want the same convenience that our consumers want to be able to deliver the services. So let me end up here by addressing a few questions which are on your mind. Number one, many of you asked what what we see if the expected forward yield curve comes true, i.e., the reduction in interest rates that is in the curve. I asked Paul to lay out our thoughts on that, and he'll do that shortly. The second question is, can your strong asset quality continue to last? Assuming the economic conditions continue to move along, we think that net charge-offs should remain low for some time, and we've told you that for many quarters in a row. This is not because something we're doing in the second quarter of 2019. It's because of the work we've done over the last decade to continue to maintain our risk-price file on a consistent basis and drive towards that. We see no immediate credit concerns as evidenced by the volume or additions to non-performing loans or delinquencies or any of the statistics around credit that you can see in the documents. The third question is, okay, given an environment where you may see a slowdown in the economy, do you have further expense levers to pull? Well, one of the questions we get is because we manage expenses so well, is there more things you can do We believe that it's important to continue to invest in the future of our franchise. Paul's going to talk to you about near-term expense guidance a little later. But importantly, the reason why we're investing is these investments are producing meaningful results. But our 2019 expenses are projected to be lower than 2018, and that brings us to every year in the last decade we've had declining expenses except for one. But we, as the managers you want us to be, agree with you that if there's severe economic and issues ahead, we have the flexibility to continue to reshape this expense base, obviously starting with revenue-related costs, which would adjust quickly and automatically, and then changing our investment strategies. I can assure these areas we focus on and are on our mind just as they're on your mind. So with that, let me turn it over to Paul for a few more details on the quarter. Paul?