We're gonna get started. I'm delighted to welcome back Bank of America's Chairman and CEO, Brian Moynihan. Brian absolutely needs no introduction whatsoever. This is his fourteenth consecutive year. I know, Brian, it makes us feel old, but it's, we really do appreciate you coming back.
I was a lot younger then.
So consistently. You're a lot wiser now.
Yes.
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.
Yes.
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?
Sure. 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 from anything from distribution to government benefits, from, you know, taking care of clients and waiving fees at the toughest times, and helping people through it, then supporting the economy as it regrew, through it. Then this year, dealing with some of the excesses of, you know, excessive 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, you know, what we do is we serve our clients.
Since the American economy is going to be strong, the American banking system has to be strong, and vice versa. I think the last, you know, 12 months, 24 months, 36 months, 48 months have continued to prove that. Then on top of that, the capital, liquidity, and other things in the industry have been strong. And at the end of the day, it comes down to helping lead our clients and helping deliver, in our case, you know, a lot of money, a lot of earnings, and do it with a purpose in helping clients live their lives. And, you know, 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, 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, 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, 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.
So, let's talk a little bit about the economy. You know, so obviously, we're in this transition to a world of higher interest rates, potentially, I guess, higher inflation 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?
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, in the world. So, and, and Candace Browning and the, 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 2-4 quarters away from when I was speaking. I'd speak, and then they'd push it out a couple of quarters. So it was one of those things I was chasing them. But, but the reality is, it's going to be a slowdown, but it's, it's, it's—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 0.5, 0.5, 0.5, kind of chugging through this US economy, and then starts building back up. So it's a, it's a pretty fast slowdown from 2, 2.5% growth, and then this peak of 5, and then slowing down to 1.5 and 0.5. But it's positive, and that's what we're seeing. So and, you know, 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 $3 trillion-$4 trillion of money moving out of customers' accounts in the economy grew at 9%.
Year- to- date, the same dollar volume's up, it's only growing about 4% now. In the month of November, it grew about 3%-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.
Right.
That's what you're seeing. Then you dig in at services being spent more, entertainment being spent more. You're seeing the rental payments going out of our customers' accounts, the year-to-year growth rate tipping down, which doesn't sound good because it's still going up, but it's going up at a less,
Mm-hmm
... high rate. You're seeing, you know, the way customers are spending their money has leveled out. In other words, there's not this, you know, goods, service, this massive change. So some things are growing faster, but it's leveled out, meaning that all the categories are kind of growing 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 the revolvers and lines of credit, let'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, are being more judicious in managing their balance sheets more tightly, and therefore, you know, am I going to hire somebody or 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 then, 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, 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% target at the end of 2025.
So, you know, it'll—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. That's the danger now: the policy mistake is on the other side. And by the way, this—I'm not saying anything-
Yeah.
that people who set the policy don't understand. That's the risk, and that's why we're trying to maintain more balance with the view that they'll fight inflation, if it kicks back in, but right now you don't see those attributes coming through.
Okay, great. So let's talk about your strategic priorities. 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.
Yeah. So if you go back, you know, 10 years ago, we said almost—we said we got to drive responsible growth. And what people—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 reshaped the company, and so that's been going on. And so 2016, 2017, 2018, 2019, 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? You know, 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 future functionality, capabilities, a new mobile banking site, et cetera.
More and more mobile customers, but at the same time, more branches. So as we've been looking over the last few years, we've built out a lot of places. As we look to the next few years, by 2026, 90% of the top 100 markets will be fully complete. Those markets are growing well. When we go to a market, it's not a branch just to say they're there. It's, you know, 25 branches in Columbus from zero four years ago. It's, you know, 15 or 17 in Cincinnati. It's 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, the investment side, that's setting it up, so.
And then credit card, we're investing more in card, and it's growing a bit in response. So in the consumer business, you know, it's basically drive the core checking franchise, drive the core borrowing attributes that, that produce good value, credit card, home equity, and things like that, although people aren't using our lines. And then drive, you know, the digitization of all that to make it more efficient. And over the last, you know, 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 just driving it.
