Bank of America Corporation

Stand by. Your program is about to begin. If you need audio assistance during today's conference, please press star zero. Good day, everyone, and welcome to today's Bank of America earnings announcement. At this time, all participants are in a listen-only mode. Please note this call will be recorded, and I am standing by if you should need any assistance. It is now my pleasure to turn today's program over to Lee McIntyre. Please go ahead.

Thank you. Good morning. Welcome. Thank you for joining the call to review the fourth quarter results. I know it's a busy day with lots of banks reporting, and we appreciate your interest. I trust everybody's had a chance to review our earnings release documents. They're available, including the earnings presentation that we'll be referring to during the call, on the investor relations section of the bankofamerica.com website. I'm going to first turn the call over to our CEO, Brian Moynihan, for some opening comments, and then ask Alistair Borthwick, our CFO, to cover some other elements of the quarter. Before I turn the call over to Brian, let me remind you that we may make forward-looking statements and refer to non-GAAP financial measures during the call. Forward-looking statements are based on management's current expectations and assumptions that are subject to risks and uncertainties. Factors that may cause actual results to materially differ from expectations are detailed in our earnings materials and SEC filings available on our website. Information about our non-GAAP financial measures, including reconciliations through US GAAP, can also be found in our earnings materials that are available on the website. So with that, take it away, Brian.

Thank you, Lee, and thank all of you for joining us this morning. I am starting on slide two. of the earnings presentation. During the fourth quarter of 2022, our team once again delivered responsible growth for our shareholders. We reported $7.1 billion in net income after tax, or 85 cents per diluted share. We grew revenue 11% year-over-year and delivered our sixth straight quarter of operating leverage. And again, we delivered a strong 16% return on tangible common equity. If you move to slide three, we list the highlights of the quarter. which have been pretty consistent throughout the year. We drove good organic customer activity and saw significant increases in net interest income, which all helped drive operating leverage. Revenue increased year-over-year 11%. It was led by a 29% improvement in net interest income, coupled with a strong 27% growth in sales and trading results by Jimmy DeMar and the team. This growth will exceed the impacts of lower investment banking fees and the impact of bond and equity market valuations on asset management fees in our wealth management business. The positive contributions of NII in sales and trading were also enough to overcome a decline in service charges driven by the fully implemented changes in NSF and overdraft fees in our consumer business. Importantly, we improved our common equity tier one ratio by 25 basis in quarter four to 11.2%, and we achieved that without changing our business strategies. We're well above our current 10.4% minimum CT1 requirement and above the requirement that we'll have beginning next year in January of 10.9%. We added to our buffer while both growing loans and reducing outstanding shares in the quarter. On a year-over-year comparative basis, both net income and EPS are up modestly with strong operating leverage more than offsetting higher provision expense. The higher provision expense is driven primarily by reserve bills this quarter, a result of loan growth in our portfolios and also our conservative weighting in our reserve setting methodology, which I'll touch on later. Last year, we had large reserve releases. Net charge-offs increased this quarter, but asset quality remained strong. Charge-offs were both at the beginning of the pandemic as well as longer-term historical levels. And again, I'll touch on this in a few pages. All that being said, the simple way to think about it is pre-tax, pre-provision income. which neutralized these reserve actions grew 23% year-over-year. Let's turn to slide four. Slide four shows the year-over-year annualized results. And quarter four results were a nice finish to a successful year in which we produced $27.5 billion in net income on 7% revenue growth and a 4% operating leverage. While the year was strong, full-year earnings declined as a result of loan loss reserve actions. For the full year of 2022, again, we built about $370 million reserves. And by contrast, last year in 21, we released $6.8 billion in reserves. Isolating those changes, again, you'll see that PPNR grew a strong 14% over 2021. As I said earlier, the themes were characterized by good organic customer activity, strong NII, and all this helped fire years of responsible growth. Slide 5 highlights some of the attributes of organic growth for the quarter and the year. This, plus the slides that we include, each earnings materials in our appendix, will show digital trends and organic growth highlights across all the businesses. Our investments over the past several years and our people, tools, and resources for our customers and our teammates as well as renovating our facilities, have allowed us to continue to enhance the customer experience to record high levels and fuel organic growth. In the fourth quarter of 2022, we added 195,000 net new checking accounts, bringing the total for the year to more than 1 million. This is twice the rate of addition that we had in 2019 in periods before the pandemic. This net growth has led to a 10% increase in our customer checking accounts since the pandemic. while keeping that 92% of our accounts are primary checking accounts of the household, and the average opening balance, not the average balance, but the average opening balance of these new accounts is over $5,000. We also produce more than 1 million new credit cards. The sixth consecutive quarter of doing that brings us back to the levels that we generated pre-pandemic. Credit quality, you can see on appendix slides 28 for consumer, remains very high on new originations. Verify Digital users grew to 56 million, with 73% of our consumer households fully digitally active. We have more than 1 billion logins to our digital platforms each month, and that's been going on for some time now. Digital sales are also growing, and they now represent half of our sales in the consumer business. Eric, our virtual digital assistant, is now handling 145 million interactions this