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 close to 3,800 branches around the country. Its total market cap, impressively, is $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 2021 was, when he was appointed as CFO. So Alastair, thank you so much for joining us.
Thanks for having me.
Maybe we could start off. 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.
Sure. Well, I think, first thing I would note is just what our research team are telling us.
Yep.
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. 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.
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. 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?
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.
Yep.
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, 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 of how we think about what we're doing when we come in every day. And then the second aspect of running a line of business is we have a context at 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 informed 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 may. And I think that, then, is.
It was, 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.
Very good. When you look out 2024, where do you see the real opportunities for growth for Bank of America?
Well, you know, w e 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, we're seeing now growth in all four of those big segments. And some of them, the Consumer Banking have been doing for 20+ 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 Management platform. You can 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, y ou know, making sure that we're investing in each to perpetuate that and keep the flywheel running.
And I know you don't want to disclose all the secret sauces on organic growth, but can you share with us some? Yeah, you've been real good at it, and so what's the drivers behind that success on the organic growth?
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, that makes a big difference. Third, because we've been able to refine the system and make little tweaks over time, that- that's helped us to really get after the core. And then there's some interesting areas where, you know, 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're 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.
You know, at the end of the fourth quarter, I think we were around $420 billion. That was up 30%+ 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.
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 gonna kind of hit a floor?
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.
Yeah.
In other words, the actual experience has borne out according to what we thought it might be.
Right
And we're getting closer now to that point in consumer. In 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 gonna 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, you know, 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.
Yeah. 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, you know, levels.
Well, I think you could look at ours. It's always, I mean, it is challenging 'cause 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.
Yeah.
That is exactly what the Fed is trying to engineer. Yes, it's happening. It's a real thing. It's, 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 has flattened out, and consumer continues to slow, so there'll be a point where we grow our deposits again, and it's coming soon.
Good. If we could shift over to 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, you know, how that can play out if the Fed, especially if they start cutting rates, what, how you can manage that deposit pricing? And then what, what's your thinking on the deposit betas on the other side, meaning as rates come down, how quickly can you guys move on, on that side of the equation?
Well, we're like, I think, every other bank in 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've the same thing. Each one of those categories has different weightings, and each one has different behavior. In addition, 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.
Right.
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.
Right.
Obviously, we have less flexibility on the non-interest-bearing side and on the operating-type accounts because those tend to be, you know, those tend to lag on the way up. So consequently, I'd expect us approximately to retrace steps on the way back down.
Yeah.
There'll 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.
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 since August, and we don't have any rate increases, obviously? Do deposits- the costs start to stabilize, or have they started to stabilize? But then all your cash flow is coming off of your assets that are, you know, repaying or being, or reinvested at higher yields.
The second part's certainly true in that scenario. With respect to the first part, it's now been July since there was a rate hike.
Right. Right.
We think we're towards the tail end of any pricing.
Right
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.
Yeah. 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 2007, and the industry's margins stabilized nicely during that period, so maybe that's ahead for you and, 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? How is it shaping up in that sense?
Well, so look, it was a little slower than we would've liked last year.
Right.
You know, normally you think GDP plus, and you hope for a good GDP number, and you hope for a lot of loan growth, and just a little quieter last year. And that, that was largely, I think, based on revolver utilization more than anything. It's, 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 at 5%.
Right.
5%+ . So as a result, we saw, I think, that was pretty much a headwind we had to get through all of last year. That, 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, we're, I think we're gonna 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.
Yep. And coming, when you put on your hat when you were in commercial, and we hear a lot about utilization rates, do you recall, what's a normal utilization rate versus where you are today?
Well, in something like commercial, it might be 34%, something like that. Today, we might be at 27%.
Yep.
You know, and those sound like statistics, and they are, but, you know, every 1% 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.
Yep.
It's just, it costs more to borrow right now, and so consequently, it's changing people's behavior.
Oh, sure. 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, you know, maybe we'd start to see some sequential growth. What's your thinking on net interest income? Are you still confident that could happen?
Yes. We have no, 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-$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'll be at the upper end of that range.
Okay
So that feels better. And then we talked about it, it may dip a little in Q2.
Yep
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 3-4 rate cuts rather than 6 or 7.
Yep
You know, we might see some benefit towards the back end as the cumulative effect of that takes place.
Sure.
So we feel better about NII, I'd say, overall.
Oh, that's very good. Okay. 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?
Yeah, 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-
Yep
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 operating leverage in mind. That was always true for me as a line of business head; it remains the case today. So everybody's pulling in the same direction on operating leverage. At the same time, there are gonna 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'll 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've considered to be historically quite good but they're normalizing nonetheless.
Right.
You can have a twist period like we're in right now. 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, w hat we're referring to there is let's make sure that, you know, 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 then we balance it for the change in the world and change in macro conditions.
Got it. When you think about investing for growth, where are some of the areas that you're actually doing that right now, as you look out to 2024?
Well, we've got a pretty ambitious investment program across the franchise. You can see that in, you know, 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 bank. So there's a lot of investment in small business, a 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.
Sure.