Better alternative, more and better alternatives practice, lack of better term, continuing to drive, you know, the investment management, but also building out the offices and places in conjunction with the consumer business where 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. So half the Merrill accounts, the Merrill customers have their core banking 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, you know, 1,000+ accounts, new customers, issue new logos, as we call it. They're doing a great job.
And then effectively, the GTS business, the cash management business, investing several hundred million dollars in 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 an initiative. And then the markets business, Jim DeMare has done a good job. That's just more balance sheet, more capital. He made a step change, and they've returned on it nicely, and he'll keep growing it. And it's, you know, it's rounding out the franchise, deeper intensity with clients and things like that, but it's not like it's a change in what they do. It's getting the levels right. And then, obviously, the digitization, that practice goes up. And then efficiency across all businesses. So it's growth with efficiency, and that's what we try to do.
Okay, great. So before you 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.
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 about the big issue on expenses, the FDIC resolution came through, so that's $2.1 billion-$2.2 billion. Slightly higher than the original estimates, but that's just due to the math of the calculation. In our expense to $15.6 billion, that sort of brings the total expense base to, you know, $17.7 billion-$17.8 billion, depending on where the FDIC settles in. So we hit the $15.6 billion, we feel good about. When you think about, you know, things like the investment banking, the fee pool looks to be down 10%-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 share on that business, and Matthew, the team, Matthew Koder and team have done a good job. On the 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 Jim's team, probably the best fourth quarter we've ever had. It still has a seasonality from you know, 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 this is the, these tax deals.
So we have been a major financer of renewable energy. So, you know, 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'd be $1.2 billion-$1.3 billion of negative other income, which is likewise in other years, but it's a big change from the third quarter, and we're just trying to get people straight. That, that. There's always confusion about that. So where are the tax benefits?
The tax benefits, you take in more pro rata, and that comes in all at once, just by when the deals close. So those are four, four or five major things. Other, I mean, the company's running well, everything else. Those are pretty much on par with what we said.
Okay, great.
Yeah.
So let's go a little bit deeper on your thoughts around NII. 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.
Yeah, it's still our view that, you know, rates have come down, you know, especially in the shorter- to intermediate term, the 10-year and 2-year and 3-year and 5-year. But basically, you know, 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 troughs in the first half, grows in the second half, and that's just the loan and deposit balance. What drives that? You know, at the end of the day, it's deposit balance. So you know, think about this early.
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 you 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.
Mm-hmm.
So in the businesses which had the, you know, like the, the banking business, the, you know, commercial banking business, those balances are actually growing again. GWIM's relatively flat. Consumer, for the last six, eight weeks, it looks like it's sort of bounced around the same level. And it was-- it's the low-- it's the slowest to do because you have people spending money and, and 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, the debate whether that would come through and end up back to $1.5 trillion.
Yeah.
So we're up 30-odd%, pandemic to date. The industry's up about 27%. That shows you the industry's done a good job at handling this up and down and stuff, so we feel good about that. As we look forward, it, 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 that. But we're reflecting rate cuts in those estimates to say we flatten out and then grow from there.
So, maybe you talked about deposits, so let's spend a bit of time on that.
Yeah.
So how would you characterize the competitive dynamic for deposits today? Obviously, there was a very competitive bid for deposits, obviously, in the early part of this year. You know, 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?
No. So we get caught up in all the different names for deposits, but there's basically two ways a human being, a wealthy human being or a company manages their money. They have the transactional cash, and they have investment cash, and there's a little bit between that called the cushion for your transaction 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, you know, $1 trillion type of numbers, $1 trillion-plus numbers, as opposed to the CDs and, and money market funds and stuff, which price up. So if you look what happens is that stuff's priced up. So in our, you know, GTS business at the margin, the non-interest bearing... The interest-bearing accounts are, you know, 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 advantage to us. And then, and then the earned credit rate, which we move up and down to adjust to that, you know, will come right back down with deposits, so there with rate structure. So we feel good about that, but you have to think about the two differences, and that's what makes us different.
