Bank of America Corporation (BAC) RBC Capital Markets Financial Institutions Conference (Transcript)

Bank of America Corporation (NYSE:BAC) RBC Capital Markets Financial Institutions Conference March 6, 2024 2:00 PM ET

Company Participants

Alastair Borthwick - CFO

Conference Call Participants

Gerard Cassidy - RBC Capital Markets

Gerard Cassidy

The company really doesn't need an introduction, nor does Alastair to my left. But Bank of America, as we all know, is the second largest commercial bank in the United States has assets of about $3.2 trillion. It has over -- close to 3,800 branches around the country. Its total market cap impressively is at $271 billion and it has a common equity Tier 1 ratio of 11.8% at the end of the year. To my left is Alastair Borthwick, who is the CFO of Bank of America. Alastair joined the company in 2005. He's been CFO for about just over two years. I guess end of ‘21 was when he was appointed as CFO. So Alastair, thank you so much for joining us.

Alastair Borthwick

Thanks for having me.

Gerard Cassidy

Maybe we could start off where we've been starting off with other fireside chat questions with the macro environment. Obviously, you've got a great position to really see what's going on in the United States because of your depth of the business you have here. So maybe you can share with us some of the trends that your customers are sharing with you.

Alastair Borthwick

Sure. Well, I think, first thing I would note is just what our research team are telling us. On the macro side, if you saw our forecast this week, we raised them from 2024 up 1.2% to up 2.1%. So that's a pretty meaningful move. At the same time, Savita upgraded and updated her forecast for the S&P 500 to 5,400. So those are obviously two positive developments. And then in terms of what we're seeing from our clients on the consumer side it's I think a continuation of the trend we've been talking about through last year. It feels to us like the Fed is winning the battle against inflation. Consumer spending is normalizing. We're back towards somewhere around 3% over last year's record. So you're up 3% year-over-year. Consumer spending's still pretty good then, but more consistent with a slowing economy. And so that feels good to us. Otherwise the consumer asset quality remains pretty good. We can see that incomes are good, unemployment's good. So consumer side still, at this point, feels pretty resilient. And on the commercial side, we feel like things are pretty good also. So no changes to how we felt about the environment at this stage.

Question-and-Answer Session

Q - Gerard Cassidy

Great. As I mentioned, you've been CFO for about two years, and prior to that you were the head of the commercial bank for about a decade. How is -- if you could take a few minutes and share with us your experiences running the commercial bank and how that has helped you take on this role as CFO?

Alastair Borthwick

Well, maybe like many people who appear in the CFO role, I come from the line of business where I've spent my time serving our clients. And I think in particular what that allows me to do coming into this role is it helps me just stay centered around what is our purpose, and our purpose as a company is to serve our clients. We have this idea of what do you want the power to do? How do we solve things for you? How do we make your life better? And that's an important part for all of us at the bank, that’s how we think about what we're doing when we come in every day. And then the second aspect of running the line of businesses with a context of Bank of America, our strategy is one of responsible growth. That means, number one, it has to be focused on the client always. Number two, it's got to be within our risk parameters. And number three, it's got to be sustainable. And number four, we must win, no excuses. So that mentality obviously isn't something that people in finance have or people in the line of business, everybody has that. But I think those inform me as I come in to be the CFO and for the last couple of years then I just view my role as helping the lines of business to serve their clients, because the lines of business are now my clients, working with our partners across the support organizations and then making sure that we build a capital structure, making sure we build a liquidity environment where we can serve our clients in any environment come whatever it may. And I think that then is -- it was an important starting point for me, but I equally think someone who came out of finance would be equally as successful, because we've all grown up in that responsible growth over the course of the past 10 years.

Gerard Cassidy

Very good. And then when you look out 2024, what do you see the real opportunities for growth for Bank America?

