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 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 link quarter in a -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 value. As we look at fly free, we start to highlight how we achieve these results. Revenue grew 2% and expenses were basically flat -over-year. We generated operating leverage of more than 200 basis points. Our credit costs remained low and stable. So that resulted in -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% -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 it continued 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 US 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 framers, 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 results 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've 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, 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 our, 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 unsuccessfully. Generating operating leverage doesn't get any easier after four plus years. However, with that strong expense discipline, we remain focused upon it. Now, one of the things that you don't see here, and you've seen 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 franchise. We're 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 in the past last few years. We have much higher retention than we've ever had, and we're improving clients' satisfaction to levels that hasn't been seen before. But most importantly, that focus on relationship debt has resulted in 92% of our households are primary, and it was 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 US 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 slides, we're gonna do something we've done in each of the earnings reports for some time, but we're gonna add a piece to it. We always have talked to you about a 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 slide six with our consumers. Each quarter, we've shown you these charts. In the second quarter, in a 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 in our excellent, both high touch and high tech. If you looked at our digital only clients, mean 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 and activity continue to grow strongly. But that's not our business. Our customers want both physical and digital access. This is why they continue to invest heavily 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 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 1200 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 3000 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 customer. 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 US consumer population. Now turning to slide seven, well, 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 platform. 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. And the other 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 we see if the expected Ford-U 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-off 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 the work we've done over the last decade to continue to maintain our risk profile on a consistent basis and drive towards that. We see no immediate credit concerns as evidenced by the volume or additions in non-performing loans or delinquencies or any of the statistics around credit that you can see in the documents. A third question is, okay, given an environment where you may see a slowdown in 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 gonna talk to you about near-term expense guidance a little later. But importantly, the reason why we're investing is to produce these investments for 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 managers, you want us to be, agree with you, that if there's severe economic 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 that 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?

