Bank of America Corporation

Well, your first point is a question of, you know, can we pay down some of the higher cost securities? The answer to that is yes. And that would be an expectation of ours as part of this. We've got some shorter dated CDs that can roll off. We can replace those or not. We have shorter dated debt. We've taken our long-term debt footprint down as we've continued to build the, you know, strength of the company. So there's a lot of different ways. It doesn't have to be securities reinvestment. It can be paying down higher cost securities. liabilities as well. So we've got a lot of different ways that we can use, quote, the reinvestment, if you like, around the fixed rate. And then what was the second? The second question was over what time period should we expect the name trajectory beyond 24? Yeah, so look, we're obviously on it right now. We feel like this is the trough. We're trying to build it from here. We'll make meaningful strides on that through 2025. That's where we're going.

Great. Thanks for taking my questions. We'll take our next question from Betsy Grosick of Morgan Stanley.

Hi, good morning. Good morning, Betsy. So, yes, another question on NII. Alistair, I did, I think, hear you correctly when you said that as you go into the second half of 25, there's going to be incremental benefits coming from swath roll-offs. Did I hear that right?

Yeah, that's correct. Second half, 25. So as we get closer, we'll be able to give you some kind of bridge like this that allows you to see what that looks like. But it's just, you know, it's a year out right now.

Yeah, for sure. But I'm just wondering, is there anything that's – I guess what I just would like to understand a little better is how the swap book is impacting slide 10, and then is it – gradual into the second half of 25, or is it a switch on in 3Q? Just understanding how the swaps are playing into that thing.

Yeah, so the part that's important for slide 10 around the second half of this year is just the BISB piece. It's not from cash flow swaps. Any cash flow swaps we have that roll off in the course of the next 12 months, really, they're all kind of current coupon-ish. because anything that we did there was to do with LIBOR cessation or whatever. And so they all got recoupons. So I wouldn't worry about that. In the second half and onwards, some of the older, longer dated things, they've got the lower coupons. So that's when, you know, the BISB number over time will disappear. But in the second half of 25, the cash flow number will begin to appear. So, and we'll give you a sense for what that looks like over time, Betsy.

Okay, got it. And then on the far right-hand side of slide 10, you've got the yellow box, $50 million to $200 million. Could you just give us a sense as to what's the inputs to the $50 versus the $200 just so we can be able to track it as we go through the rest of the next two quarters?

Yeah, we're essentially using four variables. We're thinking, what will the loan growth be? What will the deposit growth look like? What will be the rotation between non-interest-bearing and interest-bearing? and what will be any pricing changes we need to make, right? Then rotation pricing are pretty closely interlinked. You could even call them the same thing. If you use more conservative numbers, you get towards the lower end. If you use slightly more constructive numbers, you get towards the higher. I think the point that we're trying to convey is that this last part, this yellow box is always the unknowable at the beginning of the quarter where we're projecting. The pieces in the green, we kind of feel like we know what those look like. That's pretty predictable at this point. But we've got a little more certainty around that. So the teams, we've got 213,000 people who are working really hard to try and make that dotted yellow box the higher end. But obviously it depends on our assumptions and it depends on our actuals.

Super. Thank you so much for the call, Eric.

We'll take our next question from Erica Najarian of UBS.

Hi, good morning. My first question is trying to square, you know, what you're telling us on the net interest income trajectory and the setup versus your disclosure. So, you know, Alastair, you told us about, as a response to Glenn's question, the benefit from fixed asset repricing, you know, cash flow hedges repricing in the second half of 2025. And when I look at Table 40 from your queue, in both a parallel shift and a steepener scenario, down 100 is negative to net interest income. Is it because this is a 12-month look? And like you pointed out, in the second half of 25, you have underwater cash flow hedges that are rolling off. In other words, as we go through 2025, do you get less asset sensitive? And additionally, what is the notional on those cash flow hedges that you're talking about?

Yeah, so the asset sensitivity that we disclose is meant to give a sense for what happens if nothing changes. It's totally static. So that's one difference. Number two, it's off of the future curve. So it's 100 above whatever or below whatever the future curve is. So I think it's a really helpful thing for sort of short-term moves and rates. Like take, for example, that orange box on page 10. It's helpful for something like that, but it's less helpful in terms of a predictor of where 2025 NII would be because there's so many other inputs, Erica, over time.

And just what's the notional of the cash flow hedges that you're referring to?

Over time? I'd say about $150 billion. About $150 billion.

And how much of that starts rolling off in the second half of 2025?

Well, I think about it like this. You can almost think about it like it's like $10 billion or so every quarter. It's just that the ones that roll off for the first, you know, the next 12 months, they're all kind of current coupons, so they won't really have any impact. Once you get into the second half of 2025, they're a little bit lower rated, so that's when you begin to get some benefit there. And then, you know, I think probably Lee can give you more of the details following.

