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Richard
Host
We're going to get started. I'm delighted to welcome back Bank of America's chairman and CEO, Brian Monahan. Brian absolutely needs no introduction whatsoever. This is his 14th consecutive year. I know, Brian, it makes us feel old, but we really do appreciate you coming back. I was a lot younger then. So consistently. You're a lot wiser now. So thank you for joining us. So let me just start off with a very broad question, which is, look, I know it's been a very turbulent year for the banking industry, especially for the regional banks. You know, can you just start off with some of the things that you've learned from the events of this year, maybe touch on the role that banks play in the broader economy and society, and just talk about how that's evolved from your perspective over the 14 years that you've been CEO?
Brian Monahan
Chairman and CEO, Bank of America
You know, I think in the end of the day, Richard, what you saw in this year and what you saw during the pandemic, because, you know, was that the banking system supported the economy and did the things we had to do. And so if you think about it, anything from distribution to government benefits, from taking care of clients and waiving fees in the toughest times, then helping people through it, then supporting the economy as it regrew through it, then this year dealing with some of the excesses of fiscal and monetary policy that ended up causing inflation and rate movements never seen. And the industry is very resilient. And that comes back to What we do is we serve our clients. If the American economy is going to be strong, the American banking system has to be strong and vice versa. And I think the last 12 months, 24 months, 36 months, 48 months have continued to prove that. And then on top of that, the capital, liquidity, and other things in the industry have been strong. And in the end of the day, it comes down to helping lead our clients and helping deliver, in our case, prosperity. a lot of money, a lot of earnings, and do it with a purpose and helping clients live their lives. And what would you like the power to do is what we ask our clients. And when they give us the answer, we try to help them do it, whether it's about their day-to-day lives, opening a checking account, learning how to manage their household finances, or the biggest companies in the world doing offerings to help make the transition take place in the environment or whatever the things are. And so I think The keys are good capital, good liquidity, managed well, got through a crisis, helped solve the crisis, especially the larger banks as opposed to being part of it, which is a good place to be. And, by the way, the U.S. economy compared to the European economy pre-pandemic to now is grown by leaps and bounds over other economies around the world, and that's due to the financial services system writ large and the banking system supporting it.
Richard
Host
So let's talk a little bit about the economy. So obviously, we're in this transition to a world of higher interest rates, potentially, I guess, higher inflation rates. as well. Can you just touch on what you're seeing, both in terms of spending trends, both consumer and corporate, but also talk a little bit about how consumer and corporate balance sheets are holding up in this world of structurally higher interest rates?
Brian Monahan
Chairman and CEO, Bank of America
Yeah. So first of all, I have to apologize for saying this, but it's true. We're the number one research firm in the world. And Kenneth Browning and the team have done a great job. But they're basically, they've come around to the soft landing, and they weren't there. They had a recession predicted always like two to four quarters away from when I was speaking, I'd speak, and then they'd push it out a couple quarters. So it was one of those things I was chasing them. But the reality is it's going to be a slowdown, but we have it as being positive. So think about this quarter, I guess. The final read was, what, 5% in the third quarter, the most recent read. It drops to 1.5%, then to half, half, half, kind of chugging through this U.S. economy, and then starts building back up. So that's a pretty fast slowdown from 2.5% growth and then this peak of 5%, and then slowing down to 1.5%. But it's positive, and that's what we're seeing. So there's a lot of reasons for that. And so if you think about how that reflects in our customer base, what we see today is on the consumer side, The spending from 2021 to 2022 across nearly $4 trillion of money moving out of customers' accounts in the economy grew at 9%. Year-to-date, the same volume is up. It's only going about 4% now. In the month of November, it grew about 3% to 4%. Now, that being said... Black Friday was a record. Black Friday up 3.5% versus last year, which was a record. Cyber Monday was a record. The whole weekend was a record. But it's much more consistent with that money moving out of customers' accounts with a lower growth, low inflation economy. And that's what you're seeing. So then you dig in it. services being spent more, entertainment being spent more. You're seeing the rental payments going out of our customers' accounts. Your gross rate tipping down, which doesn't sound good because it's still going up, but it's going up at a less high rate. You're seeing the way customers are spending their money has leveled out. In other words, there's not this goods, services, this massive change. So some things are growing faster, but it's leveled out, meaning that all the categories are kind of growing faster. plus or minus the average. And so that's all good news that the economy is normalized. When you go to the commercial side, kind of interesting because the draw rate on revolvers and lines of credit, that's just using simple math, even though it's different by business, 40% pre-pandemic, dropped to 30, moved back up to 36, 37, is now back down by a couple hundred basis points in the last three months or so. That means corporations, because the higher cost of borrowing would be more judicious in managing their balance sheets more tightly, And therefore, you know, am I going to hire somebody to buy this piece of equipment? Things that would cause them to borrow, they're being more careful about. And that, again, means – but that's consistent with supporting growth in the economy and supporting their businesses. And they're making money and everything. It's not a credit risk question. It's just their appetite for credit is down. And so you put that all together, I think, you know, the engineering of the economy has engineered a soft landing. It's set up. We've got to be careful about overshooting the fight on inflation because we don't have inflation – getting down to 2% targets at the end of 2025. And so this will be higher for longer, but higher in the context that we sort of won the war on inflation. We've got to be careful not to win it by too much right now. The danger now is the policy mistake is on the other side. And, by the way, I'm not saying anything that people set the policy to understand. That's the risk, and that's why we're trying to maintain more balance with a view that they'll fight inflation if it kicks back in. But right now you don't see those attributes coming through.