Good morning, everyone. I'm gonna start on slide eight since Brian already covered the P&L. Overall, compared to the end of Q1, the balance sheet grew 19 billion, driven by loan growth, which ended the quarter more than 20 billion higher in our business segments. Liquidity strengthened in the quarter. Average global liquidity sources of 552 billion remained well above requirements. Sheldrold equity increased 4.4 billion as we issued 2.4 billion in preferred stock ahead of planned calls announced in July. And common equity increased 2 billion. Versus Q1, the $2 billion increase in common equity reflects an increase in AOCI as the value of our AFS debt securities rose, given a decline in long-end interest rates. In total, we returned 7.9 billion in Q2 through common dividends and share repurchases, 112% of net income available to common. As a reminder, we recently announced plans for a 20% increase in our quarterly dividend, as well as an increase in our share repurchases to more than 30 billion over the next four quarters. With respect to regulatory metrics, our TLAC ratios remain comfortably above our minimum requirements. Our CET1 standardized ratio increased to 11.7%, remaining well above our minimum requirement of 9.5%. Higher capital levels drove the increased AOCI. Excuse me, higher capital levels were driven by the increased AOCI, improved the CET1 ratio, while higher loan balances and commitments mitigated some of that improvement. Moving to client activity and starting with average deposits on slide nine, average deposits grew nearly 75 billion, or 6% year over year. This was the 15th consecutive quarter in which we grew deposits more than 40 billion. Global banking alone brought in more than 39 billion. Global banking continued to benefit from strong customer demand, reflecting the additional bankers we have deployed over the last few years in the middle market franchise. We also continued to see a shift from non-interest bearing to interest bearing deposits in global banking. Deposits with consumers grew 37 billion or 4%. Within that, global wealth management was up 18 billion year over year, reflecting client growth with a preference to hold cash amid market uncertainty, as well as inflows of about 8 billion from the conversion of some money market funds to deposits near the end of 2018. Consumer banking deposits grew by 19 billion or 3% year over year. More importantly, checking balances grew while more expensive balances declined modestly. In fact, checking balances grew 22 billion or 6% year over year to 374 billion, while rate paid remained low at nine basis points, up only five basis points year over year. Turning to average loans on slide 10, overall our loans grew a little less than 2% year over year. Our all other portfolio is down to 45 billion and has been running off at a pace of approximately 2 billion per quarter, excluding loan sales. Looking at loans across our business segments, core loans grew 34 billion or 4% year over year. Consumer, wealth management, and global banking segments each grew at a healthy year over year pace. As you can see in the bottom right chart, we continued to demonstrate a fairly consistent pattern of responsible loan growth. Growth of loans to consumers was led by an increase in mortgages as lower interest rates stimulated more originations and allowed many of our customers to lower the cost of owning their existing home or buying a new one. Within global banking, we saw increased activity for middle market clients, complementing the continued activity from large global corporate borrowers. Turning to slide 11, I'll not only review the drivers of our net interest income this quarter, but also provide a few perspectives on the future, given the expectation of lower rates embedded in the forward interest rate curves. Net interest income on a gap basis, on a gap non-FTE basis, was 12.2 billion, 12.3 billion on an FTE basis. Compared to Q2-18, gap NII was up 361 million or 3%. The improvement was driven by the value of our deposits as interest rates rose in 2018, as well as loan and deposit growth. On a link quarter basis, gap NII was down 186 million. In Q2, we benefited from an initial day of interest, as well as loan deposit growth, which was more than offset by three factors. First, lower long-term rates resulted in higher prepayments of mortgage-backed securities, which caused higher write-offs of bond premiums. Second, Q2 included higher funding costs from growth in non-earning trading assets and other global markets assets. And then lastly, lower short-term rates reduced yields on floating rate assets, such as commercial loans. As a result of these impacts, net interest yield of .44% declined seven basis points link quarter, but was up three basis points year over year. With respect to deposit rates, we remained disciplined and saw minimal movement in total deposit rate paid. At 57 basis points, it increased just three basis points from Q1. With LIBOR rates lower than Q1 and the forward curve predicting further declines, we would expect client deposit rates to begin to move lower over the third quarter. Turning to asset sensitivity of our banking book, we remain asset sensitive, given the nature and size of our deposit base and the type of loans our customers have sought from us. Our asset sensitivity in a rising rate scenario increased compared to Q2. This was driven by the decline in mortgage rates, which increases the likelihood of mortgages, of mortgage repayments in the baseline. The lower current forward curve also caused increased asset sensitivity in the falling rate scenario. In the second half of the year, we expect NAI to benefit from growth in loans and deposits, as well as an additional day of interest in Q3. However, lower rates are expected to have three primary negative effects. First, yields on floating rate assets should continue to decline from short-term rate reductions. Second, lower long-term rates may continue to stimulate mortgage refinancings, causing increased write-off of bond premiums. And third, reinvestment rates on securities and mortgages will dilute current portfolio yields. However, lower LIBOR rates should reduce the cost of our long-term debt and other funding, partially offsetting these headwinds. Last quarter on our earnings call, we reviewed our expectations that net interest income could grow roughly 3% for the full year of 2019 over 2018. That was based on a relatively flat forward curve at the time of our earnings call. Since that earnings call, on a spot basis, the 10-year rate has fallen more than 40 basis points, and short-term LIBOR rates are lower by 10 basis points or so. From here, if we were to assume stable rates, we think our NAI for 2019 would now be up approximately 2% compared to 2018. Additionally, the forward curve anticipates two Fed fund rate cuts in 2019 and another in 2020. If rates follow the forward curve and the Fed funds rate were indeed to be cut twice this year starting this month, we think it would likely shave another 1% off NAI growth for 2019. Turning to expenses on slide 12. We have now been pacing at our targeted level of non-interest expense for several quarters, and our efficiency ratio has improved 100 basis points year over year to 57%. At 13.3 billion, we were basically flat compared to Q218 with expenses up less than 50 million. While holding expenses roughly flat, we increased investment in our people, our brand, in technology, and in office space. And as you know, we are adding and renovating financial centers which serve not only consumer clients but also commercial and wealth management clients. Investment in people included adding more sales professionals, increased merit and benefit, as well as the shared success bonuses which we have awarded for two consecutive years now. Since a portion of shared success bonuses best over time, we are now covering those programs in our ongoing expense base. Also in the expense base is the increase in early Q2 of our minimum wage to $17 an hour. And as you know, we announced our intention to continue to raise our hourly minimum wage until it reaches $20 in 2021. Compared to Q1, expenses are also up modestly as Q2's decline from the seasonally elevated Q1 payroll tax expense was more than offset by the increase in investment in initiatives and marketing in Q2. In the second half of 2019, we expect our expenses to roughly equal our first half expense of 26.5 billion. We expect increased technology investment in the second half plus the cost of adding new client-facing professionals to be roughly offset by the seasonally lower incentive cost. We previously projected that we could hold 2019 flat with our 2018 expense of 53.2 billion, inclusive of these planned investments. However, as you heard Brian say, we now estimate expense in 2019 will be modestly lower than that. Turning to asset quality on slide 13. Asset quality continued to perform well, driven by our disciplined approach to underwriting in a solid U.S. economy. As you know, the industry received annual stress test results this quarter, and once again, our loss rates in stress scenarios were lower than our major peers. Total net charge-offs in Q2 were $887 million, a little more than $100 million lower than Q1 and the year-ago quarter. The decline was driven by the sale of $700 million of home equity loans, which resulted in $118 million of recoveries from previously charged-off loans. Absent this recovery, net charge-offs were just over a billion or 43 basis points of average loans and consistent with the net loss-off ratio in Q1 and the prior year quarter. Outside of the normal expected Q2 seasonality in our credit card portfolio, we had a modest increase in commercial, driven by a couple of single-name losses. Provision expense of $857 million, excuse me, provision expense was $857 million and included a modest $30 million net reserve release. Our guidance on net charge-offs from many quarters now has been roughly a billion dollars per quarter, and that remains unchanged. This guidance assumes current economic conditions continue. Okay, on slide 14, we break out credit quality metrics for both the consumer and commercial portfolios. With respect to consumer metrics, delinquencies trended lower, which we believe is a good indicator of future losses. Additionally, non-performing loans continued to improve even after taking into consideration the loan sales this quarter. And in commercial, we also saw a modest decline in non-performing loans, while reservable criticized ratios remained near historic lows. Turning to the business segments, and starting with consumer banking on slide 15, consumer banking produced another strong quarter. Earnings grew 13% year over year to $3.3 billion. Revenue grew 5%, and we created operating leverage of more than 400 basis points. The efficiency ratio also improved year over year to 45%. Even as we invest in new markets and renovate financial centers, the all-in 162 basis point cost of running the deposit franchise was relatively flat compared to Q218, as the decline in the cost of deposits component offset the increase in rates paid. Client activity remained strong, with loans and deposits showing solid growth. Mortgage originations clearly benefited from lower rates. Customer satisfaction improved. Asset quality remained strong, as the net charge-off ratio was 124 basis points, decreasing four basis points year over year. And I would note that much of the loan growth that we have added to our balance sheet is high-quality consumer real estate loans. We continue to add salespeople for consumer lending, investment advice, and small business lending. And we also increased our spend in marketing via a campaign where our 91 local market teams around the country asked their customers what they would like the power to do. Turning to slide 16, note that the 5% year over year improvement in revenue was driven by NII. While card income was down modestly year over year, card spending grew 5% more than the prior year, which on its own was a strong quarter, given elevated spending driven by tax reform last year. Versus Q1, we saw improvement in card income driven by solid purchase volumes. We continue to expect higher rewards to dampen card income, but would also remind you that we use rewards to deepen relationships with a focus on total customer revenue, not just fees. Enrollment and preferred rewards increased to 5.7 million and now represents 65% of the eligible opportunity, and our retention rate of these customers is now 99%. Balances with these customers grew 11% versus Q2 18. With respect to service charges, they were also down modestly year over year. Again, this quarter, we faced the headwinds from actions we took in previous quarters that reduced customer penalty fees. However, as with card versus Q1, we saw modest improvement in service charges. Turning to global wealth and investment management on slide 17, strong results were driven by new investment accounts and more traditional banking products, as well as the markets rebound in the quarter. Referrals from across the company also gained momentum. Net income, which approached a record level, was just over a billion dollars and grew 11% from Q2 18. Pre-tax margin was a record 29%. The business created 240 basis points of operating leverage year over year as revenue increased more than 3% and expenses grew 1%. Within revenue, positive impacts from banking activities and higher rates drove NNI higher, while fee improvements from AUM flows and market valuations more than offset general pricing pressures. With respect to expenses, higher revenue-related incentives, as well as continued investment in new advisors, technology, and brand, were modestly offset by lower intangible immunization and deposit insurance costs. Digital use by affluent clients continues to gain momentum as mobile usage once again grew double digits year over year. For example, GWIM clients used e-signature twice as much as they did only a year ago. Moving to slide 18, GWIM results reflect continued solid client engagement in both Merrill and the private bank. Strong household growth in both businesses contributed to the 2.9 trillion in client balances. AUM flows were $5 billion in Q2, or $24 billion over the past four quarters, contributing to record AUM balances, which rose 6% year over year to $1.2 trillion. On the banking side, deposits of $254 billion were up $18 billion, or 7% year over year, driven by client growth and the desire by some clients to hold more cash amid the market uncertainty. Linked quarter deposit outflows reflected seasonal tax payments by our customers. Loans were 3% higher year over year, reflecting strong mortgage growth, given the decline in rates. We also saw good growth in custom lending. With respect to client activity, one thing worth noting is the increase in client referrals both to and from Merrill and the private bank advisors. This quarter, we had nearly 15,000 referrals to advisors from other parts of the company, and advisors made more than 58,000 referrals back to our other LLBs. In Q2, these introductions added $7 billion to client balances in GWIM and helped us grow households. As you turn to slide 19, I know many of you look at global banking and global markets on a combined basis. So to help you with your comparisons, I note as I did last quarter that on a combined basis, these two segments generated revenue of 9.1 billion and earned 3 billion in Q2, which is nearly a 16% return on their combined allocated capital. Looking at them on a separate basis and beginning with global banking on slide 19, the business earned 1.9 billion and generated a 19% return on allocated capital in the quarter. Earnings were strong but down 9% from Q2-18, driven by the absence of reserve releases for energy exposure in the prior year. Revenue was down modestly year over year as loan spread compression and ALM activities offset the benefit of loan and deposit growth. Strong deposit and loan growth reflects the hundreds of bankers we have added as well as continued investment in how we deliver our loan product and treasury services. With respect to expenses, lower deposit insurance costs, mostly offset continued investment in technology and bankers. Looking at trends on slide 20 and comparing to Q2 last year, as you heard Brian mention earlier, we have made steady progress in investment banking over the last few quarters. We saw a nice finish this quarter with IB fees of 1.4 billion for the overall firm, down 4% year over year, but up 9% from Q1. This performance has to be put in the context of overall industry fees, which according to Dealogic, were down roughly 20% year over year. In fact, using Dealogic data, our market share has improved across most major products, comparing the first half of 19 to the first half of 2018. Switching to global markets on slide 21, as I usually do, I will talk about results excluding DBA. Global markets produce 1.1 billion of earnings and generated a return on capital of 12%. Overall, revenue declined 6% while expenses declined 2% year over year. Within revenue, a -over-year decline in sales and trading was partially offset by a gain on the sale of an equity investment. Sales and trading declined 10% year over year, FIC was down 8% while equity fell 3%. The decline in equities to 1.1 billion reflects weaker performance in EMEA derivatives compared to a stronger year ago period. FIC's lower revenue was due to a weaker trading environment with lower overall client activity across most products. The 2% -over-year expense decline was a reflection of lower revenue-related compensation. On slide 22, you can see that our mix of sales and trading revenue remains heavily weighted to domestic activity where global fee pools are centered. Within FIC, revenue mix remained weighted towards credit products and we had no days with trading losses in the quarter. Finally, on slide 23, we show all other, which reported a small net profit, 358 million better than Q218. There are two primary reasons for the improvement. First, provision benefit increased 136 million from Q218 driven by the non-core loan sale, which as previously noted, resulted in a recovery of 118 million. Second, we had an improvement in our tax rate compared to Q218. The tax rate for the company was 18% in the quarter, a little lower than our expectations. We expect the tax rate in the back half of the year to be approximately 19% absent any unusual items. Okay, I think with that, we're ready for some Q&A.

