Good day, everyone, and welcome to the Bank of America Earnings Announcement Conference Call. At this time, all participants are in a listen only mode, but later you'll have the opportunity to ask questions during the question and answer session. Please note this call is being recorded. It's now my pleasure to turn the conference over to Mr. Lee McIntyre.
Please go ahead.
Good morning. Thanks to everybody on the phone as well as the webcast for joining us this morning for the Q4 results. Hopefully, you guys have had a chance to review the earnings release documents available on the website.
Before I turn the
call over to Brian and Bruce, let me just remind you we may make forward looking statements. For further information on those, please refer to either our earnings release documents, our website or our other SEC filings.
So with that, let me turn
it over to Brian Moynihan, our CEO for some opening comments before Bruce Thompson, the CFO goes through the details. Thank you.
Thank you, Lee, and good morning and thank all of you for joining us to review our Q4 results for 2014. As we think about the year, we've accomplished a lot, including resolving many significant legacy issues that were overshadowing the underlying progress in our franchise. Selling these issues obviously came at a cost and drove a decline in year over year net income. But importantly, the settlements removed uncertainty for all of us, for investors, regulators, rating agencies and others, allows us to focus on the core business and operations of the company going forward. As we move to Slide 2, you can see that we have a simplified and stronger company.
Today, we reported earnings of $3,100,000,000 after tax. The company is simpler and more straightforward with improved risk profile. Everything we do now is focused on driving the company forward and delivering for our customers and clients. On this slide, you can see some of the important results. This year we completed arguably the industry's largest ever cost savings program, which achieved $8,000,000,000 of annualized savings.
Let's think about that. We started that program in 2011 when we had around 290,000 FTE. Over the last 3 years since then, driving it the right way, we completed in 2014, ending the year with around 220,000 FTEs. Non interest expense excluding litigation declined $4,400,000,000 compared from 2013 to 2014 and is down more than $8,000,000,000 in the last couple of years and yet we have more work to do ahead of us. We further strengthened an already strong and liquid balance sheet and increased our common stock dividend during 14 for the first time since 2007.
As you can see on this page, our credit costs are at a decade low level. So notwithstanding the headwinds our industry faces with rates and an ongoing global economic sluggishness, we have built a platform for growth, especially in the context of a continued improving U. S. Economy. We built a company with leading market positions across every core customer base.
And our task now is continue to build on that foundation and the progress we've made. As you look at our results, you'll see that year over year earnings in our primary businesses with exception that consumer real estate business made progress to show stability and evolve the rate and geopolitical environment. Importantly, as you think about our company, we have been investing in growth while taking out expense. We reduced our overall headcount during 2014 by around 8%, but at the same time we invested. We invested by reallocating resources to sales capacity from those savings increasing in all our core businesses.
We invested by reallocating expense reductions to product capabilities, our mobile capabilities, our cash management capabilities and other capabilities around the world.
We've invested some of those savings
in our technology spending over $3,000,000,000 in 2014 to improve and protect our company. Now you can see the results in the appendix pages and Bruce will touch on them in the line of business presentations. We expect to continue this effort going forward. We have teams working on it every day. They're working to reallocate non productive expense to drive towards growth, allowing us to obtain the good expense management come to expect from our company.
At the same time, we're laser focused on winning market share and growing with our customers, the economy continues to improve And we look forward to reporting that progress during the year ahead. With that, I'll turn it over to Bruce to take
you through the quarter's numbers. Great. Thanks, Brian, and good morning, everyone. Let's start on Slide 3, and I'm going to go through the details. During the Q4, we recorded $3,100,000,000 of earnings or $0.25 per diluted share.