Richard
Host
Okay, great. So let's talk about your strategic priorities. I mean, I ask you this question every year. You're very consistent usually in your answer. But I'm curious, look, what is top of mind strategically heading into next year? And also in your answer, maybe you can just talk a little bit about some of the growth initiatives and where those have got to, because I do feel that those really have started to bear fruit over the last few years.
Brian Monahan
Chairman and CEO, Bank of America
Yeah. So if you go back, you know, 10 years ago, we said almost we said we got to drive responsible growth in what people believe. We have to remind people at the time that that was a drive towards growth, not a drive towards responsible. We're already responsible. We'd reshape the company. And so that's been going on. And so 16, 17, 18, 19, that's clicking through. Pandemic hits, music stops, everybody has to run around, do stuff, and then you come back out and do it. But underneath that, you've seen it. So what have we been doing? Yeah, we've entered... If you think about the priorities are to continue to grow the massive consumer franchise, how do you do that? Digitization continues to invest heavily in feature functionality, capabilities, a new mobile banking site, et cetera. More and more mobile customers, but at the same time, more branches. As we've been looking over the last few years, we've built out a lot of places. As we look the next few years, by 26, we'll be at 90% of the top 100 markets will be fully complete. Those markets are growing well. When we go to the market, it's not a branch just to say they're there. It's 25 branches in Columbus from zero five, four years ago. It's 15 or 17 in Cincinnati. like in the other states. So we're driving that. And then Merrill Edge is over $400 billion of assets and driving good account growth there. So we drive that at the investment side, that's setting it up. And then credit card, we're investing more in card, and it's growing a bit in response. So in a consumer business, it's basically drive the core checking franchise, drive the core borrowing attributes that produce good value, credit card, home equity, and things like that, although people aren't using our lines, and then drive the digitization of all that to make it more efficient. And over the last 10, 15 years, we're down from 100,000 people in the consumer franchise to 60, and it's not going up yet. The amount of people selling and servicing and the sales levels are going up. Go to wealth management, net new accounts, and 110,000 net new accounts of wealth management over the last year or so. It's the Merrill teammates and the private bank teammates that's driving it. More and better alternatives, practice, lack of better term, continuing to drive the investment management, but also building out the offices and places in conjunction with the consumer business we're adding. So in Columbus, we had a bunch of financial advisors, but we didn't have a consumer franchise. Now you get it to half the Merrill accounts. The male customers have their core bank account with us. What does that mean? The other half don't. And so how do you drive that? So we're working on that, lending to those customers. And then GCIB and commercial banking, we've added a bunch of commercial bankers. They've added... uh you know thousand plus accounts uh new customers issue new logos as we call it they're doing a great job and then effectively the uh the gts business the cash management business investing several hundred million dollars and that to build out our capabilities around the world because we were not as good as we wanted to be outside the united states that's the initiative and then the markets business jim demar has done a good job that's just more balance sheet more capital he made a step change and he's returned on it nicely and he'll keep growing it and it's It's rounding out the franchise deeper intensely with clients and things like that, but it's not like a change in what they do. It's getting the levels right, and then obviously the digitization of that practice goes up. But then it's efficiency across all businesses. So it's growth with efficiency, and that's what we try to do.