At this time, if you would like to ask a question, please press the star and one on your touchtone telephone. You may withdraw your question at any time by pressing the pound key. Once again, to ask a question, please press star and one on your touchtone telephone. And we'll take our first question from Jim Mitchell with Buckingham Research. Please go ahead.

Hey, good morning,

guys. Morning.

Hey, just might as well ask a question on NII. Appreciate the guidance for this year. How do we think about, I guess, number one, the impact of just one rate cut, is it sort of half, is it linear? And I guess number two, as we think about next year, if the forward curve is realized over the course of the next 12 months, how do we think about that impact into next year? And given the strong loan growth you guys have seen kind of accelerated into Q, is there enough asset growth that you can still grow NII in this environment next year? Thanks.

Okay, so in terms of just isolating in on a 24 basis point cut on the short end, I guess a crude approximation is, you know, the three billion impact over the 12 months of 100 basis point down rate shock on the short end. The quarterly impact of that is a little more than 175 million, but it'll be even less than that because that $3 billion is measured relative to the forward curve, which already includes rate cuts. Plus, that analysis is just on our banking book. If you include our markets book, which is modestly liability sensitive, you get to the approximately $100 million levels that I discussed in the prepared remarks. In terms of 2020, look, I would say it's a little early to be talking about 2020. We don't know what rate cuts we're gonna get. We don't know why we're gonna get them, which is important. So I think as we get a little closer, we'll be more likely to talk about that.

Thanks. Jim, I'd add one thing. You remember, if you think about the industry's thought process over the last three years, basically, as rates rose, that was one thought process and how people price deposits and other things. And as that changes, you'll see a different thought process take hold, at least in our company. And I think if you look at some of the statistics and the materials, especially on the corporate, the GTS type business, the necessary increase for the highest balance customers and et cetera that's occurred will slow down and come back the other way. And that frankly is just the nature of a change in the rate environment, which the pricing is still catching up to. And so I think, so as you think about it, as you get out the longer term in 20, you have to think about that situation sort of reversing back to a different framework than the framework we had literally 200 plus basis points of short-term rate increases.

Okay, thanks.

We'll take our next question from Glenn Shore with Evercore. Please go ahead.

Hi, thanks. Morning, Glenn.

Morning. One quick one on follow up on cards. You mentioned spending up, margin compressed, and the reward costs continuing to be there, but obviously producing some growth. Can you talk a little bit more about the reward dynamic, how long the current environment you think lasts, and how you know that it's gonna continue to fuel that growth, maybe something a little bit more of growth coming from current customer base versus new ones, things like that, thanks.

So just starting at the end of your question and working backwards, we generated another million plus cards this quarter. We've been fairly consistent doing that. What has really happened in our card business over the last few years has been the continued repositioning, it's really over now. And now you're starting to see it start to work its way up and grow just in terms of balances and numbers of cards and things like that. If you think about on the rewards question generally, remember that, and you mentioned it, Glenn, that it's a relationship pricing piece. So our cards come with a relationship pricing across the whole relationship, including deposits. So you could have $20,000 deposits from these customers and so you reward them with a card because that's the way that you can do it, but you're actually getting the deposit. So we'll keep working that. But if you look at the more recent quarterly trend, you're gonna see that you've seen the impact decline, although it's still gonna hit, but you're seeing that help fuel our deposit growth in checking deposits, especially at 6% -over-year in consumer, and that is a huge payback for the reward price. So you'll see the dynamic continue. We haven't seen big breakage fees, and it's not so volatile, it's kind of steady, but the industry dynamics and how people are using rewards, not only for the card activity, but also more broadly, is I don't expect a change, but in the Bank of America context, we've been using it for the broadest part of the franchise and that's why you see the good growth in the other parts of the business.

Appreciate that. One other one, a follow-up on wealth management. You mentioned new household growth up 45% -to-date. Are you doing anything specific on incentives to spur that growth that seems like a big number for such an already big business? And the related question is, do you think of there being a ceiling to margins because they're already huge at 29%?

Couple things. One, just on the way the incentive system works, Andy and team, going back two years ago now, basically added to a modifier for lack of better term in the incentive compensation construct for a requirement, yeah, a bonus if you grew your households on the numbers and obviously an inverse of that if you did not. And that's just led to the activity that you've seen in the pickup and Andy and team have done a good job. On the private banking side, we've been adding sales teammates and Katie and the team have been driving that. It's up dramatically over a year and that's critically important because that business profitability dynamics are much or even higher. And so it does come from modifying the system and also comes from the way we operate in the markets on the referral business that is, in Paul's comments you heard that, there's a huge flow between the FSAs that operate in the Merrill Edge platform at the branch to the financial advisors. So someone comes in, has the amount of assets and desires, a financial advisor, we move them to the platform. That happens a lot. And then off to business banking, small business banking, commercial franchise, the entrepreneurs behind those businesses referred over and you saw I think 15,000, I think was Paul's number towards Merrill and we track that in every market. We make sure they get executed on and we count the success rate and that energy creates, it's gold in every market every year and this year we'll do seven million referrals across all the businesses in the markets that we're doing. And so, and then on the margin, we moved to 29. As you see the NII type activities, loans deposits continue to grow, that margin will continue to grow. We're fighting the fee compression on the pure asset management business that you've seen go on for years in this industry. But we have lots of advantage of scale and capabilities on the digitization of the operational side of that business and platforms and statements and things like that. We're getting to 50, 60% digital statements and consumer. We're not anywhere near that in wealth management and all that is not some snap your fingers and overnight it happens, but all of it's the grind to make the business more efficient. So our industry leading margin, we think we can keep pushing it up.

Thanks, appreciate it

Brian. We'll now go to Mike Mayo with Wells Fargo Securities. Please go ahead.