Alastair Borthwick

Well, we put out some pretty good disclosure, I think, every quarter now around what does the organic growth look like in each of the big four segments. And what's most encouraging, I think for us as a management team is we're seeing now growth in all four of those big segments. And some of them in the consumer bank have been doing for 20 plus quarters of generating net new checking, generating net new card. And as you look across the other three businesses, you can see just continual taking more households, getting more families onto the wealth platform. You continue to see us taking share in global markets and global banking. So we're fortunate right now that we've got four cylinders that are driving organic growth. And then the key for us is just keeping -- making sure that we're investing in each to perpetuate that and keep the flywheel running.

Gerard Cassidy

And I know you don't want to disclose all the secret sauces on organic growth. But can you share with us some -- you've been real good at it, and so what's the drivers behind that success on the organic growth?

Alastair Borthwick

Well, I think, look, we're fortunate in a couple of different ways. First, we're fortunate that we have four great franchises already and that opens the doors in a lot of places. Second, I think we're fortunate we have a management team that largely have been working together and under responsible growth now for over a decade, that makes a big difference. Third, because we've been able to refine the system and make the little tweaks over time, that's helped us to really get after the core. And then there's some interesting areas where Brian has done a really good job, I think, of reinforcing in local markets, for example, we've got 90 of them around the country. How do we refer business from one business line to another? Like, it's not the idea that I'm only going to help my client in what I do. But if you are a wealthy person, can we introduce your company to our commercial colleagues? So that's been an important part of our success. And you can sort of see that in -- when we talk about consumer investments, for example. At the end of the fourth quarter, I think we were around $420 billion, that was up 30% plus year-over-year. What's that look like? That's got a little bit of wealth management, it's got a little bit of consumer, that's those teams working together to come up with something compelling, obviously with a large digital component as well. Or if you look at what we're doing in investment banking, a lot of our focus has been not just in building out our international presence, but also even in the USA, adding more local bankers to serve our commercial banking clients has been an important part of our market share gains there. So the businesses are good at doing what they do anyway. But I think this idea of cooperating with one another and finding interesting opportunities where it requires two or three to work together has been an important part of our success.

Gerard Cassidy

Got it. Maybe shifting over to the balance sheet for a moment. Can you provide some color on the drivers of your expectations on moderate deposit growth in the second half of the year? What gives you confidence that consumer deposits are going to kind of hit a floor?

Alastair Borthwick

Well, we haven't changed our perspective on this. And I think over the course of the past several quarters, the date when we think that begins to flatten and grow, just it's approaching us closer and closer now. So in other words, the actual experience has borne out according to what we thought it might be, and we're getting closer now to that point in consumer. And consumer, I think what largely gives us confidence is there was a very large pandemic bump. The consumer stuff has been coming down, it's been slowing in terms of the declines. But along the way, real GDP in America is still growing and growing upwards. And at some point that's where we find a floor is we're going to cross back down to long term trend lines. So we see that happening this year. We're pretty confident in that regard. And in the meantime, the wealth balances, last quarter we showed they're flattened out now. We've shown that the commercial balances are growing. Those two are very important deposit growth engines for us. So we felt like the deposit picture is consistent with what we'd expected. This quarter it's consistent, again. We feel pretty good about deposits overall.

Gerard Cassidy

Yes. Is there any way for you folks to try to figure out the impact QT is having on deposits at your organization? It seems challenging for all of us to try to link the QT to actual individual bank deposit levels.

Alastair Borthwick

Well, I think you could look at ours. It's always -- I mean, it is challenging, because it's so idiosyncratic. And we feel like we've taken a little bit of market share since the pandemic, so that's probably softened the blow for us a little bit. But if you look at the industry overall, no question industry deposits are down. And that is exactly what the Fed is trying to engineer. So yes, it's happening, it's a real thing. It's happened to us. It's just that we've had a considerable amount of stability in the course of the past year based on the fact that global banking's back to growth. The wealth is flattened out and consumer continues to slow. So there will be a point where we grow our deposits again and it's coming soon.