Richard
Host
Okay, great. So before we start going through some of the details around interest rates and how they're going to move, perhaps you can just give us some high-level thoughts on the fourth quarter and if anything has changed from the last time that you spoke.
Brian Monahan
Chairman and CEO, Bank of America
Well, if you think about the fourth quarter, you know, we still feel good about the NII guidance, you know, $14 billion, which was what we said. We feel good. The big issue on expenses, the FDIC resolution came through, so that's $2.1 to $2.2 billion, slightly higher than the original estimates, but that's just due to the math and the calculation. In our expense of $15.6, that sort of brings a total expense base to, you know, $17.7 to $17.8, depending on where the FDIC settles in. So we hit the $15.6 we feel good about. When you think about things like the investment banking, the fee pool looks to be down 10% to 15%. We'll be at about $1 billion in fees this quarter is our best estimate now, which puts us just down low single digits, which outperforms the industry. And we've been doing that, frankly. We've been gaining a share in that business. And Matthew, the team, Matthew Coder and team have done a good job. On markets and trading, you know, Now we're this late in the quarter, you can look at it and say it looks like we'll be up low single digits year over year, which is good performance by Jimmy's team, probably the best fourth quarter we've ever had. It still has a seasonality from third quarter, but they've done a good job. And I think the other thing that we're just trying to get people sort of on par with us is these tax deals. So we have been a major financer of tax. Renewable energy. So 10, 15, 20, some percentage of all the renewables sits on our balance sheet tax equity, and that's what we've been doing to drive that business. And so the benefits have been coming through the tax line all year, but what happens in the fourth quarter, you get a ramp up of the deals that close because everybody rushes to get stuff closed by year end. And that looks like it would be $1.2 to $1.3 billion of negative other income, which is a like rise in other years, but it's a big change from the third quarter, and we're just trying to get people straight. There's always confusion about they say, well, where are the tax benefits? With tax benefits, you take in more pro rata, and that comes in all at once just by when the deal is closed. So those are four or five major things. I mean, the companies are running well.
Richard
Host
Everything else, those are pretty much in par with what we said. Okay, great. So let's go a little bit deeper on your thoughts around NII and You know, I think last time you spoke, I think you said your expectation is that NII is going to trough in the first half of 2024, and then it will start to grow in the middle of next year. I mean, I think since you last spoke, obviously, interest rate structures have moved around all over the place. So is that still your view? And maybe you can just unpack some of the drivers for that growth.
Brian Monahan
Chairman and CEO, Bank of America
Yeah, it's still our view that, you know, rates have come down, you know, especially in this sort of, you know, shorter intermediate term, 10-year and 2-year and 3-year and 5-year, but But basically, we had rate cuts in that scenario. So we always follow the curve, and that's what we're trying to be careful about, that we follow the curve. And so there was a rate increase in the curve. That went out and other things. But we still feel good. It drops in the first half, grows in the second half, and that's just a loan and deposit balance. What drives that? At the end of the day, it's deposit balance. I was thinking about this earlier. Last year, I think we talked heavily about you had a trajectory of 5% growth in deposits in the industry. And the industry had shot up above that and was coming down. And frankly, the belief of most participants out there would go right through it and get back to sort of on par with the pre-pandemic. And he said, no, it's going to start to flatten out. What's happened a year later is you're seeing our deposit balances actually flatten out. So in the businesses which had the, you know, like the banking business, the commercial banking business, those balances are actually growing again. G1 is relatively flat. Consumer for the last six, eight weeks has looked like it's sort of bouncing around the same level. And it's the slowest to do because you have people spending money and it sort of has more dynamics to it. But that total number, $1.9 trillion versus $1.5 trillion, is a lot bigger deposit franchise. And we were sitting here last year at the debate whether that would come through and end up back to $1.5 trillion. So we're up 30-odd%. uh pandemic today the industry's up about 27 that shows you the industry's done a good job of handling this up and down and stuff so we feel good about that as we look forward it appears that those deposit balances are the key and as they sort of hit the balance levels and stabilize and the pricing stabilizes and and then you know you reflect out but we're reflecting rate cuts in those estimates to say we flatten out and then grow from there so so maybe you talked about deposits so let's spend a bit of time on that so
Richard
Host
How would you characterize the competitive dynamic for deposits today? Obviously, there's a very competitive bid for deposits, obviously, in the early part of this year. How has that evolved? And I think, look, specifically for you, more than half of your deposit funding is obviously consumer deposits where the rate paid is very, very low. Now that we've been in this world of structurally higher interest rates, are you starting to see changes in customer behavior in terms of yield seeking?