That's why our all-in cost of deposits seems to be lower, you know, than others. It's because of that. We just don't have a lot of CDs in the consumer business-
Yeah
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 even 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-pandemic, lower average balance. The higher-end are down 25% because they moved all that money to the market because it was-
Yeah
... investment cash, it wasn't transactional cash.
Right.
And so that's gone out of the system, and we put that all together. We have $1.9 trillion deposits. We used to have $1.5 trillion. Consumer went from $700 billion to $950 billion to $960 billion, and the costs have gone up. And, you know, I'd rather have the franchise in the industry and our company that against the 5.5% cost of funds, is only paying 1.5%. That's 400 basis points of gross spread. Will that even out over time? Sure, it will, but it's a pretty nice place to be.
So you talked a little about deposit flows, and it does seem as if they're coming in a little bit better.
Yeah.
So can you just spend a minute on what you would attribute that to, relative to, you know, the debate that we were?
Yeah
having last year
Yeah
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, you know, how much of a liquidity drain from the banking system do you think we could see?
On the first, you know, if you look at what's going on, just to give you a simple... If you think about, you know, the last, yep, 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, where the age ones are, like, $10,000 average balance. You know, 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+ logos that we got in the, in the... It's 1,000+ logos in the middle market and, and GCIB space are all bringing us operational corporate accounts. I mean, that's it's borrowing and, and GTS, so you're seeing that business, you know, well above $500 billion now. And, and it's still, it's all in the rate is 2.5-6 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, you know, across everything. It's really by one customer at a time, net new checking, net getting the account balances from our wealth management customers in the house, getting, you know, more GTS relationships here and around the world. And, you know, some of it's more pricey, and some of it's not so pricey. But when you blend it all together, you see what you get, and that's, it's a very advantaged price. When you think about QT, that's always affecting the far ends of the collection, which is, you know, the RRP rate versus the overnight rate versus the bank deposit rate. That's always, you know, gonna affect that. It's not gonna affect the fact that, you know, the employees at 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 got to keep that plus the cushion. That piece doesn't change much, but at the margin, you know, the withdrawal liquidity comes from, you know, money going to, you know, 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, it affects their cost of funds more than not in ours.
Okay. So let's talk a little bit about, you know, 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-
Right.
rates as we head into next year.
Well, so our basis, you know, our base assumption, the market, you know, have rate cuts. We internally, just to give you, you know, 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, you know, we had 3% Fed funds rate and say, 4.5, 10-year or something like that. You know, 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 2018 and 2019, was a rate structure, got that, what, 2.5 peak on a Fed fund or something. It just didn't open up quite the value. So you ought to see the restoration away from the, you know, fighting for a 2% NIM to back to 2.30% and 2.40%, potentially, which is a big expansion, but that's gonna 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 you, that transactional cash, again, is washing through there at no interest rate paid.
And so, you know, in consumer, the checking, say, $500-$600 billion or something like that, or more, you know, out of the $900 billion, $500 billion, I think, out of the $900 billion. So, you know, that's really coming at, at very low cost. Even some of the other stuff is too, but that, that really doesn't change. And so I think as rates stay higher, that's worth more. And you, you forget, it sounds like more, but when you're saying 0% versus 4%, you know, or let's say, you know, 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, it's 185 versus 385. That's a huge difference for our profitability over time, and that's, 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 people—it's a little bit different than people think. We really think about how consumers, companies, and wealthy people use their money.
Got it. So look, you know, 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, you know, 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 balance sheet over the next couple of years, just given the amount of uncertainty over where rates are gonna settle out?
Well, right, you know, right now we have $3.3 trillion. Our interest rate sensitivity today, the last quarter, and it's sort of up $103 billion to the good, down $103 billion to the bad. It, it hasn't really changed that much, and that's because the focus on that portfolio at, you know, $600 billion at this in running down is against $3.3 trillion in assets, all this other stuff's going on. And so, you know, we, 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're you know, we run millions of simulations and all that stuff. But if you think about what happens is we have a $1.9+ trillion of deposits.