Gerard Cassidy

If we could shift over to the deposit pricing. Obviously, there's been a lot of talk about what's going on with deposit betas and such. Your organization has been very disciplined on deposit pricing as rates have risen. Can you share with us how that can play out if the Fed, especially if they start cutting rates, how you can manage that deposit pricing? And then what's your thinking on the deposit betas on the other side? Meaning as rates come down, how quickly can you guys move on that side of the equation?

Alastair Borthwick

Well, we're like, I think, every other bank and that our deposits have different characteristics. In the consumer side, we've got some non-interest bearing. We have interest bearing. We have in wealth, we've got some non-interest bearing, we've got some interest bearing. And obviously, in commercial we have the same thing. Each one of those categories has different weightings and each one has different behavior. In addition, we compete with -- we compete pretty fiercely for deposits with others around the country obviously and around the world. So it'll be very different depending on which deposit category we're talking about. Typically, when rates begin to go down on the things that have the highest beta, so think about that being non-operating deposits for corporations, for example, or non-operating for wealth, upper end wealth, there, that's when rates move fastest, because we're competing with market based alternatives. Obviously, we have less flexibility on the non-interest bearing side and on the operating type accounts, because those tend to lag on the way up. So consequently, I'd expect us approximately to retrace steps on the way back down. There will be some element of lag. We'll need to see how the competitive environment unfolds for everybody. But just like we raised rates on the way up to make sure that we were competing and treating our clients appropriately and fairly, we'll be doing the same thing on the way back down.

Gerard Cassidy

What's the scenario like for your organization if, let's say, the Fed just doesn't move or if they cut the first time, it’s August, and we don't have any rate increases, obviously. Do deposits -- do the costs start to stabilize or have they started to stabilize, but then all your cash flows coming off of your assets that are repaying are being reinvested in higher yields?

Alastair Borthwick

So the second part's certainly true in that scenario. With respect to the first part, it's now being July since there was a rate hike. So we think we're towards the tail end of any pricing, other than things that we have to do from competitive reasons. But there isn't anything on the table right now that would say rates are higher than they were two months ago or a month ago, or five months ago even. So we think we're getting towards the tail end of that.

Gerard Cassidy

Yes. It's very encouraging. It's almost like 2006, you might recall, they stopped raising rates in June of that year and they didn't start cutting them until we got well into ‘07. And the industry's margins stabilized nicely during that period. So maybe that's ahead for you and some of your peers. When you look at loan demand, what are you guys seeing, both on the consumer and commercial side this quarter and how is it shaping up in that sense?

Alastair Borthwick

Well, it was a -- look, it was a little slower than we would've liked last year. Normally, you think GDP plus and you hope for a good GDP number and you hope for a lot of long growth, and just a little quieter last year. And that was largely, I think, based on revolver utilization more than anything. It's less about us extending commitments to clients, it's more about clients finding it less interesting to borrow when the base rate is now 5% plus. So as a result, we saw -- I think, that was pretty much a headwind we had to get through all of last year, that's continuing a little bit. I'd say loan growth this first quarter, we're off to a slowish start. Some of that is what we would expect. Card comes down in Q1, that's pretty typical. And on the commercial side, I think we're going to be fighting this headwind around revolver utilization for a little while here. But we're still optimistic and we're still battling away for loans where we can and we have plenty of capital, so we're trying to commit it where we can.

Gerard Cassidy

Yes. And coming out, when you put it on your hat when you ran commercial and we hear a lot about utilization rates. What would you recall or what's a normal utilization rate versus where you are today?

Alastair Borthwick

Well, in something like commercial, it might be 34%, something like that. Today, we might be at 27%. Those sound like statistics and they are, but every percent is $5 billion. So it's the sort of thing that makes a difference over time. It varies by different parts of the bank, obviously. But that's been a common theme for the industry and it's been a common theme for our lines of business. It’s just it costs more to borrow right now. And so consequently it's changing people's behavior.

