Bank of America reported strong earnings for the second quarter and first half of the year, with organic growth and operating leverage contributing to their success. Lee McEntire provided a reminder that forward-looking statements and non-GAAP financial measures may be used during the call, and then gave the floor to Brian Moynihan, who reported that the quarter and first half of the year were some of the best in the company's history.

Bank of America had a strong quarter, earning $7.4 billion after tax and growing earnings per share by 21%. All business segments performed well and the company grew clients and accounts organically. The balance sheet was strengthened and returns for shareholders were strong. Global markets and sales and trading teams, as well as investment banking teams, outperformed industry peers. Middle-market clients made a strong contribution, and the company continued to invest in its franchise and drive growth.

In the second quarter, Bank of America opened 157,000 new checking accounts and 1 million-plus credit card accounts, as well as 36,000 new banking relationships in the Global Wealth segment. In Global Banking, they added clients and increased the number of solutions per relationship, as well as improved their tools for prospecting and technology investments to add customers and increase solutions per existing clients.

This paragraph discusses the progress that the company has made in digital technology, which has enabled them to add over 1,000 new commercial and business banking clients year-to-date. It also highlights the success of their global markets area, as well as their consumer digital platform, which has 46 million active users and is logging over 1 billion times a month. The customer uses of Erica, an artificial intelligence application, has also risen 35% in the past year and has had 1.5 billion client interactions since its introduction.

Erica and Zelle have seen 19% growth in the past year and Bank of America has opened 310 new financial centers since 2019 and plans to open 50 more each year for the next few years. They have also refurbished all existing centers and have seen strong success in the expansion markets with an average deposit balance of $160 million per branch. Digital engagement is high with 82% of Merrill clients and 92% of private bank clients engaging digitally and a new program, Advisor Match, has generated 20,000 digital leads to 7,000 advisors. Global banking also has high digital engagement.

Bank of America has seen a 60% increase in CashPro App sign-ins and a 20% increase in payments, which have enabled the company to grow its industry-leading digital tools. This has allowed Bank of America to achieve operating leverage in 34 of the last 42 quarters, including 6 during the pandemic. This has resulted in a 19% increase in earnings and a 15% return on tangible common equity, and Alastair is going to discuss the company's outlook for the rest of the year.

In the second quarter of '23, the company generated $7.4 billion in net income, resulting in $0.88 per diluted share. Revenue was strong despite a few headwinds, including lower service charges due to policy changes, lower asset management and brokerage fees due to lower equity and fixed income market levels, a net DVA loss of $102 million, and $200 million in securities losses. Alastair Borthwick then discussed the detailed highlights of the quarter and a summary income statement on Slide 8 and 9.

This paragraph discusses the tax-rate benefits from ESG investments, as well as the operating losses associated with them. It also mentions the expected 15% tax-rate benefit from the ESG investment tax credit deals, and the $276 million in litigation expense for the quarter. Lastly, it touches on the balance sheet, which ended the quarter at $3.1 trillion, declining $72 billion from the first quarter.

In the second quarter of '23, deposits decreased by 1.7%, securities decreased by $41 billion, and cash levels remained high at $374 billion. Shareholders' equity increased by $3 billion and AOCI decreased by $2 billion. The company paid out $1.8 billion in dividends and bought back $550 million in shares. Regulatory capital improved, with CET1 increasing to $190 billion and the CET1 ratio increasing by 20 basis points to 11.6%. The company has improved its CET1 ratio by 110 basis points in the past 12 months, and its supplemental leverage ratio is 6%.

The TLAC ratio remains comfortably above requirements, and average loans grew 3% year-over-year. The drivers of loan growth are consumer credit card growth and commercial loans, which saw a slight slowdown this quarter due to paydowns and weaker customer demand. Deposit trends remain stable, with total deposits at $1.88 trillion, down 1.7%, and the difference in movement between low to no interest checking accounts and higher-yielding non-checking accounts is shown in the top right chart. Consumer investments and CD balances remain low.

Consumer deposits remain above pre-pandemic levels, driven by higher debt payments, higher spend, and seasonal tax activity. Competition in CDs caused some financial institutions to push prices higher, but the average deposit balances remain high. Total rate paid on consumer deposits rose to 22 basis points, driven by the high mix of quality transactional accounts. Wealth management deposits were down $72 billion, but global banking deposits were stable, remaining in the $490 billion to $500 billion range.

Over the past few quarters, deposits have seen a modest decrease, but remain 33% higher than pre-pandemic levels. Excess deposits over loans have increased from $500 billion pre-pandemic to $1.1 trillion in the fall of 2021 and remain high at the end of June at $826 billion. The excess deposits have been held in a balanced manner with 50% in fixed, longer-dated held-to-maturity securities and the rest in shorter-dated available-for-sale securities and cash. Cash and the shorter day-to-day FS securities combined was $516 billion at the end of the quarter and cash of $375 billion is more than twice what was held pre-pandemic.