Brian Monahan
Chairman and CEO, Bank of America
No. We get caught up in all the different names for deposits, but there's basically two ways a wealthy human being or a company manager money. They have the transactional cash, and they have investment cash. And there's a little bit between that called the cushion for your transactional cash. We are the largest generation of transactional cash relationships with our consumers and our companies, and that's what we do. That's why we have a low cost of deposits. Because those are generally zero interest in the consumer side or very low interest in other parts. And they come in and out, and the money comes in and out. It's just for us, that's a trillion bucks type of numbers, trillion plus numbers, as opposed to the CDs and money market funds and stuff, which price up. So if you look, what happens is that stuff is priced up. So in our You know, GTS business at the margin, the interest-bearing accounts are priced competitively, and we're growing those. But you still have the non-interest-bearing and middle-market companies and small business and stuff that are very advantaged to us. And then the earnings credit rate, which we move up and down to adjust to that, you know, will come right back down with deposits, with rate structures. So, you know, we feel good about that. But you have to think about the two differences, and that's what makes us different, and that's why our all-in-cost deposit seems to be lower than others, it's because of that. We just don't have a lot of CDs in the consumer business, you know, and we don't have a lot. Now, what we've seen is that rate of increase is slowing down as rates fall off. And frankly, it would start to come back down, frankly, if rates happen. But the money people are taking out of the market, and if you look at the consumer balances, we get this great debate is, you know, do people have more money in their accounts or less from pre-pandemic? The reality is all the movement on the consumer side is of the higher end accounts that went into the market. The lower end accounts are still sitting with multiples of what they had pre-benefit, lower average balance. The higher end are down 25% because they moved all that money to the market because it was investment cash. It wasn't transactional cash. And so that's gone out of the system, and we put that all together. We have $1.9 trillion in deposits. We used to have 1.5. Consumer went from $700 to $950 to $960. And the cost has gone up. And I'd rather have the franchise in the industry in our company that against a 5.5% cost of funds is only paying a buck and a half. That's 400 points of growth spread. Will that even out over time? Sure it will, but it's a pretty nice place to be.
Richard
Host
So you talked a little bit about deposit flows, and it does seem as if they're coming in a little bit better. So can you just spend a minute on what you would attribute that to relative to the debate that we were having last year around just how much was going to leave the system? And then specifically, as we think about 2024, if QT is going to remain a feature, if you like, of Fed policy, how much of a liquidity drain for the banking system do you think we could see?
Brian Monahan
Chairman and CEO, Bank of America
So on the first, if you look at what's going on, just to give you a simple, if you think about Over the last 19 months or something like that, we produced 3.4 million net new checking accounts. Wow. An average balance of $4,500 in those net new ones, not in the age ones. The age ones are like $10,000 average balance. So that's like the core franchise is growing, the net checking account production, and we're grabbing people who are using us as a primary bank and getting there. And that's what happens. The 1,000-plus logos that we got in the – it's 1,000-plus logos in the middle market and GTIB space are all bringing us operational corporate accounts. I mean, it's borrowing and GTI, so you're seeing that business grow. well above $500 billion now. And still, it's all in the rate is $2.5 to $2.60 or something last quarter. Think about that. So it's very advantaged, but that's a blend of all the different types. So I think we're seeing the flows across everything. It's really by one customer at a time, net new checking, net getting the cap balances from our wealth management customers in the house, getting more GTS relationships here and around the world. And some of it's More pricey. Some of it's not so pricey. But when you blend it all together, you see what you get. And that's a very advantaged process. When you think about QT, that's always affecting the far ends of the question, which is the RRP rate versus the overnight rate versus the bank deposit rate. That's always going to affect that. It's not going to affect the fact that the employees of Goldman Sachs are getting paid more money than they were pre-pandemic. It's running through their accounts. Guys like you are spending on all this wonderful stuff. You don't know you have the money, honestly. Why? Because it's always going in and out. You've got to keep that plus the cushion. That piece doesn't change much. But at the margin, the withdrawal liquidity comes from money going to off-balance sheet and things like that because of the relative attractiveness. But that's a small part of what we do in our company. Other companies' effects are cost of funds more than ours.