Hi, I was intrigued by your comments about 16 million millennial customers, $200 billion of deposits. And I think that's the first time that you've disclosed that information. So I guess what's the growth rate profitability of those customers? And as you look at the millennial customer set, what's your assumption for how long they'll be customers with you since they're younger and you have more digital banking? Do you now assume that they'll be with you say 20 years instead of 10 years? And if so, how do you change the pricing of products for that millennial customer set?

Sure. You know, one of the things I don't wanna sound pervocatious in terms of people's views that big banks don't do business with millennials. It's just to set the tone, we put the 16 million to give you one sense of $400 billion of client balances with us. But if you look at our checking sales, Mike, and you look at the population representation of millennials in the population, in Gen Z in a population, you look about 18 years old and millennials is about 24% and people between 18 and 24 is 11%. But if you look at the rate we sell to that class of our sales, to millennials is 40% of our sales. So it's basically one and a half times the rate in the population we're selling to. And if you look at their holdings and balances today, just pure checking, nothing not into savings or investment, the millennials hold about $70 billion of checking balances with us and it's growing quickly. And so we are gaining share in that class it's because of the digital capabilities and all the things we talked about. Are they profitable? All our consumers basically are profitable. They represent a big part of our business today. The representation is currently outstanding, checking accounts is about 40% just for millennials. So we're gaining share in that segment. We gotta be on our toes at all times. And it's very valuable if you think, you know, Mike, you've been around this business a long time you think about just those checking balances alone or provide tremendous value. Will they stay with us? The answer is they have in the past and we expect in the future as long as we keep driving the great experiences we have. And going back to the comments in the page six that I get is in the slide deck on consumer strategies. Just look at the activity levels. And those are generally would have a stronger cohort to younger below 40 year old people. But on the other hand, across the platform it wouldn't work. But if you look at it, you know, it was Zell, the activity volumes, you could look at it with Erica in a year, 50 million plus customer interactions. And if you look at it in terms of digital interactions at 2.3 billion and a quarter, mobile log-ins a billion and a half, this is as advanced stage as anybody. And so we are very pleased with the teams work in this area. And then if you go to Merrill-Ledge, if you look at the millennial balances again, they represent, you know, twice the rate of the population. And we're accumulating those balances, which when we compare them to other competitors, 64% of our new clients are in the millennial categories for Merrill-Ledge and our preferred clients and things. So it's very good, we're driving it, but it's the competency of teams capabilities in those categories that drive it.

And the other question that I had, you know, how long do you assume these customers will stay with you and how does that compare to the past? The reason I ask that, you look at some of the offers out there and you can get 400, 500, $600 simply for opening accounts at certain banks. And the assumption is that, you know, once you get these customers, maybe they'll stay with you longer than they would have, say, 10 years ago.

Well, that goes back to your colleague's question about the rewards and things like that. Our preferred base of customers in the consumer business is a 99% plus retention rate. And so they really all stay with us. And so, you know, that's extremely powerful dynamics. So the assumption, I don't have the top of my head that the team puts in their models and stuff like that, but if you're retaining 99% of them, it's a pretty long duration. All right, thank you.

We'll take our next question from John McDonald with Autonomous Research. Please go ahead.

Good morning. The core loan growth continues to remain solid at 4%, Paul. Are you seeing some improved momentum in middle market and small business? And also the 2% reported has closed some of the gap to that core number. I guess, as you think about the rundown pace, could we continue to see a narrowing so that your overall balance sheet growth looks closer to that core?

I guess I'll take the second one first. The answer is yes. I mean, we have 45 billion in the non-core portfolio. Of that 45 billion, half, I would say, is sort of legacy home equity and residential mortgages that will run off and or depending on market conditions, we may see some more sales. The other half is mortgages that a previous treasurer or CFO bought many years ago. They're good mortgages. They're gonna run off as well. Together, they're running off at about 2 billion a quarter. So yes, I mean, you can just do the math. It's becoming a smaller component of the overall picture. And as you point out, when you look at our LOBs, they were up 4% year over year this quarter and we are seeing, I think, good growth in small business. In fact, I think we're the largest lender to small business companies in the US now surpassing a competitor recently. We were seeing in middle market this quarter, we saw a pickup in growth that really complimented the consistent growth that we've been seeing for many quarters now from large global corporations. I mean, we don't see anything on the horizon to suggest that we can't continue to grow kind of what we've been telling you, which is kind of the low, mid, single digits for the company from the business segments.

I just had two thoughts. One is, Sharon Millen runs our small business force in the consumer business and Alistair Boerthweke runs middle market. They've got their team sort of moving along and as you said, growing at a consistent five, six, 7%, depending on the product set, the type of what's real estate's lower versus core middle market. And so we feel very good about that. You remember that the runoff pace in the all other book has been accelerated by the sales over the last few years and that was to reduce our potential credit risk and stress and you've seen that be reflected, including last year asking for the extra capital return based on selling a bunch of loans during the year, which had higher charge-offs in the C-CAR process, as you might expect. And then secondly, the operating risk of the company comes way down because those loans would have a tendency and we sell them servicing release. So we're getting to the bottom of the barrel. It's now 4% to 5% of the portfolio used to be, 8, 9% of the total portfolio, maybe 10%. So we feel good about that impact really narrowing now. And the sales are largely, we always chipping away, this quarter was a relatively modest balance, but the sales are largely through the money and the stuff we have now is actually 12 years current pay and the thought that none of these loans were made since the crisis. So we feel good about that. And the last thing is think about in the Merrill side in terms of, in the private banking side, terms of loans growth, we're seeing a solid performance there and the integration in Middlemark Investment Bank and we feel good.

Ray and Brian, I know you clicked on this a little bit, but could you talk about your feelings about your ability to maintain the strong checking account growth that you've had given the stance on rates paid? What's your outlook for that checking account growth to continue maybe relative to GDP or to the industry?

If you look at it, we have maintained that pace. If you look at retail deposit growth since the beginning of 16, I think our gross balance has grown about 20%. The peer group's grown about 12. And so that's significant difference. We've been pretty consistent growing 20 odd billion dollars in checking. That is the core transaction account. So if you look at what we're seeing now, the average balance in our checking accounts, I think are 7.5, 7.5 thousand, 7.7, something like that. 92% current, yet we're still, in the last couple years, starting to net accumulate and so we feel good if we can keep that checking balance growth. It's not dependent on rate paid because it's the core transactional account. So even though there's some payment toward the interest bearing checking, the dominant part is non-interest bearing and it's just the core transaction account. If you look in the money markets and stuff and see the rates, that's where the people get paid for the excess balances. But this is the money that's flowing through the household on a daily, weekly, monthly basis and we feel very good about it and figure we can continue it because we have in all the environments and all the rate changes.

Great, thank you.

We'll now go to Saul Martinez with UBS. Please go ahead.

Hey, good morning guys. Couple questions. First, I wanted to key in on something you said, Paul, on the rate sensitivity. You mentioned, I know it's a crude approximation, but 25 base point cut on the short end, it's about 175 million a quarter, but that's just the banking book. And your liability sensitive in your trading book. And I think you mentioned it's 100 million if you kind of net that out. So should we, is my math right in suggesting that you get something in the neighborhood of a $75 million benefit per quarter for every 25 base point cut in your trading book? Because obviously in the past, sometimes we've kind of looked at your NII growth and your NIM expansion in a rising rate environment and maybe it hasn't grown as much as we thought because of the headwinds in the trading portfolio, but as short term rates move down, should we see the opposite of that also occur and some of those headwinds get mitigated by expanding margins in your trading book?