Gerard Cassidy

Sure. On your last -- on the earnings call for the fourth quarter, you guys gave us some guidance on net interest income and you thought in the second half of the year, maybe we start to see some sequential growth. What's your thinking on net interest income? Are you still confident that could happen?

Alastair Borthwick

Yes. We have no particular change to net interest income. At this stage, I'd say, when we got together at the earnings, we felt like first quarter might be $13.9 billion to $14 billion of NII. If anything, I think just the way the deposit structure is settling in here for us this quarter, we're pretty confident it will be at the upper end of that range. So that feels better. And then we talked about it may dip a little in Q2, which we haven't changed our point of view on Q2. But I'd say when we look forward to Q3 and Q4, now that the market's sort of pricing in three to four rate cuts rather than six or seven, we might see some benefit towards the back end as the cumulative effect of that takes place. So we feel better about NII, I'd say, overall.

Gerard Cassidy

That's very good. Okay. You -- Brian has been very focused over the last 10 years on operating leverage, and you guys have done a good job in creating positive operating leverage. How do you manage that with sustainability of investing for growth, and how do you guys balance that out?

Alastair Borthwick

Yes. So there are two things going on at the same time in your question. The first one is, does our management team believe in operating leverage? And the answer to that is yes. And it's a habit, it's an attitude, it's a discipline, it's an expectation, when we put the strategic plan together, each year. And as we update that with each quarter and each month, it's with a operating leverage in mind. That was always true for me as a line of business head, it remains the case today. So everybody is pulling in the same direction on operating leverage. At the same time, there are going to be some periods where NII is coming off of a peak because rates have changed so significant in terms of deposit rate paid. So there will be a period of NII headwinds for a temporary period of time. There may be a period where credit costs are normalizing to something we would have considered to be historically quite good, but they're normalizing nonetheless. So you can have a twist period like we're in right now. And I think the important thing then for us as a leadership team is we can't lose sight of the fact there are certain things we're committed to. When we talk about sustainability of responsible growth, what we're referring to there is let's make sure that we stay true to investing in the franchise for the future. So you shouldn't see significant swings down in certain of our expense categories, because it's important to invest for the long term health of the franchise, and that's a balance. But I feel like we've got one eye on long term and another on this year's performance and we’ve balanced it for the change in the world and change in macro conditions.

Gerard Cassidy

Got it. And when you think about investing for growth, what are some of the areas that you're actually doing that right now as you look out to 2024?

Alastair Borthwick

Well, we've got a pretty ambitious investment program across the franchise. You can see that in -- you mentioned our financial centers. We've now renovated all of them in the course of the last five years. We'll open more financial centers again this year. We'll refresh another tranche of financial centers. We're opening in some of our growth markets around the country where we don't have quite the same legacy footprint. So we're excited about that. We're investing in bankers and that's true across the wealth franchise, it's true in the financial centers, it's true in the investment bank and across the commercial banks. So there's a lot of investment in small business, lot of things that we are doing to invest in front line people. And then we'll continue to invest a lot in technology, because that's obviously such an important part of the client experience. It's so important in terms of the operational excellence that you mentioned. That's where we get a lot of the expense saves that pay for these investments. And then finally, we'll invest a lot in marketing because -- and it's not just -- you used to think about print and radio, but increasingly, these are personalized offers on your mobile app that come digitally. So there's a lot we can do, I think, across the board in terms of investment.

Gerard Cassidy

Yes. And speaking of the tech budget or technology budget, can you remind us the size of the budget and how it's changed over the years?