Let me give you a few thoughts on revenues. There were 2 significant adjustments to revenue as well as negative DBA charges that in the aggregate reduced reported revenues this quarter by $1,200,000,000 pretax or roughly $0.07 a share after tax. Of the components of the $1,200,000,000 impact, we recorded a roughly $578,000,000 negative market related adjustment, which as you all know we refer to as FAS 91 and net interest income for the acceleration of fund premium amortization on our debt securities that was driven by lower long term rates. Otherwise, our core net interest income, which excludes this market related adjustment, was pretty stable with the 4th quarter coming in a little bit better than we signaled to you all during our Q3 earnings call. In addition, this quarter we adopted FBA, which is for funding valuation adjustment and incurred a $497,000,000 charge against our sales and trading results as a result of that adoption.
And as we normally provide to you, our credit spreads tightened and this tightening caused a negative charge per DVA in the trading account of approximately $130,000,000 during the quarter. Expenses during the quarter were well managed. Our total non interest expense in the 4th quarter was $14,200,000,000 which included approximately $400,000,000 in litigation expense during the quarter. This level of expense is the lowest level of expense that we've seen since the Merrill Lynch merger. And credit costs during the quarter improved as our provision for credit losses was $219,000,000 and included $660,000,000 dollars in the release of reserves.
On Slide 4, reduced asset levels Global Markets business drove our balance sheet levels lower coming down $19,000,000,000 from the Q3 of 2014 and we finished at just over $2,100,000,000,000 in assets. We continued our focus on balance sheet optimization for liquidity as we continued to shift our discretionary portfolio into HQLA eligible securities from non HQLA loans also improved our deposit composition. As we signaled to you in the 3rd quarter earnings call, portfolio 1st lien loans declined from the Q3 of 2014 levels, but we were very pleased with the loan growth we saw in our core businesses during the quarter. If we look in those core businesses, global banking loans increased $4,000,000,000 during the quarter. Within Wealth Management, loan balances grew $3,000,000,000 and our U.
S. Consumer credit card receivables increased $2,900,000,000 during the quarter. We did have a $2,700,000 decline in our direct and indirect portfolio as we transferred a portfolio of student loans to held for sale. Our deposits grew from the end of the third quarter, short term funding declined. We executed another successful issuance of $1,400,000,000 of preferred stock early in the Q3 and that benefited regulatory capital.
Shareholders' equity improved with both growth as well as the improvements in AOCI. As a result of that, our tangible book value increased to 14.4 $3 per share and our tangible common equity ratio improved to 7.47%. We move to regulatory capital on Slide 5. Under the transition rules, our CET1 ratio was 12.3%. If we look at our Basel III regulatory capital metrics on a fully phased in basis, CET1 Capital improved $6,200,000,000 during the quarter.
That was driven by earnings, deferred tax utilization as well as the improvement in AOCI. Our operational risk weighted assets during the quarter increased again. They now represent 34% of total risk weighted assets. But notwithstanding that increase, we were able to keep our Basel III advanced ratio at levels consistent with what we saw at the end of the third quarter. Under the standardized approach, our CET1 ratio improved from 9.5% in the Q3 of 2014 to 10% at the end of the year.
If we look at our supplementary leverage ratios, we've done a lot of work over the past year to improve those. Obviously, the fully phased in kick in, in 2018. We look at where we ended the quarter. At our bank holding company, our SLR ratio was at 5.9 percent. And at our primary banking subsidiary, Bana, we were at approximately 7%.
We turn to Slide 6, funding and liquidity. Long term debt ended the quarter at $243,000,000,000 down $7,000,000,000 from the Q3 of 2014. We've done a lot of work over the past couple of years to smooth out our parent company maturity profile. And as you can see, we have $22,000,000,000 scheduled to mature in 2015 and comparable amounts over the next 4 or 5 years. Our global excess liquidity sources reached a record level during the quarter and closed at 4 $39,000,000,000 And within those global excess liquidity sources, our parent company liquidity improved $5,000,000,000 from the end of the Q3 to $98,000,000,000 at the end of the year.