Well, I think you're close, but the one piece you're missing is that, in addition to being modestly liability sensitive in the trading book, when you look at those disclosures about the impact of 100 basis point shock on the down rate scenario on the short end, remember that's below the forward curve.

Right.

So you're looking, you're literally talking about a scenario where short end rates would be shocked down to 75 basis points and long end would be at one percentage point.

So that

three billion obviously, it gets, you have more and more impact the lower and lower rates go. That first 20 basis points is not gonna be three billion divided by 60. Right. So you gotta factor in both of those things.

No, I'm understood there, but is the logic right, I guess is my question that you'll get an offset and that offset is sort of in that magnitude of, for every 25 basis points, something in the neighborhood of 75 million on the trading book.

Yeah, I don't think we're prepared today to give too much guidance on the, how liability sensitive the trading book is, but when you put all the factors together, you kind of get to roughly 100 basis points, I mean, 100 million on that first rate cut.

Okay. And

remember when I went through the script and talked about how that we still end up growing year over year, 2019 versus 2018, you gotta factor in loan and deposit growth, we got a day coming in the quarter. So all those things impacted.

And you're also baking in a little bit of a benefit, a little bit of an offset then from expanding margins in the trading book on the rate cuts. And that guidance.

Yeah, and that guidance, we're putting in a little bit,

yeah. Okay, changing gears and apologize if I missed it, but did you disclose the size of the gain on the sale of the equity investment?

We didn't disclose the equity investment, trade wise, yeah. No, it was 200 million.

200 million, okay, awesome. Thanks so much.

Thank you.

We'll now go to Stephen Chuback with Wolf Research. Please go ahead.

Hey, good morning. So I wanted to start off with a question on the investment banking business. It was pretty nice to see fee share increasing in the quarter. We had seen some share loss in some of the more recent quarters. Now I was hoping you could speak to some of the factors that are maybe driving some improved business momentum, whether it's leadership changes or anything else that you could attribute it to.

Sure. So just a quick review. Year over year, the market fees according to the deal logic were down, I think, 21%. Our reported fees were down only 4%. And if you look at deal logic fees for us, maybe 11%. So clearly, we picked up, at least in this quarter, meaningful, I would say, market share. I think this is a result of all the things that we said we were gonna do, not that we ever had a problem in investment banking, but we think we should be top three. And there was a little bit of slippage there. And so we just reinvigorated the focus. We decided to add more bankers, particularly to cover the middle market. Remember, we have an army of commercial bankers out there. They have great relationships. They've been making loans to clients for years. And there's certainly an opportunity when those companies need to do something, need to use investment banking products for us to be there. We just needed to probably add a few more bankers dedicated to that segment. We've done that. We've got regional bankers now all around the US. We're gonna be adding more. They're in the market with the commercial bankers. And that, and I think just the reinvigoration from the leadership team across global corporate investment bank and commercial bank and business banking, I just think is having an effect.

All right, helpful color. And then Paul, just one more for me. And it's on the topic of NII. I'm gonna take a slightly different tack. No, there's obviously pretty heavy reliance across the industry on the 10Q disclosures, which I know are inherently flawed. It's a very static snapshot. I was hoping you'd speak to some of the factors that are driving more benign impact in terms of the rate sensitivity that you cited versus what's explicitly disclosed in the 10Q, whether it's volume growth, some issues relating to your comparing it versus the forward curve, deposit offsets, or anything else you could speak to.

But just one thing to be precise, that Paul said a couple of times, but it gets lost sometimes, and I'll let Paul get into the broader statement. When we disclose the minus 100 basis points shock or down to 100 basis points across the curve, that is on top of what the forward curve has in it. And so sometimes people get confused by that because they think it's from the current rate, stable rate environment we see today, minus 100. It's actually, in the case of forward curve, having the rest of the year two cuts in it, it's 50 off and then another 100 off. And so that dynamic Paul's mentioned twice to sort of make sure people don't get ahead of us. But Paul can take you through the broader factors, but just be careful that you're not making that miscalculation which we've seen other people do. We're not saying you have, but other people have.

I understand. Sure, look, I'm not sure what else I can add. I mean, if you think about our clients, right? You've got GMOM client and global banking clients where if rates change, the pass through rates on those clients are gonna be roughly the same up or down, right? And you've got consumer clients where, because of the great job we've done on rate paid in this cycle, there just isn't a lot of room on the downside, but if rates go up, there'll probably be a little bit more pass through. So that's the dynamic we're living with. On top of that, you've got to factor in when long-term interest rates go down, the quarter later or the month or later, you're gonna see an impact. That doesn't continue forever. It's only an impact when the rates go down, you get a lag effect on some increase and right off of premium.

And that's what's going

on.

Paul, just on that this quarter, a couple basis points of the compression is due to the amortization of the premium, which goes away next quarter if the tenure doesn't fall by 50 basis points again during the quarter. So in another basis point sort of seasonality. So when Paul talked about some of these sort of spot issues earlier on, of the seven basis points, three of it is really just literally a quarterly effect that goes away. And so that's where you think, as you think about it, you go back to all the factors listed, loan growth, deposit growth, deposit pricing, loan pricing, but then the twist in the market when things change instantaneously can have a quarter effect and go away next quarter as long as rates don't move at the same velocity that they move this quarter. And that's why that we are always careful about these estimates to make sure people understand the online basis. Now, one of your colleagues said earlier, the whole clue of this is we gotta grow loans in deposits. We grew $70 billion in deposits a year ago, a year ago $30 billion in loans. The rest of the deposits go into securities. That is the core business and that will drive the earnings power of this company and average earning assets are growing. And that's what we're up to. That will ultimately make NI grow. The questions, the twists and turns along the way can be a little different.

Now, very helpful color, Brian. Thanks for taking my questions.

Our next question comes from Matt O'Connor with Deutsche Bank. Please go ahead.

Morning, Matt.

Good morning. You mentioned earlier about some of the puts and takes on the expenses and gave guidance for this year to be a little bit below what you had thought a few months ago. But what are your thoughts kind of beyond this year? I think at one point you had said try to keep costs relatively flat at $53 billion. And then you did mention if, I think you're talking if you're alluding to call it capital markets related or volume related areas, if those were weaker there are some levers to pull on costs. But if it's just a lower rate environment, is there other area on the cost side that you can pull in? So I guess the question is like in a stable rate environment or your base case, what are you thinking on costs? And then if the revenue shortfall is just rate driven, are there some areas that you can tighten? Thanks.