Got it. If I could just slide in one more question on the normalized NIM, you know, 2.3 and 2.4 clearly is much higher than where you are now. Alastair, you mentioned we should assume a flat-ish balance sheet, but I think I had conversations with the company before in that half of that path between 1.9-ish to 2.3 to 2.4 has to do with balance sheet efficiency. And I'm wondering if you could carry out the balance sheet efficiency and keep your balance sheet flat-ish. In other words, obviously what the market is going to do is take your earning assets today and apply two, three, five, and say, okay, over time, whether it's 26 or 27, this is what B of A can earn under a normalized curve. I'm wondering if that's the right math to do, or should we expect some shrinkage of the balance sheet that's part of the path for?

Yeah, I think what will happen is the underlying growth of the company will still be there. But we have some things that we know, you know, just like Steve asked that question, is there any higher rate, shorter dated stuff you'd like to pay off? Yes, there will be over time. So I think we've got some ability to, you know, almost like self-fund the first $100, $150 billion of growth in terms of earning assets. So that's why we're saying that'll keep the denominator down while we're growing the numerator.

Okay, thank you.

We'll take our next question from Ken Houston of Jefferies.

Hey, thanks. Good morning. Hey, Alistair, I just wanted to ask you a little bit more on the securities portfolio side, because you also have, what, $180 billion or so of pay fix swaps on the AFS book. And so we know about the HFS, the HTM maturity schedule. But how do you look at that AFS book and, you know, how much are those pay fix swaps currently in the money and kind of like how you're just thinking about that side of the portfolio as well? Thanks.

Yeah, just remember those are received fixed. So remember that there, remember that is when we put the AFS in our portfolio, it's so that we've got a group of securities that are sitting there. They're typically treasuries. We swap them to floating so that they look like they're cash as far as we're concerned. We don't have to worry about impact into regulatory capital flowing through. And to us, they just look like cash equivalents. So that's how we think about it, Ken.

And then how do you manage that going forward with regards to like the rate forecast? Do those come off as the securities book? matures or?

Well, I mean, it's less of an interest rate call for us. It's more of, you know, going back to this concept of we've got 1.9 trillion of deposits and we've got 1.05 trillion of loans. So we've got 850 billion of excess. So when the excess comes in, we can do a variety of different things. We'd love to put it in loans, but that's always our first, that's our first love. But in the absence of that, we're going to put it in cash or we're going to put it in available for sale, probably swap to floating for the most part. And we can choose to put things in hold to maturity if we choose to. But obviously right now we feel like we want hold to maturity just continuing to pay down. That's what's been happening over the course of the past 11 quarters. We're just going to keep going with that. So no particular changes to our philosophy around available for sale.

Okay. And a quick one on expenses. I believe you said that costs should kind of hang in here at around the 16-3 that was reported. And so just kind of any caller on puts and takes here, just, you know, is that better kind of revenue-related comp against your ongoing efficiencies? And just how do you think about longer-term expense growth again? Thank you.

Sure, Ken. You know, I think Honestly, the second quarter is sort of emblematic. If you think about last year's second quarter and this year's second quarter, we went up by $300 million. As Alistair said, $200 million was just what management had sent up company. Other growth was really other. So the idea, the pressures we face now are really more due to fee growth in the businesses, which typically have a tighter correlation between fees and expenses and incentive comp related to those fees. So that's a good expense growth. It's what you want. It does grow, and it grows at a good rate. Headcount has basically been bouncing around relatively flat. We're at 212 this quarter, even adding a bunch of summer teammates. We were at 215 last year this quarter, the same summer teammates included. So managing headcount, redeploying people. We have the cleanup stuff going on. We have the new initiatives going on. We're bringing up work and moving it over. So we feel good about managing the company. And that's against the inflation rate and wages that are 3%, 5%. you know, going on, inflation and all the services we buy in the third-party markets, obviously, that the world experiences. So we feel good about how we're managing expenses. The key is pretty simple. All the revenue side equation that, you know, Alex, you've been talking about your colleagues on NI stuff. As that lifts, the expenses stay relatively flat. You start moving towards positive operating leverage. We're minus a percent or something like that this quarter kind of hanging in there, and we'll expect that to go back to the five-year track we had all the way up until the pandemic hit and things got thrown in the sun.

Thanks, Brian.

We'll take our next question from Gerard Cassidy of RBC.