Richard
Host
Okay. So let's talk a little bit about the rate environment as we head into next year because I think there's a real debate around what this means for the banking system. you know, the market's obviously now pricing in a series of rate cuts for next year. But I think a higher for longer rate environment is obviously still a potential outcome. You know, so maybe you can spend a couple of minutes talking about what structurally higher interest rates mean when you think about the trajectory of NII versus a scenario where the Fed actually does start to cut rates as we head into next year.
Brian Monahan
Chairman and CEO, Bank of America
Well, so our basis, you know, our base assumption, the market, you know, have rate cuts. We internally, just to give you have two to three cuts next year and then four the next year. And let's say it's two and four. That's 150 basis points. That's still a pretty high rate, to your point, and that's what's needed to do it. But if you go back and look in the periods of time when that was going on, we'd have 3% Fed funds rate in, say, four and a half, 10 years, something like that. It was a good place to be because all these zero interest deposits, these transaction accounts, now they're worth a lot more. What's hurt since post-financial crisis and barely got there in 18 to 19 was the rate structure got there, what, two and a half peak on the Fed funds or something. It just didn't open up quite the value. So you ought to see the restoration away from the fighting for a 2% NIMH. to back to 230 and 240 potentially, which is a big expansion. But that's going to be by the zero interest floor, by the stuff staying above the floors at a higher level. And, you know, and yes, there'll be more competitive rate structure sort of permanently embedded in the other stuff. But that transactional cash, again, is washing through their no interest rate pay. And so. You know, in consumer, the checking's, I think, $500, $600 billion or something like that or more, you know, out of the $900, $500, I think out of the $900. So, you know, that's really coming in at very low cost. Even some of the other stuff is, too, but that really doesn't change. If rates stay higher, that's worth more. And you forget it sounds like more. But when you're saying zero versus four, you know, or let's say 15 basis points versus 4%, that's a huge nominal spread difference versus when rates were 2% versus, you know, 10, 15 basis points, you know, to 185 versus 385. That's a huge difference for our profitability over time. And that's what happened. Now, There'll be more competition and other things will happen, but that's more on the non-transactional side. And that's where I think it's a little bit different than people think when you really think about how consumers, companies, and wealthy people use their money.
Richard
Host
Got it. So, look, I know there's been a lot of focus on the HTM portfolio this year as rates have risen, and obviously losses on that portfolio have increased, but obviously they do pull to par over time. But can you just spend a minute or two talking about how you're thinking about managing the the balance sheet over the next couple of years, just given the amount of uncertainty over where rates are going to settle out?
Brian Monahan
Chairman and CEO, Bank of America
Well, right now we have $3.3 trillion. Our interest rate sensitivity today, the last quarter, is sort of up $100 billion, $300 billion to the good, down $100 billion to the bad. It hasn't really changed that much, and that's because the focus on that portfolio at $600 billion and running down is... I guess $3 trillion in assets, all this other stuff's going on. And so we manage it to keep in a quarter that we think is acceptable based on the realities of where we think it's going. We run millions of simulations and all that stuff. But if you think about what happens is we have $2.9 trillion plus of deposits. We have $1.5 trillion of loans. You have $1 trillion plus to put to work every day, and basically it's barbell. At some point, with new liquidity rules and everything that's going to go on and people are talking about, you're probably going to have to take that long-term portfolio and ladder it more, and that will give up some yield. But that will be reflected a bit in deposit pricing, too, because if you can't make money on the asset carrier, you're going to have to take more deposits out to make the money. And so we'll see this play out in the industry, but I think it's no different we have, which is how do you manage the whole balance sheet, the banking book for NII and even the markets book, but how do you manage the whole balance sheet, how do you think about the relative pricing? And, you know, my guess is when you throw it all through, a regional bank will have a NIM around three and something. A big bank like ours will have a NIM around two and a quarter, two and a half. And because it will all sort of settle out in the wash, it just will feel funny going through it because this pace of rate up and down is something we haven't seen.