This paragraph explains how investments in cash and securities have improved the NII of the banking book. The deposit rate has risen by 118 basis points, while the cash and securities yield has improved by 164 basis points. The NII excluding global markets has increased from $9.1 billion in the third quarter of 2020 to $14 billion in the second quarter of 2023. The hold-to-maturity book has declined by $69 billion since the third quarter of 2021. These investments have resulted in a stronger capital position and have allowed for capital to be returned to shareholders and supplied to customers in the form of loans and other financing capital.

In the second quarter of 2023, net interest income increased $1.7 billion year-over-year and the net interest yield improved 20 basis points to 2.06%. This was driven by higher rates and amortization, as well as $32 billion in average loan growth. On a linked quarter basis, net interest income decreased by $289 million or 2%, due to lower deposit balances and mix shift into interest bearing, partially offset by one additional day of interest in the period. Global markets NII increased during the quarter, but the net interest yield fell 14 basis points due to a larger average balance sheet and higher funding costs.

In the second quarter of 2023, NII was expected to be around $57 billion, a slight increase from the previous year. This was due to stabilization of deposits and better pricing. Expenses were $16 billion, down $200 million from the previous quarter, which included $276 million of litigation expense. A 100 basis point down-rate scenario was unchanged at negative $3.6 billion.

In the second quarter, the higher revenue related expenses were offset by the absence of payroll taxes and a reduction in headcount of 4,000, excluding summer interns. Net charge-offs of $869 million increased $62 million from the first quarter, mainly due to credit card losses. There is also a proposed notice of special assessment from the FDIC which could add $1.9 billion expense, but the timing of this expense is uncertain. For context, the credit card net charge-off rate was 2.6%.

In Q2, the provision expense was $1.1 billion, which included a $256 million reserve build due to loan growth in credit cards. Asset quality metrics for consumer and commercial portfolios remain below historical averages, and commercial net charge-offs were flat from first quarter. Consumer banking earned $2.9 billion on strong organic revenue growth, with top-line revenue growing 15% and expense rising 10%.

In the quarter, reported earnings were strong at $2.9 billion, with EPNR growing 21% year-over-year despite the cost of regulator agreements. Revenue growth overcame a decline in service charges, driven by organic growth of checking and card accounts. Wealth management earned a little less than $1 billion, affected by lower equity and fixed income markets and transactional volume. Merrill and the private bank continued to see strong organic growth and produced solid client flows, while expenses reflected lower revenue-related incentives and investments in the business.

The global banking business had strong earnings of $2.7 billion, driven by 29% growth in revenue, and good expense management. Investment banking fees were $1.2 billion, growing 7% year-over-year and 4% linked quarter. Global markets had another strong quarter with earnings of $1.2 billion, driven by a 14% revenue growth, and was impacted by inflation, geopolitical tensions, central bank policies, and debt ceiling concerns.

Brian and Alastair were asked about the likelihood of capital ratios going up for large banks, as well as a Bloomberg report that capital requirements for holding residential mortgages may increase. The quarter saw strong performance in both macro and micro trading businesses, with revenue growth from sales and trading. Expenses increased 8%, driven by investments and revenue-related costs. All other showed a loss of $182 million, with a lower effective tax rate of 8%.

Brian Moynihan discussed the need for the U.S. banking industry to maintain global competitiveness while also taking into account the potential impact of Basel 3 rules on non-banks. He also discussed the effect that a 10% increase in capital levels would have on their ability to make loans, which would support the economy. Alastair then mentioned that a 100 basis point increase in the balance sheet would lead to a net interest revenue growth of $3 billion over the next 12 months, while a 100 basis point decrease would lead to a decline of the same amount.

Brian Moynihan states that Bank of America's philosophy on interest rate risk has not changed much and that the company is in a good position in terms of balance. He goes on to explain that the company will be tweaking at the margin, but that deposit normalization and loan growth will largely drive things from here. He also affirms that Bank of America has been able to keep expenses in and around the same area despite investments and FDIC charges.

In order to remain profitable, the company plans to control headcount and expenses while growing revenue faster than expenses. They have been doing this for decades, but the way they do it has changed over the years. Technology initiatives have gone from $2.5 billion a year to $3.8 billion, and there is more wealth management revenue to offset this. As they move into 2024 and beyond, they expect to manage expenses in line with revenue, while growing a couple of hundred basis points lower than the economy on revenue and expenses.

Alastair Borthwick and Brian Moynihan both expect the firm to deliver 15.8 in the third quarter and 15.6 in the fourth quarter, which would be a continuation of eight consecutive quarters of positive operating leverage. Mike Mayo asked how long the sector slides would last, and Moynihan responded that they expect to continue with positive operating leverage for as long as possible, despite headwinds from NII and lower commercial loan demand and utilization.

Brian Moynihan explains that their goal is to maintain positive operating leverage through 2024 and 2025. He explains that they have positioned the franchise in a way that allows 80% of NII to fall to the bottom line, and they have given specific expense guidance by quarter. He also notes that the environment can be different depending on whether there is a recession or not, but they feel good about their efforts.