past quarter and has passed a billion interactions since its introduction just a few years ago. This saves a lot of work for our team. When we moved to the GWIM business, the Wealth Management business, our advisors grew by 800 in the second half of the year. Our team added 28,000 net new households across Merrill and the private bank in 2022. We experienced solid net flows despite the turbulence of markets. By the way, during 2022, our average Merrill household opened with a balance of $1.6 million. Again, very high-quality account openings. On flows, when confined across all our investment platforms in our a consumer wealth management business, we saw $125 billion of net client flows this year. Additionally, we continue to see increased activity around both investments in our G1 business and our banking products. Diversified bank element adds a strong differentiator for us as a company. It also supports the healthy pre-tax margin. This helped the G1 business deliver strong operating leverage for the year, and it grew revenue and net income to records. In our global banking business, We saw solid loan production and growing use of our digital platforms throughout the year and added new clients to our portfolio. As you well know, the overall investment banking fee pool was down. However, we continued to deepen and expand client relationships with our build-out of commercial bankers. Our global treasury services business also grew revenue 38% year-over-year as a result of both rates as well as fees for service on cash management. In global markets, we had our highest fourth quarter sales and trading performance on record, growing 27% from last year, ex-DVA. This was led by strong performance on our macro businesses, where we made continuous investments over the past 18 months. Equities had a record quarter four performance as well. Let's move to slide six and talk about operating leverage. As I've said to you for many years, one of the primary goals of this company, which is an important part of our shareholder return model, has been to drive operating leverage. Those efforts, including investments made for the future, coupled with revenue growth, produced 18 straight quarters of operating leverage, as you can see, leading up to the pandemic. Beginning last year in the third quarter of 21, 2021, I told you that we've now started achieving operating leverage and got back on streak. Six then were six quarters of operating leverage despite all the things that are going on out there, and the team continues to drive towards that for 2023. So I thought I'd spend a few minutes on a discussion of topics that's been important to, as we've talked about investors over the last couple of months, deposits and credit. So let's go to slide seven. First on deposits, there are several factors impacting deposits as our industry works through and the economy works through an unprecedented period, a surge in deposits from the pandemic-related stimulus, the impact of unprecedented monetary easing, the impact of high inflation, and then the reversal of that with unprecedented pace and size of rate hikes and monetary tightening. But on a year-on-year basis, average deposits of $1.93 trillion are down 5%. This reflects the market trends, and in fact, it reflects high tax payments to the governments in quarter 2022. In addition, as we move forward through 2022, customers with excess cash, investment-oriented cash, saw yield as rates increased for money market funds, direct treasuries, and other products. It's probably more relevant to discuss the more near-term trends. Comparing third quarter of 22 to fourth quarter of 22, average deposits were down 1.9%. Non-interest-bearing deposits are down 8%. Low-interest-bearing deposits are up 2%. The mixed shift is especially pronounced in treasury services in the global banking business. Corporate treasurers manage $500 billion of deposits they have with us. The impact of their activities has a change in the mix. On a personal side, you can see the checking balances floating down a little bit from core expenses and spending, while more affluent customers put money into the higher yearly deposits in the market. We do manage all these products differentially, and the discussion is the deposits by business segment you can see on slide 8, and we'll talk through that. So this breaks down our deposits in a more near-term trend. In the upper left, you can see the full year for the whole company going across the page in the upper left-hand chart. We also put in the rate hikes that you can see. On the chart, you can see the heavy tax payment outflows in the second quarter. Then we saw the acceleration of rate hikes in deposits that moved to products seeking yield in certain customer segments. But in large part, what we've seen over the course of the quarter four has been stabilization and more normal client activity. Simply put, we ended quarter four of 22 with $1.93 trillion in deposits, roughly the overall level as we ended in quarter three ending deposit balances. So let's look at those differentiated by business. In consumer, looking at the upper right chart, we show the difference between the movement through the quarter between the balance of low to no interest checking accounts to somewhat higher yielding non-checking accounts, money market and saving accounts in this limited portion of CDs. Across the quarter, we saw a $24 billion decline in total, down 2%. We have seen small declines in customers' continued higher levels of spending, paid down debt, and also moved money to their brokerage accounts, even in this business. Higher wages have offset this. While we saw a decline in quarter four deposits in consumer, correspondingly, we also saw brokerage levels of consumer investments increase $11 billion, capturing a good portion of those deposits. In general, think of these consumer deposits as being very sticky, of $1 trillion. That stickiness, along with net checking account growth, reflect the recognition and the value proposition of a relationship transactional account with our company. It also reflects the industry-leading digital capabilities we offer and the convenience of a nationwide franchise. It also reflects that the customers in our mass market segments have fewer excess cash investment-style cash balances. Fifty-six percent of the $1 trillion in consumer deposits remain in low and no interest checking accounts. And because of all that, overall rate paid in this segment remains low at six basis points. In wealth management, which you can see at the bottom left of the chart, more than $300 billion of deposits became more