I'm Brian. Hi, Allison. Hi, Greg. Hi there. Brian, you talked and Allison, both of you talked about the excess deposits. I think it was slide 22 you pointed to. Can you share with us, as you go forward, and assuming the Federal Reserve does cut interest rates, I know you put, I think, free Fed fund rate cuts in your slide 10, but as we go out onto the end of 25, the forward curve is calling for, obviously, more rate cuts. Could you tell us how you expect to price your deposits as rates continue to fall? With this excess deposit level, can you be more aggressive in lowering your deposit costs?

I think that's very business-intensive. More importantly, customer specific use. So we think of our deposit strategies in the context of how our customers utilize. And so, you know, if you think about the parts that priced up in global banking or the investment-related cash in the consumer business and wealth management, that'll come back down as rates come because the short-term equivalents come down. Some it's absolutely mechanical because it's actually priced to meet a money market fund equivalent. That'll happen. And so, yes, I think if you think about us being, you know, all in, if you look on that slide at 203 basis points, you know, there'll be some pickup as rates come down. in those higher things. The zero interest, you know, balance accounts or low interest checking, you know, they don't really move because there's zero interest to low interest. So they'll be kind of static, but they're still extremely valuable in the current context. So when you think of all in consumer, I think 60-odd basis points or something, that's driven by the fact that we have, you know, 40-odd million transactional primary checking accounts that is growing at a million a year. you know, multiple years in a row, $900,000, $1 million a year that are maturing, you know, from $3,000 up to $7,000 or $8,000 in balances as people, you know, mature the relationship with us. That's where the tremendous value in the deposit base of this company goes. And so, you know, if you think about $1.91 trillion having grown $100 billion almost from the trough, you think about it, you know, growing in a quarter, multiple quarters in a row. You think about even as we look now to buy the balances above that amount. Yeah, those are good dynamics. So we think about it, but it'll move. But remember, part of our deposit pricing is never going to move because it's zero.

Right, right. No doubt. Those are the golden deposits. One other question on slide 10, and also I think if I recall your first quarter Q, you guys indicated you were asset sensitive. I would assume that this slide 10 also shows that with the three rate cuts. Alistair, what would it take to move to a more neutral position on the balance sheet or even a liability sensitive position should the Fed really get into a rate cutting environment?

Yeah, so this shows that we're asset sensitive. That's why the red box obviously is bigger than the green box. It's the market's piece that's liability sensitive. So we're still asset sensitive, Gerard. What it would take for us is either we could have a lot more rotation into interest bearing, or we could buy some short-dated duration, fixed rate. So those are the two alternatives. And if you look at the course of time, if you were to go back through our queues over time, you'd see that we've become less and less rate sensitive over time. We've really narrowed the corridor of whether rates go up by 100 or down by 100. What could that outcome look like? Narrowed that pretty substantially over time because we're trying to lock in rates here, recognizing the NII is up, you know, four or five billion over the course of the past several years per quarter.

Yeah, the last thing I'd say, Gerard, for a person who's been around this business as many years as you have, you know, this has been a very abnormal rate environment for the last 15 years or so. And if you get to where you have a more, you know, fed funds rate three and a half, which is what our experts predict it sort of stops out at, the ability to bring the asset sensitivity tighter and tighter is there because you actually have room to move down without hitting zero floors and stuff. So there's And so stability, time periods of which the rate environment doesn't whip around, and then secondly, a higher nominal rate environment allow you to manage to that outcome because part of the other outcome for us is just as the rate structure is nominally very low is the zero floors kick in, and that creates an amount of sensitivity that over time will go away if rate structure is higher. Does that make sense to you?

Yeah, no, it does. Thank you. And just, Brian or Alistair, one last quick question. I noticed in slide 25, your home equity loan balance has actually increased. I think that's the first time in maybe over two or three years. Was there a new program or what are you seeing that drives that? And should that or can that continue as we go forward into 25? Thank you.

Yeah, I think it just reflects that the people have locked in low-rate loans, and now that they want to borrow, it's an expensive view because they've got a fixed-rate mortgage loan, and they've got a home equity sitting on top of it. Why wouldn't they use it? I'd like it if it was only two years. It's been four or five years since that balance went from $30 billion to start declining. So it's good to see. I'll note at the bottom of that page, if you look at year-over-year mortgage production, you know, $5.7 billion and $5.9 billion. You look at home equity line production, which is new originations in the boxes, you know, solid. But, you know, it is nice to finally see that the actual balances have stabilized. And, you know, we'll see they're kind of flattish. They're not really growing. But it's nice to see them not just keep coming down, and hopefully they'll start to be utilized. Our expectation would be they will be as consumers, you know, over time want to take out part of the equity in their home at a rate that is reasonable but doesn't require to refinance the whole first.

Great. Thank you again, Brian.

We'll take our next question from Vivek Junja of J.P. Morgan.