Richard
Host
Okay. So let's talk about expenses. I think you've done a great job managing expenses really over the duration of your tenure as CEO, driven a lot of operating leverage. Maybe you can unpack a little bit what's happening below the surface in terms of continued investment spend versus efficiency saves, and maybe talk a little bit about how some of the inflationary pressures are maybe either starting to ease or still are in place, given the competitive environment for talent heading into next year.
Brian Monahan
Chairman and CEO, Bank of America
So just overall, we had about 15 or so, I think, to today, 15 or something, maybe 16, 14 and 15. We're running the company in the same nominal expense dollars. That's kind of interesting when you think about it, right? You know, so 8, 10 years out. Now, what's happened is it came down to a low of 53 and has moved back up. That's part of the inflation. If you actually look at what's going on, the inflation has caused us to go from 53, 54 billion up to 63, 64 billion in concept and in the investments. And so if you look at... If you went back and looked at that nominal dollar amount years ago, even pre-pandemic, we're probably doing $2.8 to $3 billion a year in technology initiative development. Now we're at $3.8 billion. We're probably doing... 70% of the marketing we do now. The charity was 60%, which is part marketing too. So all that's increased, and the wages have increased dramatically, and the incentive compensation. So we invest in technology because that makes us more efficient and more effective, and that number is huge. It costs about $11-12 billion to run a technology platform, which 3.8 this year and 3.8 plus next year will be invested in pure initiatives. We have 6,100 patents on technology. in our company we have hundreds and hundreds of inventors and stuff and we keep deploying that so that's that's the investment the second thing we invest is people and so if you look at the head count for your business banking which is companies up to 50 million that's gone from 600 800 last years you look at middle even gcib the corporate investment bank we're up 1500 people over the last couple of these last four or five years and that's matt matthew building out the franchise of commercial bankers corporate bankers If you look at the sales training team, so we invest in that. What do we do? We take it out of the work, and so we'll get there. And then the other thing is invest in real estate and capabilities, not office buildings. And that's a net interesting play because if you think about it, the branch counts come down probably from that time, I'd say probably high 4,000s to like 3,800, 3,900 today. But in there is complete refurbishment of all the branches, a complete deployment to all these markets we weren't in, and you're paying for that by doing it. So broad scopes, we invest in those types of things, technology, people, the physical plant for those people to work. And then you say, okay, then inflation. Inflation has been high, but it's leveling back off, quite frankly, in terms of wage growth in the population generally. Our turnovers might hit an all-time low. So then the question is, how do you manage your expenses without having to make adjustments? So we started last year at this time, having come through the great resignation, which, again, was 15 months ago. We're all talking about this. It's like people forget. It was literally the second, third quarter of 2022. We're all worried that every person is going to quit our companies. We turned up the hiring. We come through the end of 22, and all of a sudden, we over-cheated the hiring. We just ran right through the turnover rate as the turnover rate started coming down, and then we adjusted. So we hit a peak. We went from 208,000 people to 219,000 people, probably from, say, March or April of 22 to January of 23. And we're back down to 212,000 people. And that's just by managing the headcount carefully. And in there, you're still adding those bankers. You're still adding those financial advisors. You're still adding them. But what you're doing is you're taking it out of the operations, and that's the efficiency move, the OpEx movement. And so we're down to 212,900, I think, at the end of November. including 2,500 new kids that came in in August and September. We just manage a heck of it. We haven't had to take big charges. We haven't had to lay off a lot of people because I think that's just bad management. So how do we manage it? We manage headcount three years out by month by every position, by every heartbeat, as we call it. By taking managers out, we're down 200 or 300 managers this year. Actually, we're down 500 managers this year because we've gotten overachieved on management hiring, and you just manage it. That allows you to kind of keep that expense base. That sets us up for 15.5, you know, 15.6, excuse me, 16.2, 16, 15.8, 15.6. Last year it was 15.5. And so you've leveled back out. And now you can invest to grow off of that, but you've got a good baseline to start with. So I don't know if that helps you think through, but it's all off X. We have $2.5 billion of takeout expenses, 26 and beyond, and an annualized run rate that are going through the system in 23, 24, and 25. Now, you won't see that hit the bottom line because it takes that much investment to keep the company going across $64 billion, but that's how you pay for it and keep the expenses relatively flat.