We have $1.05 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 gonna go on, and people are talking about, you're probably gonna have to take that long-term portfolio and ladder it more, and that will give up some yield. But that'll be reflected a bit in deposit pricing too, because if you can't make money on the asset carry, you're gonna have to take more deposit down to make the money. And so we'll see this play out in the industry, but I think it's no different than we had, which is how do you manage a whole balance sheet, the banking book for NII and even the markets book, but how do you manage a 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 3 and something. A big bank like ours will have a NIM around 2.25-2.5. And because we're all sort of set off 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.
Okay.
Yeah.
So, let's talk about expenses.
Yeah.
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.
Yeah.
You know, 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.
Sure
... given the competitive environment for talent heading into next year.
So just overall, you know, we had about 2 to 15 or so, I think, to today, if we're 15 or something, maybe 16, 14, 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 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 billion-$54 billion up to $63 billion-$64 billion in concept and 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 billion-$3 billion a year in technology initiative development.
Now we're at $3.8 billion. We're probably doing, you know, 70% of the marketing we do now. The charity was 60%, which is part of marketing too. And yes, so all that's increased, and the wages 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 the 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 headcount for your business banking, which is companies up to $50 million, that's gone from 600 - 800 in the last few years. You look at middle—Even GCIB, the corporate investment bank, we're up 1,500 people over the last couple of years, last four or five years, and that's Matthew building out the franchise of commercial bankers, corporate bankers. If you look at the sales trading team up. 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, invest in real estate and capabilities, not office buildings, but...
That's a net interesting play because, you know, 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 that, you know, we invest in those types of things, technology, people, and the physical plant for those people to work. 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 this time, having come through the great resignation, which again, was 15 months ago. We're all talking about this. It's like if people forget, it was literally, you know, second, third quarter of 2022. We're all worried that every person's going to quit our companies. We turned up the hiring. We come through the end of 2022, and all of a sudden, we overachieved at 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 2022 to, yep, February, January of 2023. We're back down to 212,000 people, and that just by managing the headcount carefully.
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, you know, September, and August and September. And, you know, we just managed a headcount. 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.
Maybe actually down 500 managers this year because we've gotten overachieved on management hiring, and you just manage it. And 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 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 OpEx. We have $2.5 billion of take out of expenses, 2026 and beyond an annualized run rate that are going through the system in 2023, 2024, and 2025.
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.
So, 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?
We always do a little bit around the markets and banking business, just as, you know, the usual stuff that you guys all do at the beginning of the year. But other than that, we just... All of it's redeployment. So we wanted to add some people in AML. We took 400 people out of, you know, 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 working on the special programs. And so it's, we... And we're paying for 212,900 people today. They may be doing different things next year, and that's the key to keep that headcount flat, is to redeploy.
Because the problem, typical managers say, "I need 50 people," and they hire 50, then somebody else says, "I want to get rid of 50 people." You're- 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 lo- 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, it's much more flexible. And so all we're doing is watching the fill rate versus the attrition rate. So we got to keep the headcount level. So we will have to hire, you know, 1,100 people to sort of st- you know, stay in, running in place and, you know, and but you're just watching it.
But you have to watch it way out there and be adjusting all the time.
So, let's talk a little bit about your investment banking and capital market businesses. So a two-part question.
Yes.
The first is, look, are you expecting a significant pickup in primary activity next year, so M&A and ECM?
Yes.
Then secondly, I think, look, one of the growth initiatives-
Yes
... that really has worked is the investment that you've made in the capital market business.
Yes.
You've clearly taken the market share in there, in, in those businesses. But the Basel III proposal increases the capital requirements in some of those businesses.
Yes
... quite significantly.
Yes.
Does it in any way change your view of the attractiveness of growing in those businesses going forward?