So I think if you think about it over the last two years plus, I think we've run around $13.1, $13.2, $13.3 billion in quarterly expenses. Except for one quarter we had $13.8, which is sort of the seasonality of a strong markets quarter. Plus it was the first quarter with the FICA and stuff like that. So basically we got this thing at a run rate. But you got to remember in 19 that run rate is picked up. If you go back to when tax reform came through, we said we'd put $500 million more in the technology investment platform. A chunk of it ran through last year, and about 200 or 300 of it's running through this year. So that was increased expense. We said we did a share for success. We did over $1 billion in the two programs. There was a near term cost to it. And then there was an amortization of the deferred parts of their stock. That's all in the P&L today. And then you have incentives and create rent and all the other stuff, the benefits. And with all that, we thought we'd be 53.2, 53.3 this year. And Paul's told you basically to assume that we'll be closer to 53 with all that going on and all that extra investment. So if you go back to 16 when we said we're running a 57 or 6 or whatever we were, we told you we'd be 53, low 53. It's nobody believed this. We got here. We've invested a lot more. And we still are running at 53. That is the inherent ability of the new BAC, CIM, Operational Excellence, Org Health, which doesn't mean a lot to all of you, but the teammates listening will understand all that. That allows us to keep driving the relative efficiency of the company. And even in an environment where the world just kind of goes on, you have 2% growth, we know there's more we can do. What we don't want you to do is to get ahead of us because frankly, the investment year over year in marketing was $150 million last year's second quarter, this quarter, additional in the quarter. That won't sustain at that kind of level, but it's part of driving that customer satisfaction to light scores through the roof, which then means the millennial accumulation that counts at twice the rate of the population, which then turns into customers to Mike's point of the future that the digital competency allows us to serve more efficiently, which then drives down the efficiency ratio. That is the operating model. And so those investments pay back and they'll redound our benefit. With that said, we're saying we gave you a platish from 18 to 19 to 20. And we're basically saying you don't push 20 down yet in your models because we'll see what happens. But right now we think 19 is gonna come in a couple hundred million under what we said, which is just good, by the teammates here is good management. We didn't do anything, we didn't pull any lever. We just kept driving the basic efficiency of this platform through and we'll continue to do that. And if that comes in to be lower than the number we're talking about for 20, and when we get there, it's gonna go to you. But importantly is we shouldn't change our investment strategy, our belief, our board's belief and our shareholders' belief frankly, is don't change your investment strategy because right now you're seeing the market share accumulations come that you wouldn't change to pick up expenses by 100 million and a quarter. A penny wouldn't make it good, but the investments are long term strategic drives that are happening. And just on the investment banking, adding 50 middle market investment bankers and doubling that again over the next couple years is paying us back.

Okay, that's helpful. And then just separately the CCAR ask and approval impressive at 30 billion as you mentioned earlier. Do you plan to use all of that? And should we assume the timing if you do plan to use all that is spread even or do you have flexibility to front end it if you wanted to?

Yes, we plan to use all of it and it's spread equally over the quarters under the way the method works and sort of the guidance they give you. So it's spread evenly over the four quarters and yes, we plan to use 100% of it.

Okay, thank you.

We'll now go to Ken Houston with Jeffries. Your line is open.

Thanks, good morning guys. Brian, you mentioned in your opening remarks just how strong credit is and expected to continue and you guys have had talked about charge-offs kind of living in the 900 to a billion range of quarter. We went under that even this quarter. So can you just talk about, is there any reason why we should see any change in this kind of 900-ish run rate even with card losses are barely even moving as is just an update on what you're expecting to be great, thank you.

I'll let Paul hit that one just because he talked about it. Go ahead,

Paul. So you're right. Net charge-offs were lower than a billion this quarter but that's because we wrote back up charge-offs we took earlier associated with the loans we sold this quarter. So if you back that out, it's approximately a billion dollars of net charge-off and that number we think is a good number, approximately that number, it'll bounce around because we're bouncing around the bottom on commercial so one commercial client or another can always move things but it's been a billion now or up to a billion now for many, many, many quarters and if we think the environment stays the way it is, that's what we think it's gonna be and then provision will follow that.

And you think about it, card's the number, right? And if you look at our lag charge-off rate because sometimes growth, we're basically consistent with our current charge-off rates so the stable portfolio, stable credit, in the end of the day it's 80, 90% of all the activity and you've seen that basically be fairly consistent and this year is the lowest increase in card year over year since 2013 so that prime focus book, that primary customer account basis, the combined rewards probably leads to a very, very strong customer base there so we feel good about credit and our view of the economy continues to move along and the low to mid twos is what the research team has and then next year around two and given that, we would not see a change.

Okay, got it. My second question is just on the preferred stack. You guys did some issuance and I think some either pending or calls. Can you talk about just at least where you expect to prefer dividend to land going forward and there's more opportunities to refinance that part of the capital stack?

Well, we never really like to talk about plan stuff but in terms of the preferred stack, we're gonna end up roughly the same place where we started because we're just reducing the cost of that preferred stack by calling some high yielding preferred and replacing the lower yielding preferreds so in terms of the dividends in the first quarter and the third quarter, we're kind of approximately in the 440 range and in the second quarter and the fourth quarter, we're kind of in the 240 range. That could fluctuate a little bit because it's based upon, some of them are based upon floating rates but on the other hand, some of those get floored after a while as well.

Got it, okay, thank you.

Thanks, thank you.

Our next question comes from Gerard Cassidy with RBC. Your line is open.

Morning, Gerard. Good morning, guys, how are you? Paul, I may have missed this. I apologize if you addressed it already. Can you share with us how you're managing the CET1 ratio with the stress capital buffer that may now be included in next year's CCAR? Have you guys run the numbers and where does your CET1 ratio comes out under that CB?

Well, our CET1 ratio, minimum ratio right now is nine and a half and we don't know what the final rule is gonna be yet but if you look at the past four years and you run using those scenarios, CCAR scenarios, our SCB would be below the two and a half percent floor in three of the last four years. And that's just a reflection of responsible growth and how we run the company. We've got loans to consumers that are prime and super prime. We have very prudent trading and we got a legacy portfolio that's running off. So, you know, we're below, we've been below for three out of the last four years.

And to be clear, I think this is Lee, when Paul said the CET, our CET1 was .7% and our minimum requirement, which is what he was referring to, is the nine and a half percent.

Very good. And then, Brian, I know you talked about the economy from what the research has said at Merrill Lynch, but can you share with us what your business customers are saying to you about their outlooks? Obviously, the consumer numbers speak for themselves. We all see the employment numbers, which are very strong, but what are you guys seeing both in small business and mid-size and larger businesses?

So the core loan growth is strong. The usage of lines is good. It's running near the high levels and stuff. So the activity is there. You know, I'd say that depending on the type of a commercial customer, the more they're in the global trade, international supply chain, whatever words, you know, the more they have China's flow down, if that's 20% of business, they're dealing with that. But, you know, they're all sanguine. They all feel good. They all would wish that discussions of trade would come to a resolution and reestablish the relationships and the flows, because the fact of the current impact is one thing. And the fact of the belief that there's future impacts. So I'd say they're optimistic. They're struggling to get people, because that's the thing we're lacking in the US especially. They see their business plans not being as robust as they were in 18, but still solid growth. But they continue to watch the headlines daily, trying to figure out if these situations will resolve. And I think there's pent-up enthusiasm if these situations start to fall in place, that you'll hear more investment in business and things like that. On the other hand, the indicias in our surveys about their confidence are basically more consistent where they were as they were coming up to the peaks they hit in 18, right after tax reform, i.e. where they were in 17. So they've kind of come down a little bit, but the levels are as high as any time they've been, other than, you know, there's tremendous business enthusiasm came out of the year in 17 and early 18 between regulatory reform and tax. That has been mitigated by the trade discussions and uncertainty around them, but overall they're solid. And I think they're sort of waiting for this to resolve, and then they'll push back on the accelerate again right now. They're staying within the speed limits to say that.

Thank you. And we'll now go to Brian Klein-Hansel with KBW. Your line is open.