Richard
Host
So just a quick follow-up. I mean, given what you mentioned about turnover rates being very, very low, should we expect any type of larger severance charges versus what you've taken in the past?
Brian Monahan
Chairman and CEO, Bank of America
We always do a little bit around the markets and banking business, just the usual stuff that you guys all do at the beginning of the year. But other than that, it's redeployment, so we'll have... We wanted to add some people into AML. We took 400 people out of one of the other operations and moved them over. And we've gotten pretty good at moving people around. Really, from the pandemic, we had to move tens of thousands of people, work on the special programs. And so it's – and we're paying for 212,900 people a day. They may be doing different things next year. And that's the key to keep that headcount flat is to redeploy because the problem – Typically, managers say, I need 50 people, and they hire 50, and then somebody else says, I want to get rid of 50 people. We're now saying, how many of those people fit that hole? And when you go across 200,000-plus people, and you'd be a little more location agnostic than you could because of what we learned in the pandemic. They'll work in our buildings, but they can work different places in our buildings and still work. And it's much more flexible. And so all we're doing is watching the fill rate versus the attrition rate. So we've got to keep the headcount level. So we'll have to hire 1,100 people to sort of stay running in place. But you're just watching it. But you have to watch it way out there and be adjusting all the time.
Richard
Host
So let's talk a little bit about your investment banking and capital market businesses. So a two-part question. The first is, look, are you expecting a significant pickup in primary activity next year, so M&A and ECM? Yes. And then secondly, I think one of the growth initiatives that really has worked is the investment that you've made in the capital market business. You've clearly taken a market share in there, in those businesses. The Basel III proposal increases the capital requirements in some of those businesses quite significantly. Does it in any way change your view of the attractiveness of growing in those businesses going forward?
Brian Monahan
Chairman and CEO, Bank of America
So if we separate the markets business, Demi DeMar and his team away from Matthew Coder and team, Matthew and team, you know, As we look at the pipelines, they're still very full. The dynamics around large company acquisition are real in terms of getting deals approved, and that slows it down. But if you look at the financing dynamics, they've kicked back up. Pre-pandemic, we'd run $1.3 billion to $1.5 billion a quarter in investment banking fees in the firm. Now we're running down a billion, ran up to $2 billion plus, but that had to do with a lot of just the stuff flying through. But you're seeing it fundamentally set up well. We've got the coverage we have. We built our middle market coverage, which they've done a good job, from 60 people to 200. We'll keep growing that, which helps with the middle market franchise. So I think the investments we made in the corporate investment banking, there's still places we've got to invest, are strong, and they've got a good return. But if you look at that business as a set of customers, it's loans, deposits, and the capital markets and M&A. And right now, you're seeing a rebound in the debt capital markets, just activity picked up. You're seeing some equity deals get done. The M&A deals are coming a little faster, but there's a lot more out there that could go through, frankly, if you get a stability in the interest rate environment, stability in the belief of the economy. Because right now you're in this transition, and corporate CEOs are sort of looking at it and saying, yeah, but what if that's wrong? Do I really want to make a deal now? And then find out that everybody's prediction of the soft landing isn't quite true, and then I have to pay for it. So that's going on. But they've moved up to a given category or whatever. There's number three in fees, number four in fees, and they've pushed through. And so Matthew and the team have done a good job there. Jimmy, what's happened, if you think about it from 20 years ago to now, is the consolidation industry from the – this is a hard business now with all this capital, with all the – risk around it with all the technology investment, with the separate rules requiring you to do things differently in different countries, and the separate legal structures, and Brexit breaking, and all this stuff. So frankly, the scale players have it. And so what we've done is we just happened to be building out when the market share was moving our way. And Jim and the team have done a good job. I don't see us changing that course. As we look at it, they'll pick up some more capital. And their returns are, you know, we return 15% return on tender capital because they're 12-ish. They're at the low end, but that's because they occupy a bunch of capital. But the offset, honestly, the mix together optimizes the total capital of the company and the expertise and capabilities. So you're going to let them invest up. And we always said they'd be 30-ish percent of the company. They actually shrank down a little bit, pushed them back up, and we'll keep pushing them. But I think the market share is coming from how hard this business is to do now. So the firms, when you look at a Pareto chart, firms on the left are gathering share away from the firms on the right because it's just gotten hard. And I can understand the people on the right saying this has gotten difficult and it affects my enterprise differently than it affects ours because of the balance we have with the businesses.