stable across the fourth quarter. Here you also witnessed a shift to higher-yielding preferred deposits, as you can see on the labels, from lower-yielding transactional deposits, as these customers have more excess cash and move them to seek higher yields. Early in the quarter, we saw modest declines in balances, but November's rate hikes began to slow, and the probability of future rate hikes became less. People had moved their money, and we saw an uptick in balances as we moved through the quarter. This reflects the seasonal wind flows that happened in the fourth quarter for wealth management clients. At the bottom right chart, you can see the most dynamic part of this equation. Our global banking deposit movement moves across $500 billion in customer deposits. The shift here is what drives a mixed total for the company. It's pretty typical with the exception that it happened very quickly in quarter four, driven by the pace of rate hikes. In a rising rate environment where a company's operational funds are more expensive, we anticipate these changes, particularly in high liquidity environments as clients use both cash for inventory yield, pay down debt, or manage their cash for investment yield. We have seen the mix of global banking interest-bearing deposits move from 35% last quarter to 45% in quarter four, and obviously we're paying higher rates on those deposits to retain them. Customer pricing here is on a customer-to-customer basis based on the depth of relationship, the product usage, and many other factors. So overall, deposit rates paid as a percent of Fed funds increases are still very favorable to last cycle, even as rates are rising much faster than last cycle. I would note about to the last cycle that the Fed increases have been rapid and we'd expect to pay higher rates as we continue to move through the end of the interest rate cycle. So just remember, while we're paying more for deposits, we also get that on our asset side. That is simply why the NIA's net interest income is up 29% from quarter four 2022 versus quarter four 2021. Now let's move to the second topic I want to touch on specifically, which is credit. And this begins on slide nine. First, it is an ineluctable truth that our asset quality of our customers remains very healthy. On the other hand, it's impossible to gainsay that the net charge-offs are moving to pre-pandemic levels. So in the fourth quarter, we saw net charge-offs of $689 million increase to $169 million from quarter three. The increase was driven by both higher commercial and credit card losses. But as these charts show, they're still very low in the overall context. In commercial, we had a few of older company-specific loans were not related or not predictive of any broader trends in the portfolio. These were already reserved for in prior periods and based on our methodologies went through charge-off in quarter four. Credit card charge-offs increased in quarter four as a result of the flow-through of modest increase in last quarter's late-stage delinquencies. This should continue as we transition off the historic lows in delinquencies to still very low pre-pandemic levels. Revision expense was $1.1 billion in quarter four. In addition to higher charge-offs, provision included a roughly $400 million reserve bill. This was higher than quarter three, reflecting good credit card and other loan growth combined with a reserve-setting scenario. So let's just stop on a reserve-setting scenario. Our baseline scenario contemplates a mild recession. That's the base case of the economic assumptions in the blue chip and other methods we use. But we also add to that a downside scenario, and what this results in is 95% of our reserve methodology is weighted towards a recessionary environment in 2023. That includes higher expectations of inflation leading to depressed GDP and higher unemployment expectations. This scenario is more conservative than last quarter's scenario. Now, to be clear, just to give you a sense of how that scenario plays out, it contemplates a rapid rise in unemployment to peak at 5.5% early this year in 2023 and remain at 5% or above all the way through the end of 2024. Obviously, much more conservative than the economic estimates that are out there. We included, again, the updated slides in the appendix, pages 36 and 37, to highlight differences in our credit portfolios between pre-financial, pre-pandemic, and current status. We also, again, gave you the new origination statistics for consumer credit on page 28. The work the team has done on responsible growth continues to show strong results. From an outsider's view, you don't have to look any further than the Fed's stress test results. We've had the lowest net charge off of peer banks in 10 of the last 11 stress tests. On slides 10 to 12, we included some longer-term perspective. We showed long-term transfer commercial net charge-offs, total consumer charge-off rates, and more specifically, credit card charge-off rates. This compares those ratios to pre-financial crisis, during the recovery after the financial crisis, pre-pandemic, and then through the pandemic. So that gives you a long-term perspective, which keeps in context the idea that we're moving off the bottom in credit costs towards a level which is normalized into pre-pandemic, but that level is very low in the grand context of banking. So before I move it to Alistair, I want to just update a few comments on consumer behavior. Consumer deposit balances continue to show strong liquidity, with the lower cohorts of our consumers continue to hold several multiples of balance that they have as a pandemic begins. These balances are drifting down, but they still have plenty of cushion left. And while their spending remains healthy, we continue to see the pace of that year-over-year growth slow. In the aggregate in 2022, our consumers spent $4.2 trillion, which outpaced 2021 by 10%. You can see that on slide 35. Two things to note on that consumer spending pace. There continues to be a slowdown. Year-over-year growth percentage earlier in 2022 were 14% year-over-year. They've now moved to 5% year-over-year in the fourth quarter. So what does this mean? Well, that level of growth in year-over-year spending is consistent with a low inflation, 2% growth economy we saw pre-pandemic. They're also moving from goods to service and experience and spend more money on travel, vacations, and eating out and things like that. That is a good for unemployment, but continues to maintain service side inflation pressure. With that, let me pass the mic over to Alistair to go through the rest of the quarter.