Great, thanks. Yeah, just a quick question on the NIAI sensitivity that you gave. What were the deposit beta assumptions behind those? Were you being conservative? Just checking to sense there.

Sure, so again, the way to think about it, and I'll give you a little bit more detail, but just to get the concept down, we've got GMIM clients, we've got global banking clients. The pass-through rate in an up and down scenario are roughly similar. Then we've got a consumer franchise where we have not passed through a lot of rate increase in the form of rate paid. That's obviously going to have a different sensitivity in the up scenario than in the down scenario. That's just the basics. So if you look at the pass-through rate in the down scenario, on average we're talking approximately 40%. And again, consumer would be a lot lower. GMIM and global banking would be a lot higher, kind of in the 60, 65% range.

OK, great, thanks.

Thank you.

And we'll now go to Kevin St. Pierre with KSP Research. Please go ahead.

Good morning, thanks. Going back to the mobile and digital trends, which are obviously really strong, but looking backwards over the last several quarters, your tech spend has been pretty flat. Now you mentioned that tech spend is likely to increase. Is that a constant investment in the mobile and digital channels?

Yes, we've been consistent. I think what I said is we elevated tech spend after tax savings, and then we've been relatively consistent. One of the things I'd say that we're receiving a benefit, as you think about that number, if you think about the combination of the money spent on Brexit, the broker deal of separation for resolution planning, and a bunch of other initiatives like that, we can reposition that money more towards offense over time. And that's been good. And as we look forward to the next couple of years, a flat number will actually provide more pop, if for lack of a better term. And our teammates are always happy to hear that. But these things are impacts that compound. And so I'll give you an example. If you look at digital mortgage, which did $3 billion, where digitally originated this quarter of the 18, so it's growing. But it took us a little over a year to do the first billion. It took us eight weeks to do the second billion. It took us six weeks to do the third billion. So what happens with these implementations is the technology investments made, and then it ramps up. And what's really happening in digital mortgage, remember, is it's actually saving us a lot of money in the origination process, as well as be a good client experience. And so you take that or take Erika, which has now moved to several million customers, you can see, with 50 million interactions first year. But each month it's growing. Small business, Zelle, went out, and it's going a 50% a week type of numbers, even though we haven't told people it's out there, and things like that. And so Zelle growing 100 billion year over year, checks written are coming down more effectively. All this really points to the compounding effect of that digitization. So that consistent investment renders benefits two, three, five years out, and that's what we're driving at. So we'll be a consistent investment. There's only so much you can do. We do about a million lines of code in every weekend and a conversion, so to speak. And you gotta be careful you don't have a problem. And we've, not gonna lie, Kathy and the team have done a great job, and we haven't seen any issues. We've implemented tremendous new code, so to speak, over the course of years here. And so we are bound more by what we can get done in getting the benefits out of it than we are by money.

Great, and I noticed the digital appointments continue to go really strongly. Are you at a point where, and notice that sort of year over year, and sequentially your financial center numbers are pretty stable. Can we assume that the foot traffic that's being driven makes you think that you're at the right critical mass of financial centers, or can we expect over time continued consolidation and rationalization there?

We will see the numbers not be as dramatic from the 6100 to the 4300, obviously. But it's a complete distribution system. So the ATMs have gone from 16,000 up to, I think, 18,000 or something, that's the number now. Branges have come down. The branches are completely different. They're bigger, they have more people in them. People go to them because of more complex needs, et cetera, versus take the transaction side and take the check and deposit. So we're driving more of a co-location. But if you think about the real interesting news is, remember the end of the day, we have the number one retail deposit share in the United States. We're growing faster than anybody else. But we're still not in several markets, in the top 30 markets, and that's what we're building out, whether it's Indianapolis, whether it's Minneapolis, whether it's Denver, whether it's now Cincinnati, Columbus, and we are in Pittsburgh. And there's many other cities in the top 30 and top 50 that we have to figure out how we drive a configuration against them over the next piece of time here. So the actual branch count may have different elements than you would have thought, going back to the constant down. But you see it drift down a little bit, net, net, net, because even in major cities, the consolidation of branches into bigger enterprises, as a co-location with mayoral teammates or business banking teammates or small business teammates and private banking teammates is part of the drive. So don't get so focused on that. What I would get focused on is actually the cost of operating the platform. And if you look at that year over year, it fell by four basis points as a percent of deposits. That is phones, that is everything. And if you think about that, if you add that in the cost of deposit rate paid, you basically flat you every year total cost of goods sold, for lack of a better term, to produce this wonderful transaction franchise and consumer and then you throw the loans franchise on top of it and the investment franchise on top of that. It is a powerful engine, but it's a combination of everything that I just talked about, not five less branches or four less of this.

Great, thanks very much.

And we'll now go to Vivek Srinathia with JP Morgan. Your line is open.

Hi, thanks for taking the questions. A couple of questions. Firstly, since there was, you pointed out Brian and Paul couple of times about making sure that we take account of the fact that your NII guidance is based on over and above the forward curve. So let's step back, given that that may not be as realistic or likely to happen. What is the outlook for NII if the forward curve is realized when you look at over a 12 month period? I know you've given us second half, but since these things are not linear, can you give us a sense of what would that be on NII? What would NII do with the forward curve being realized?

I'm not sure I quite follow your question Vivek, but just to be very clear. The asset productivity of the company, those disclosures that you read in the queue, that is in excess of the forward curve. When we were talking about earlier in this call, somebody asked about what was the next 25 basis points and we went through what we thought the impact of that was.

And I think Paul's statements earlier in the prepare remarks are exactly what you're saying, which is stable rates and follow the forward curve for the rest of 19 and he gave you the three goes to 2%, two goes to 1% growth, 18 to 19.

Right, right, no you give that for 19 and I'm I guess asking for a fuller 12 months rather than just simply the second half Brian.

We said that if we watch what happens over the next few months, we can do better. We'll have a better view of giving you 19 or 20, excuse me. But you think of the run rate exiting 19 at that level and you can add two more quarters to it. But loan growth, deposit growth, whether the cut comes, when it comes, those are all factors in there. So I think Paul said, we'll talk about that next quarter when we know a little bit more.

Okay, okay, so let's move to another one. Residential mortgage loan growth accelerated sharply this quarter, far more than we've seen in the last couple of years, actually probably in dollar mark double of what you've seen in any quarter. And that's despite low rates and more refi. So are you holding on to some conforming or is there such a sharp increase in jumbles?

We have held all mortgages for six, seven years now.

Meaning even the conforming?

We basically sell the FHAVA, that and everything else that goes on the balance sheet, because frankly the risk in our mortgage portfolio isn't worth passing to someone to take the risk away from us. And so the increase is just due to purely the origination platform basically went from eight billion dollars last year, second quarter to 18 this quarter, maybe nine last quarter year. So that all goes on and increases the growth rate. And then we're not also in the aggregate sense, remember we're not selling as much out of the portfolio in the current environment. But we have not sold mortgages to the secondary market for years other than the FHAVA.

And remember we're focused on prime and super prime. These are our customers, we feel good about the risk.

Okay, got it. One tiny detail, trade web gain. I know 200 million was the amount you gave. Is that included in other income or is that actually in trading?

That was not included in the external sales and trading numbers that we presented in the, that I discussed today and we presented in the materials. It's in other income in global markets. So it's in the revenue but not in sales and trading.

Great, thank you.

Thank

you. We'll now go to Andrew Lim with Societe Generale. Please go ahead.