Alastair Borthwick

So we'll spend about $3.8 billion this year on what we would consider to be new technology. So I'm talking investments in the future of the franchise, not operating the place. That $3.8 billion, I don't have the exact number. But if I cast my eye back over the past 10 years, it would have been a number like 3, maybe less. And every year, it just goes up. So again, this principle of sustainable growth, this is one of the things I think Brian has done a good job of leading us through the long term. It's an idea that you don't spend $3 billion one year and $1 billion in the next depending on what happens with NII that year or what happens -- there's a commitment you're making to invest in the franchise through the pandemic, through rain, sun, all the various things. And that commitment should grow over time with the size of the balance sheet and the income statement and the land, and we try to make sure that we do that. And the good news is that means we have plenty to invest in each of the lines of business and drive the organic growth we talked about.

Gerard Cassidy

Yes. You really have been a leader in technology. So maybe this would be a good question for you as well then. Can you share your thoughts about the impact AI may have on improving profitability for you folks?

Alastair Borthwick

Well, it's still early days for us. The simplest example of an AI at work for us at Bank of America is our Erica, which if any of the folks listening to this, think about in their own personal lives, it's an opportunity to just pick up your phone and talk to someone, right, not someone, but talk to and walk through instructions of what you want to do and what you want to learn. Erica is now handling a billion transactions for us per year, just to give you an idea. I mean this is a significant savings for us. And for the client this is savings of their time. It's an experienced driver for them. So Erica has been an important part in our early days. And we will continue to look at across the platform where the opportunities for us to drive client experience and to help with the expense side. And it's a little bit like the advent of the Internet or the advent of the mobile phone, there's an awful lot of opportunities. We're investing in several areas and we're excited about this opportunity over time.

Gerard Cassidy

That's great. Maybe pivoting over to credit quality, which is obviously on everybody's mind. Can you share with us any update on the consumer clients? You've talked about the deposit balances pre-pandemic to where we are today, but also on the credit card, new charge-offs where we are today and as they're normalizing?

Alastair Borthwick

Well, we try to give a lot of disclosure on the consumer side and an asset quality generally. So I'd say if you were to look at what we put out at the end of the year, normally, when you take a look at the 90 days past due, that's the piece that we charged off this quarter. So we're now at levels that are consistent with kind of 2018, 2019, a period that we thought was very good in terms of asset quality, well inside of where we underwrote them. So no particular change to the consumer side and more or less what we would expect, that's just aging its way through.

Gerard Cassidy

Yes. And coming over to commercial -- not commercial real estate, but just good old fashioned commercial, an area, again, that you ran. It's remarkable with 500 plus basis points of rate increases, it's resilient for you and your peers. Any thoughts on -- or is that not true, it's not resilient and you're starting to see cracks, but I don't think…

Alastair Borthwick

No, it's -- I mean, it's been historically good for a while now. And our commercial asset quality has generally been excellent. So it's at such a low level that if anything, you're really talking about one deal or two deals out of the thousands of companies that we bank. But that picture, I think you're right, it's been terrific.

Gerard Cassidy

And when you think about -- especially you were obviously a lion head during the pandemic. What did -- do you think the business customers got lean and mean and had it because it was extremely difficult there for a while? And that is now they're benefiting from that period that they went through that they can handle the higher cost of funding?

Alastair Borthwick

Well, I'd say there are probably two or three things. The first one is most owners, CEOs, CFOs and treasurers of corporate America went through 2008 and 2009. And they remember that, they're scared by that,they're shaped by that…

Gerard Cassidy

SOE by the way.

Alastair Borthwick

SOE. And they also went through COVID. And by that point, corporate America was a little less levered. So both of those things, I think, have shaped and informed people about how to run and sustain a franchise over decades. And then I think there's an additional thing, which is the US economy has done quite well since then. It's done quite well. And so one of the reasons that the Fed is trying to slow things down is because it's done so well. So I think when you add those two things together, you find yourself in a position where even those names that struggled during COVID, it could be travel, could be leisure. I mean those things are back. So very quickly, I think corporate America found a way to put up defenses around liquidity and capital. And then with customer behavior returning to normal, the credit experience has been very strong.