Richard
Host
Okay. So we've got a few minutes left. So let me ask you a couple of questions. The first is let's talk about credit. Obviously a lot of focus on commercial real estate, a lot of focus on office. Can you give us an update as to what you've seen over the course of the last few months in terms of deterioration Are you seeing any contagion outside of office into other parts of your commercial real estate portfolio? And just broadly, how are you thinking about the trajectory of Charge Us as we head into next year?
Brian Monahan
Chairman and CEO, Bank of America
So starting with the broader point to the narrow point, if you look at the Charge Our Freight for third quarter and so far this quarter, it looks holding in line. You know, it's still below where it was pre-pandemic, which you're trying to have people remember that was like a 40-year low. So, you know, 30 to 40 basis point charge off rate per company has $100 billion of credit cards driving that, as some of our companies do. That's still very strong credit performance. We built some reserves. So the consumer side, other than that, is kind of uninteresting. Mortgage loans, home equity loans, cars are very much under control. It's a smaller book and contributes some, but cards are always going to be the dominant part of the actual month-by-month charge-off. And the delinquency rates are still not quite back to where they were pre-pandemic, which is very good times. And quite honestly, are we smart? Yeah, we believe we are. But what's really happening? Unemployment rate at 3.9% does not generate a lot of car charge-offs. But you have to let that charge-off rate come back in because that's how you invest in the business. Cards are a cost of goods sold as part credit. When you go to the commercial real estate side, it's a small book for us. We have re-rated it. As we re-rate it, you have to do new appraisals. New appraisals are coming in, you know, 80% LTV. The original appraisal are 50. So we feel good about that business. We put up some specific reserves. Chargers will come through and take away those reserves, but it won't be that eventful. And we're not seeing it creep into other stuff at all. And so we have $5 billion of it's credit size, and that's all been reappraised fully, $5, $6 billion of this, really $15 billion of credit risk in there. There's some stuff that's more securities. And so we feel good about it. And we're not seeing it in other parts of commercial real estate, and we're not seeing it leak out of really the eight quality offices still hanging in their major cities. So it's really a B.C. quality office. And for us, it's just such a small part of the table. It's not something – whereas general commercial credit is in very good shape. I mean, the ratings and stuff are solid. Remember, the SNCC reviews come through. Nothing's getting re-rated for us. It's all good stuff, and the team's done a great job there. And, in fact, we're pushing ourselves and saying, are we taking the right amount of risk now given – how strong the risk parameter is. And so we're pushing team, you know, is it time to help some of our commercial real estate clients? Is it time that are very well-structured deals today? Because, you know, 75% LTV today after a markdown is actually an interesting question.
Richard
Host
So final question. I know we're kind of running out of time, but can you talk about the Basel III proposal? It does seem as if the consensus view is that it is likely to change. Is that your view of But maybe you can also just talk more broadly about how you're thinking about managing capital returns, just given the uncertainty around where capital requirements could end up.
Brian Monahan
Chairman and CEO, Bank of America
So simply put, if you say our requirement is 10% and you do that math times the implied increase in RWA, we have that capital as of the third quarter. So we don't need to, quote, raise capital to get there. We don't have to change a balance sheet. Then we can have capital for dividends, capital for growth, and capital for share buybacks and grow the little bit of cushion we need. So this is not an event. The problem is I just think that it raises capital, captures $30 billion of capital that our shareholders deserve to have the right to get back with no real risk change in the company. And so if you look at it from advance, one of the things everybody looks at it from standardized, if you look at it from advance, the credit risk in the industry is going up a lot. And one thing this industry is beating themselves up on with CCAR, with everything, with the models, with the model risk management, with advanced approaches, with parallel run, all the stuff we talked about from 2010 to 2015 and 18, 19. You're just throwing it all away. It doesn't make sense. And it will restrain the U.S. economy and make the U.S. middle market company less competitive than the European middle market company or the Asian middle market company, all supplying into the same supply chain. The world's a global place, despite what people say. So that's why I think they've got to be probative and balanced in it. From our standpoint, we earn 15% ROTC on the capital that's required. We'll be fine, but that's not the right answer for the economy.
Richard
Host
Okay. With that, we're out of time. But, Brian, thank you so much for coming back. Look forward
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