Hi. Thanks for the question. Just a little color on non-interest-bearing deposits. When you look at it on an average basis, the decline has clearly slowed sharply. Period N was down at a faster rate. Is that just the noise around end of one queue, or what are you seeing as you look sort of month by month? Is that truly slowing? And talk to it a little bit by customer segment, if you can, please.

Yeah, I think the fact you're catching two things. First one is it is slowing, that rotation is slowing, and we would expect that because at the end of the day, this is mostly cash in motion. It's transactional accounts. That's why it's not interest-bearing. And the answer why it's a little different this quarter is because of the seasonality of tax payments. For anyone who has a big tax payment due, they frequently just allow it to, you know, they may pull it out of their brokerage account, put it into their non-interest bearing, and then they're, you know, wiring it out from there. So that's, again, an example of money in motion, but that's what's going on this quarter.

A quick one. Visa B derivative gains, did you have anything in your equity derivatives trading revenues this quarter?

Nothing to highlight, nothing to note. That's a position we sold years ago, and anything that's happened with Visa, we've just unwound on the balance sheet. We've recycled it, so it shouldn't have any impact to revenue.

Thank you. We'll take a question from Matt O'Connor of Deutsche Bank.

Good morning, Matt. Good morning. How are you guys thinking about kind of targeted capital levels going forward? You know, obviously we're still waiting for final rules. Maybe there's a little more volatility in your SCB than you would have thought, but you still got a nice buffer. And then I guess one last piece I was thinking is the remixing of the balance sheet that's been commented kind of throughout this call over time probably causes a little creep in RWAs, right? Like loans higher than, say, securities. So lots of excess capital, but some puts and takes. And how are you thinking about it between now and when we get final guidelines?

First off, I think we always want to use the capital to grow the business. So if we need to use it to support RWA growth for loans or something, that's a good outcome, and that's what we want to do first. Second, we maintain the 11.9% quarter-to-quarter with a little bit of RWA increase. I think that would be sort of emblematic growth. And, you know, we bought $3.5 billion, paid out $1.9 billion in dividends. So you'd expect that kind of to continue on in terms of that basic idea of we don't need a lot of capital to grow because the RWA demands are met with a fairly straightforward amount. We're earning a nice amount of dollars, and we'll deploy it back in the dividend and the buybacks. Our job is to maintain a 50 basis point type of management buffer to whatever the requirements are. The volatility... Well, there's a whole different discussion on that in terms of the wisdom of that. But the reality is the volatility is absorbable, you know, because you have time to plan into it and get done within a race we've seen. So whether we agree with the volatility or not, we've easily absorbed it. And the new rule is coming out. We'll see what happens and we'll adjust. But just think of this as basically a requirement of 10.7 under the new SEB plus 50 is 11.2. Maybe you get a little tighter if you feel you got great insight to what happens next year. But And then I think the finalization of Basel III will come through, and we'll see what that is and see how that all correlates to the various aspects. But, you know, we feel good about where we are and expect that all current earnings are, you know, basically available to support the growth we're talking about in the current economic environment. That's relatively modest need. But really, the rest of it just goes plowing back to you.

Okay, and just to summarize that, I mean, do you think about bringing down the 11-9 to 11-2 kind of in the near term or just make it obvious, like, wait, that's a little bit more theoretical and wait for the capital rules to play out?

I think we need to see how the next 60, 90, 120 days play out. You hear a lot of discussion about the timing of a re-proposal or not, et cetera. So we have a lot of flexibility, but we continue to – focus on shareholder value creation and all of that, but I think we're in a critical spot for the industry in terms of learning the outcome of a lot of these things over the next short period of time here.

Okay, thank you.

That concludes our question and answer session for the day. I'd be happy to return the call to Brian Moynihan for closing comments.

Thank you, Operator. Thank all of you for joining us today. Obviously, a lot of focus in on I, and we gave you the slide 10 to give you the bridge. Alistair answered a lot of the questions. Lee is here to answer it. The key is to understand what's driving that, which is Deposit performance was just stabilized and starting to grow for like six quarters in a row now. Loan growth very low, but just staying positive. Those are going to drive the value of this franchise, and that's going to grant growth by our customers. That's coupled with strong fee performance this quarter in terms of wealth management fees, investment banking fees, consumer fees even growing significantly. global payment services fees, and, of course, the great work done by our markets team. So that level with flattish expenses gives us a chance to start driving operating leverage again in the company, and that generates a lot of earnings, a lot of excess capital, and we put that back in your hands. So thank you for your time and attention. We look forward to talking next quarter.

This does conclude today's Bank of America earnings announcement. You may now disconnect your lines. And, everyone, have a great day.