Gerard Cassidy

I know you don't have excessive exposure to commercial real estate, but getting your views on it would be helpful as the urban office markets, we know, are struggling, maybe in some suburban markets. So what are you guys seeing in your portfolio in this area?

Alastair Borthwick

Well, look, I don't think we have a lot new to comment on in large part because we put out so much disclosure in each of our documents. So I'd refer everyone to the materials we put out in fourth quarter earnings, because you can see our portfolio broken down piece by piece. And then I think our general mentality is we're just going to try and stay in front of things. We try to have a conservative methodology around underwriting in the first place, that's why our LTVs are low. And then we are continually just making sure that we refresh the scorecards, refresh the appraisals and then we push it through the P&L as we go. So -- but the commercial real estate will just take a while to filter its way through, because you talked about long term assets with long term loans, and it will work its way through over time.

Gerard Cassidy

Yes. And have you guys run into -- the shadow banking industry has taken a lot of the risk as part of, as you well know, the CCAR process, the Fed has purposely derisked the industry and it seems to have succeeded. Are there areas in the shadow banks that when you and Brian just talk about it that you're focused on as a concern potentially if commercial real estate got a lot worse?

Alastair Borthwick

Well, we spend a lot of time going through all the various scenarios. The scenario planning for a bank like ours doesn't stop with CCAR. CCAR is one thing that we do. But we're continually testing our balance sheet and our income streams against any scenario we can think of, that might be one of them. And then we try to just make sure that we have a capital base that can withstand anything we can think of. So look, I think you're pointing out a second thing, which is this question of, if the regulators push things out of the banking system, does that make the banking system safer? Yes. Does it make the United States economy safer? Well, maybe, maybe not. But that's a question for other people in another time.

Gerard Cassidy

Well, let's go to a question you can answer. How about -- how does the investment banking activity shaping up this quarter? And then second, also about sales and trading, how is it shaping up also in the quarter?

Alastair Borthwick

Yes, I think we feel good about how both have opened up the year. When we look at the investment banking side, we've had better capital markets activity. I think you can see that just in the deal flow, you can see it in the league tables. I'd expect us to participate in that. So at this point, we're -- I'd expect our investment banking to be up this year, year-over-year, 10% to 15%, something like that at this stage. And on the global market side, as we've continued to invest in the franchise, we obviously feel very good about that. Jim and the team have done a wonderful job there of just continuing to grow. And last year was close to a record year for us in terms of first quarter. So we're hoping to repeat that and I think it will be around flattish this year just based on the equity strength at this stage.

Gerard Cassidy

Got it. Very good. And then maybe as we wind down here, where is Basel III end game is coming, there's news out of Washington today about [indiscernible] testimony and what he's thinking. Any thoughts about how it's shaping up and how you feel about it in your capital levels?

Alastair Borthwick

So obviously, read the Chairman's remarks, and I'm familiar with them. I think regardless of how it plays out, the important thing for us has been we have to build the capital to make sure that we're ready if the rules were in place today. And we got to a point in the fourth quarter where we felt like we're kind of there, and maybe third quarter, fourth quarter added a little bit, but we're there. We have the capital that we need for the rule as originally proposed. And we bought -- we've been buying back shares over the course of time really to offset employee share dilution. But last quarter, we bought a little bit more because we felt like we're at that point now we have a little more flexibility. This quarter, we'll do that again. And then we'll need to see how the rules develop and how they play out. But I think we're likely to have more and more flexibility over time to return capital to the shareholders.

Gerard Cassidy

Sure. And then one final question. Obviously, the CCAR, DFAST economic scenarios came out. Any thought -- I know they weren't materially different than last year, and you guys refined. But any thoughts on what we saw with those scenarios?

Alastair Borthwick

Well, I think it looks pretty similar to last year. I'm really proud of the US in the way that we have a really robust stress testing system. But I think it will probably be very similar to last year.

Gerard Cassidy

Great. With that, please join me in a round of applause thanking Alastair for being here.

Alastair Borthwick

Thank you.