Brian Moynihan of Bank of America discussed the bank's privileged position in the global banking market, citing its extraordinary resilience in the past year and a half. He also noted that deposits were down in Q2 due to tax payments, but that there was beginning to be more stability. Moynihan also mentioned that the bank was reacting to the Fed's engineering of an across-the-board reaction, and showed a slide from the earnings deck demonstrating this.

Brian Moynihan explains that Bank of America has a low loan-to-deposit ratio, meaning there is more transactional cash than loan balances. This has resulted in a cost to deposits of $1.24, which is lower than other banks. Moynihan also mentions that after tax season, there was a big pay-out to tap into taxes and people have been slowly paying down their checking accounts. The average balance in checking accounts has gone from a peak of 10,600 to 10,500.

Brian Moynihan explains that the mix of interest-bearing and non-interest bearing accounts is a misnomer as it really depends on how customers use the cash. The data on page 12 shows that the mix-shift is starting to stabilize, and there is an increase in the average consumer balance due to inflation. The consumer goods are advantaged by 20 odd basis points in total, and there is only $40 billion of CD's.

Brian Moynihan of Wells Fargo discussed the settlement with the CFPB Director, Chopra, which alleged that the firm opened customer accounts without consent. Moynihan explained that the accounts in question were from 2016 and before 2017, and that the firm had made changes to their processes since then. Christopher Kotowski asked for clarification on the time period in question, to which Moynihan provided an answer.

Brian Moynihan discussed how Bank of America has achieved positive operating leverage in the past through consolidation of branches and is now investing in branches. He noted that the number of branches has decreased from 3,900 to 3,800, but digital activity levels are increasing with Zelle transactions far exceeding checks. This shift to digital is helping to reduce the overall cost of operating plus the cost of pays and deposits.

Brian Moynihan discusses the benefits of digitization in the markets business, such as operational excellence, which has enabled the business to manage people down as a percentage of work done. This has been achieved through the use of artificial intelligence, which has allowed bankers to be more efficient in their prospecting and has enabled the adviser match to match clients to advisers more quickly. Moynihan also notes that the brand system has come down a slope, but that this slope is starting to flatten out due to the reinvestment and deposits, and he expresses enthusiasm for the potential of artificial intelligence going forward.

Alastair Borthwick discusses Erica, an algorithm they have been working on for eight years that can answer questions using natural language processing and proprietary systems. This algorithm is used to answer 165 million interactions in the last quarter, such as emails, texts, and phone calls. Borthwick also mentions that the same principles are used for drafting credit offer memoranda and business targeting, but in a controlled environment. Finally, he discusses the review of the SCB with the Fed and potential expectations for buybacks with the benefits of the SCB.

Alastair Borthwick explains that the Basel 3 regulations still need to be finalized before any decisions can be made, but the company has the flexibility to do a little bit of everything and have already added 110 basis points to the stress capital buffer and capped the return on tangible common equity at 15%. He then comments on the gradual normalization of card losses, noting that the consumer is still in a healthy place.

Brian Moynihan explains that all the changes to the overdraft fees, rewards card benefits, etc. have been fully implemented and are now in the current run rate. He also notes that the FDIC data shows that overdraft fees are down to $30-odd million a quarter. Charles Peabody then asks about the average balance sheet on Page 8, which shows that interest-bearing deposits with the Fed have increased considerably, despite the relatively flat deposit base.

Alastair Borthwick and Charles Peabody discussed the decision to build up cash balances at the end of last quarter due to the extraordinary period. This was done out of prudence. As the environment is normalizing, the cash balances will drift lower and the net interest yield will improve. There will be a smaller, more efficient balance sheet and it will not hurt NII.

Alastair Borthwick explains that the asset disclosures show the betas they believe at the time and that they will need the next three to six months to figure out their confidence around 2024. Erika Najarian then asks how much of the $3 billion drop is attributed to short rates versus long rates and suggests that if it is half-half, it could get to a run rate of $13.75 billion.

Alastair Borthwick and Erika Najarian are discussing the financial success of the company, which is at $3.6 billion. They attribute their stability to their securities book and a large rotation into interest-bearing. Mike Mayo is asking why the efficiency ratio of expenses to revenues is not returning to the levels seen in 2018 and 2019, and Brian Moynihan is linking the digital activity to the company's operating leverage.

Bank of America is continuing to work to improve their efficiency ratio, which is high due to the wealth management business. They are using technology to reduce manual labor and increase efficiency, which will save them expenses in the future. Brian Moynihan also stated that the number of customers who do their core checking list is up 10%, which is a large number of people.

Bank of America has grown from 100,000 customers to 16 million customers in the past decade, and has been able to absorb costs associated with inflation, wages, and new branches. The cost of deposits is still lower than the rate customers receive for deposit balances. The company has kept a flat headcount in their operations group and invested in technology and developers, as well as third parties. This has allowed them to become more efficient and has had a positive impact on their profitability and return on tangible common equity.

The company is feeling good about its performance, especially in capital markets and investment banking, and is confident in its future prospects. The operator concluded the program and thanked participants for their participation.

This summary was generated with AI and may contain some inaccuracies.