Hi, thanks for taking my questions. I'm just looking for a bit more color on the net interests, sorry, the deposit side in terms of mix and rates. So this is related to slide nine. So, you know, we see here non-interest bearing deposits struggling to grow. Interest bearing deposits growing quite nicely. And that's very much emanating from what's going on in the global banking side. So I'm just wondering if you can talk a bit more about competitive dynamics as to why it's a bit more difficult to grow your non-interest bearing deposits, especially on the global banking side. And then my second question is relating to the interest bearing deposit side. So if we look to the supplement, then the interest rate paid has gone up by four basis points. Could you talk about what's driving that? Is that simply the betas going up there? And then how would you expect that to develop in a declining rate environment? And then my third question is that your interest rate guidance and on the yield, is that based on a static deposit mix? Or would you take into account some further mixed shifts as we've seen there?

Okay, well, let's start with non-interest bearing deposits. And you'll have to help me remember your questions as we go through here. So on non-interest bearing deposits, we are growing non-interest bearing deposits in consumer. We're growing low interest tracking in consumer. That's really where you find conceptually the non-interest bearing deposits in the company. In global banking, we have interest bearing deposits and non-interest bearing deposits. But remember we pay an ECR on the non-interest bearing deposits. As interest rates rise, corporations that were very comfortable leaving excess funds in their non-interest bearing account when rates were lower, they just get a little bit more careful and they only leave in their non-interest bearing accounts what they need to do their transactions. Think about it as like the daily sort of transactions that those clients need to do. And any excess liquidity, they're probably pushing into non-interest bearing. Plus outside the US, they don't really have the concepts of non-interest bearing and interest bearing. It's all interest bearing. So what you should focus on is the fact that we grew deposits in global banking 12% year over year. That reflects the sophistication and value we're bringing clients from that treasury services platform. And it reflects the bankers we've added and the relations that they have in the US and around the world, 12% growth in a economy is going at 2%, you know, feels good to us. So that's how I'd answer the first question. What was the second question?

The rates on your non-interest bearing deposits, so if we look to your supplement disclosure, then I think we're looking at US interest bearing deposits, the rate they're going up four basis points, from 73 to 77.

Yeah, I mean, that is probably just reflects the mix shift that we've just been talking about in global banking. There wasn't a lot of increase, other than maybe a little bit of exception pricing and consumer. GWIM, I think, was relatively flat. And in global banking, when you have a mix shift, you're gonna see, since more deposits are going in to the interest bearing, you're gonna see an increase in the overall deposit rate of the company.

And would you expect that mix shift to continue going forward?

I don't know if it's gonna continue, depending on the trends of the environment.

Remember, it really is a question of looking at the different businesses, because consumers had checking growth 41 consecutive quarters, so you should expect the trends there to continue, like we said earlier, Nicole, with the institutional business, the global banking business, as rates moved, you saw a movement, and then that movement will stabilize as rates stabilize, or if they come down, you actually see the thing come back the other way a little bit, and if you look in the wealth manager, it's sort of halfway between, and you have to then think about the use of cash. Some is transactional, some is investment oriented, i.e. they're trying to get a yield on it, and where people put money depends on that, and that becomes more exacerbated or more prevalent. In the wealthier part of the consumer client base, and then obviously institutional client base. So, yeah, we do use, when we make our estimates, I think it was the third part of your question, we estimate mixes deposit growth by categories, deposit growth by business line, and we think of all that, and all that's factored in into the discussion Paul had with you. I don't wanna be stubborn here, but you gotta remember that you back up and think about it, $70 billion of deposit growth, all at a hugely advantage cost of funds, all with core customers, is what we drive in one part of our business here. That is a tremendous impact, and half of it from the consumer side, and then 20 billion in checking in our own consumer deposits segment. These are massive growth engines that exceed the size of many institutions.

That's great, thanks very much.

And our last question today is a follow-up from Mike Mayo with Wells Fargo Securities. Please go ahead.

Hi, your AOCI, I guess it got better by what, $2.5 billion late quarter, so that's good. You guided for lower NII growth this year. Investors don't necessarily like that. So I guess I'm asking you, this environment with lower interest rates, I know investors don't like guidance lower for spread revenues, but how do you think about it? Because while you have lower guidance for spread revenues, you also have better values of those securities, better AOCI, better capital, and better book value. So when you look at that trade-off, how do you think about it? Do you think of monetizing from those securities gains? Do you get as worried as investors, or do you say, hey, this is fine, we look at the economic value of the firm, we're not paying attention to a few basic points here or there?

We look at the long-term, Mike, as you're well aware, and going back to your earlier question. So we always look at what the most efficient use of all the dynamics you talked about, but we're not here to trade the balance sheet, we're here to let the customer activity come through it and then optimize that for the shareholder. And so the AOCI came up this quarter, people always forget about that, that's the offset to the NII debate with lower rates going forward, is the current long-term securities, you have a worth more, and we invest every quarter about half treasuries and half mortgage backs, and those treasuries are now advantaged from the last whatever period of time. And so we don't try to say, let's try to get a penny here, as you said, because at the end of the day, we're driving that long-term value of the franchise. So I think the spirit of your question is, do you manage a company for the long-term value? The answer is absolutely yes. And are we mindful of trying to optimize things on a given day, month, week, quarter? Yes, but the reality is that we always make the decision for the long-term value of the company. And the real solve here that you referenced is our capital keeps growing even though we're returning 100% of it, and we have an excess for many of the constraints in the C-car that is tens of billions of dollars, and we're gonna return part of that. That's driven by how we run the company for the last decade, not how we ran it this week, and we're getting the payback for that.

And then last follow-up, just this whole discussion of low interest rates assumes that maybe we're gonna head into a recession, maybe activity's slowing down. You have better data than we have. So what's your read on the economy? What's your overall read just on the conditions for you to do business?

We don't see any condition. If you think of the U.S. economy, it's two-thirds driven by the consumers. And if you think about the employment levels, the job counts, you think about the wage growth. You think about the wage growth in our firm, which exceeds the national averages by two and three times. A lot of my peers I talk to and not only in our industry outside it, the wages they're paying their teammates are much higher. They're sharing the benefits of their success. We do not see anything that says the U.S. consumer in our business is spending 5% more plus than they did last year for the second quarter. It has grown first quarter, second quarter. It is accelerating. And in a borrowing and good shape, we don't see anything consistent with a recession. And what we can see is it's consistent with a 2% plus growth rate versus a 3% growth rate, largely due to the impacts of some of the benefits of tax reform and other things running through the economy last year. And so we feel it's very solid. And so yes, there's a slowdown, but that slowdown was predicted by everybody. And now you're seeing it evidence, but you're actually seeing it pick up a little bit in the consumer side from first quarter to second quarter. And we'll see how that plays out, Mike. All right, thank you.

We have no further questions at this time. It is now my pleasure to turn our call back over to Brian Moynihan for closing remarks.

Thank you very much for your time and your interest in our company. We had a strong quarter of record earnings. We have continued to manage it the right way, growing responsibly by driving customer growth, by managing the risk well, and by investing in a franchise on a sustainable basis. We'll continue to do that. We're monitoring the environment, as the questioner, Mike, just said, in terms of focused on any condition we see where we have to change the operating model. But we continue to deliver good share of value and plan to push the capital back to you that comes off this wonderful franchise that we have. Thank you.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.