It's so important in terms of the operational excellence you measure that you mentioned. That's where we get a lot of the expense saves that pay for these investments. So, and then finally, we'll invest a lot in marketing because, and it's not just, you know, 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.
Yeah. 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?
We'll spend about $3.8 billion this year on what we would consider to be new technology.
Yes.
I'm talking investments in the future of the franchise, not operating the place.
Right.
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've been a number like $3 billion, maybe less.
Okay.
Every year it just goes up. So that, again, this principle of sustainable growth, you know, this is one of the things I think Brian's 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 the next depending on what happens with NII that year or what happens, you know. 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, you know, with the size of the balance sheet and the income statement and all that, 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.
Yeah. 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?
Well, it's still early days for us. You know, the simplest example of an AI at work for us at Bank of America is our Erica which, if any, you know, if the folks listening to this think about, you know, in their own personal lives, it's an opportunity to just pick up your phone and talk to someone.
Right.
Not someone, but to talk to and work, walk through instructions of what you want to do and what you want to learn. Erica's now handling 1 billion transactions for us per year, just to give you an idea. I mean, this is a significant savings for us.
Yeah.
For the client, it's a savings of their time. It's an experience driver for them. So Erica's been an important part in our early days, and we will continue to look at, across the platform, where are the opportunities for us to drive client experience, and to help with the expense side. You know, 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.
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, you know, the deposit balances pre-pandemic to where we are today, but also on the credit card, the charge-offs, where we are today and as they're normalizing.
Well, you know, we try to give a lot of disclosure on the consumer side and on 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'll charge off this quarter. So, you know, 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 ex- you know, more or less what we would expect. That's just aging its way through.
Yeah. 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+ 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 you are.
No, I mean, it's been historically good for a while now.
Yeah.
Our commercial asset quality has generally been excellent. So, you know, 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, no, that picture, I think you're right, it's been, it's been terrific.
When you think about, especially, you were obviously a line head during the pandemic, what did you... Is, do you think your, the business customers got lean and mean and had to 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 costs of funding?
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.
Yeah.
And t hey remember that. They're scarred by that. They're shaped by that.
As are we, by the way.
As are we. And they also went through COVID. And, you know, by that point, corporate America was a little less levered.
Yep.
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 U.S. economy's done quite well since then.
Yeah.
It's done quite well. 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 could be travel, could be leisure, I mean, those things are back. So very quickly, I think corporate America found a way to, you know, put up defenses around liquidity and capital. And then with customer behavior returning to normal, the credit experience has been very strong.
Yeah. I know you don't have excessive exposure to commercial real estate, but getting your views on it would be helpful. As you know, 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?
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.
Right.
I'd refer everyone to the materials we put out in fourth quarter earnings, 'cause you can see our portfolio broken down piece by piece. And then I think our general mentality is we're just gonna try and stay in front of things. We try to have a conservative methodology around underwriting in the first place.
Right.
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 that, the commercial real estate will just take a while to filter its way through because, you know, you talk about long-term assets with long-term loans, and it'll, it'll work its way through over time.
Yeah. And you guys run into, you know, 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 de-risked the industry, and it seems to have succeeded. Are there areas in the shadow banks that when you and Brian and others talk about it, that you're focused on as a concern, potentially, if, you know, commercial real estate got a lot worse?
Well, we spend a lot of time going through all the various scenarios. You know, the scenario planning for a bank like ours doesn't stop with CCAR.
Right.
You know, 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.
Right.
We try to just make sure that we have a capital base that can withstand anything we can think of.
Right.
So, look, I think you're, you're pointing out a second thing, which is this question of if, 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 and another time.
Well, let's go to a question you can answer. How about how is the Investment Banking activity shaping up this quarter? And then second, also about sales and trading, how is this shaping up also in the quarter?
Yeah, 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.
Sure.
You can see it in the league tables. I'd expect us to participate in that. So at this point, y ou know, I'd expect our Investment Banking to be up this year, year-over-year, 10%-15%, something like that at this stage.
Sure.
And on the Global Markets 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, you know, last year was a close to a record year for us in terms of first quarter, so we're hoping to repeat that, and I think it'll be around flattish this year just based on the equity strength, at this stage.
Got it. Very good. And then maybe as we wind down here, Basel III Endgame is coming. There's news out of Washington today about, you know, Powell's testimony and what he's thinking. Any thoughts about how it's shaping up and how you feel about it and your capital levels?
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, you know, maybe third quarter, fourth quarter, add a little bit, but we're there. We have the capital that we need for the rule as originally proposed.
Yes.
We bought, you know, we've been buying back shares over the course of time, really to offset employee share dilution.
Yes.
But last quarter, we bought a little bit more because we felt like we're at that point now where we have a little more flexibility.
Sure.
This quarter, we'll do that again.
Okay.
And then we'll need to see how the rules develop and how they play out, but I think, you know, we're likely to have more and more flexibility over time to return capital to the shareholder.
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 were fine, but any thoughts on what we saw with those scenarios?
Well, I think it looks pretty similar to last year. I'm really proud of the U.S. and the way that we have a really robust stress-testing system. But I think it'll probably be very similar to last year.
Great. With that, please join me in a round of applause, thanking Alastair for being here.
Thank you.