So if we separate the markets business, Jim DeMare and his team away from Matthew Koder and team, Matthew and the team, you know, as we look at the pipelines are still very full. The dynamics around large company acquisition are real in terms of getting deals approved and while they can, debt slows down. But if you look at the financing dynamics, they've kicked back up and, you know, and, you know, pre-pandemic, we'd run, you know, $1.3 billion-$1.5 billion a quarter in investment banking fees in the firm. You know, now we're running you run down $1 billion, ran up to $2 billion+ and down, 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 corporate investment banking, there's still places we got to invest, are strong, and they've got a good return. But if you look at that business as a set of customers, you know, it's loans, deposits, and the capital markets and M&A. And right now, you're seeing a rebound in the debt capital markets, you know, just activity picked up. You're seeing some equity deals get done. The M&A deals are coming a little faster, but they're still...
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, you know, a given category or whatever. There's number 3 in fees, number 4 in fees, and they've, you know, pushed through. And so Jim, Matthew and the team have done a good job there.
Jim, what's happened, if you think about it from 20 years ago to now, is the consolidation in the 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 and structures and Brexit breaking and all this stuff. So frankly, the scale players have it. And so what we've done is we just have been 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. In- As we look at, they'll pick up some more capital, and their returns are, you know, we return 15%, return in 10, they're coming back, 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 cap 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% of the company. 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, you know, a Pareto chart, firms on the left are gathering share away from the firms on the right because it's just gotten hard.
I can understand the people on the right saying, "This, this has gotten difficult, and it affects my enterprise differently than it affects ours because of the balance we have with the businesses.
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.
Yeah.
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-
Yeah
of your commercial real estate portfolio? And just broadly-
Yeah
How are you thinking about the trajectory of charge-offs as we head into next year across the firm?
Starting with a broader point to the narrow point, if you look at the charge-off rate 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 four-year low. So in the high, you know, 30-40 basis point charge-off rate for a company that 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 then you go, so the consumer side, other than that, is kind of uninteresting. Mortgage loans, home equity loans, cars are very much under control.
That, it's a smaller book and contributes some, but not, cards are always going to be the dominant part of the actual month-by-month charge-off. And the delinquency rates on there are still not quite back to where they were pre-pandemic, which is very good times. And that's, and quite honestly, are we smart? Yeah, we believe we are. But what's really happening? An unemployment rate of 3.9% does not generate a lot of card 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 of credit. When you go to the commercial real estate side, it's just, 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 at, you know, 80% LTV. The original appraisers are 50, so we feel good about that business. We put up some specific reserves. Charges 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. We have $5 billion of its credit size, and that's all been reappraised fully. $5 billion-$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. We're not seeing it in other parts of commercial real estate, and we're not seeing it leak out of really the, the A-quality offices still hanging in their major cities. So it's really a B, C quality office.
For us, it's just such a small part of the book table. It's not something... Whereas general commercial credit is in very good shape. I mean, the ratings and stuff, you know, are solid. You know, the SNC 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 to say: Are we taking the right amount of risk now, given how strong the risk parameter is? And so we're pushing the team, you know, is it time to help some of our commercial real estate clients? Is it time to... That are very well-structured deals today because, you know, 75% LTV today after a markdown is actually an interesting question.
So final question. I know we've gone, we're kind of running out of time, but can you talk about the Basel III proposal? It does seem as if the-
Yeah
Consensus view is that it is likely to change. Is that your view? 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-
Yeah
could end up.
So simply put, we, 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 the 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 it. The problem is, I, 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 Advanced, one of the things everybody looks at it from Standardized.
If you look at it from Advanced, the credit risk in the industry is going up a lot. One thing this industry has beaten 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 - 2015 - 2018, 2019, 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 chains. 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% ROTCE on the capital that's required
We'll be fine, but that's not the right answer for the economy.
Okay. With that, we're out of time. But, Brian, thank you so much-
Thank you
... for coming back. Look forward to seeing you next year.