Time to require funding increased to 39 months during the Q4. And during the quarter, we continue to increase our estimated liquidity coverage ratios at both the consolidated as well as at the bank levels. At the end of the year, we're well ahead of the 100% fully phased in twenty 17 requirement at the consolidated level and at more than 90% at the bank level, which is well ahead of the 80% phased in 2015 requirement and are well positioned to achieve the 2017 requirement. If we turn to slide 7 on net interest income. Our net interest income on an FTE basis was $9,900,000,000 down from the Q3 of 2014 as a result of the more negative market related adjustment I mentioned a moment ago, which also drove a reported net interest yield decline of 11 basis points.
Lower long term rates coupled with a flattened yield curve resulted in adjustments to our assumptions to our bond premium amortization, which drove the $578,000,000 of market related adjustments in the 4th quarter versus the negative $55,000,000 we saw during the Q3 of 2014. We adjust this market related adjustment. NII was $10,400,000,000 and declined less than $100,000,000 from the Q3 of 2014, despite the challenging rate environment we saw during the Q4. The adjusted NII decline was driven by the impacts of the lower the lower discretionary loan balances within the consumer real estate portfolio. If we look at net interest yield on an adjusted basis, it was up a touch from the Q3 of 2014 to 2.3%.
Given the movement lower in rates that we saw during the quarter, we did become more asset sensitive such that a 100 basis point parallel increase in rates from what we saw at the end of the year expected to contribute roughly $3,700,000,000 in NII benefits over the course of the next 12 months. And given the movement rates, the sensitivity is now more evenly weighted to both long term as well as short term rate moves. Before we leave this slide, I do want to remind you that during the Q1 of 2015, we have 2 fewer interest accrual days than the Q4 of 2014, which will negatively impact NII by a couple of $100,000,000 Non interest expense, and I'm moving to Slide 8, was $14,200,000,000 in the Q4 of 2014 and included approximately $400,000,000 in litigation expense. As I said earlier, this is the lowest quarterly expense amount that we have reported since the Merrill Lynch merger. If we exclude litigation, total expenses were $13,800,000,000 which declined $300,000,000 from the Q3 of 2014 and was driven by our LAS initiative cost savings as well as lower revenue related incentive costs within our Global Markets business.
These expenses to the Q4 of 2013, we were down $1,200,000,000 driven by LAS cost savings, new BAC benefits and to a lesser degree, the lower revenue related incentives. Legacy assets and servicing costs ex litigation were $1,100,000,000 in the quarter, dollars 200,000,000 lower than the 3rd quarter and $700,000,000 lower than the Q4 of 2013. As we continue to work through these delinquent loans, we expect these quarterly costs will come down a few $100,000,000 more by the end of 2015. Headcount was down 5,800 during the quarter. And as we look at expense, a reminder that we will record our normal annual retirement eligible incentive cost in the Q1 of 2015, and we expect that number to be roughly $1,000,000,000 consistent with what we've seen in the past couple of years.
We turn to asset quality on Slide 9. Credit quality continued to improve during the quarter. Q4 provision expense was 219,000,000 dollars and we released a net $660,000,000 of reserves given the continued pace of asset quality improvement, particularly within our consumer real estate portfolio. Reported charge offs were $879,000,000 and declined from the Q3 of 2014. I would remind you both periods of net charge offs included NPL sales and other recoveries, and the 4th quarter included approximately 150,000,000 dollars of cost related to actions that were taken in relation to our DOJ settlement, which were previously reserved for.
We exclude the recoveries in the DOJ component charge offs in the 4th quarter were just over $1,000,000,000 versus a similarly adjusted net charge off amount of $1,200,000,000 in the Q3 of 2014. Loss rates on the same adjusted basis were 47 basis points in the Q4 of 2014 versus 52 basis points that we saw in the Q3 of 2014. Let's now move to the business segment results, which we start on slide 10 with Consumer and Business Banking. Our results within Consumer and Business Banking showed solid bottom line performance with earnings of $1,800,000,000 Those were down from the Q4 of 2013 due largely to lower release of loan loss reserves and to a lesser degree higher tax rates. The business generated a solid 24% return on allocated capital during the quarter.
Revenue was up slightly on a year over year basis despite net interest income being down as our non interest income grew more than 5% with a strong improvement in card income. We look at customer activity the quarter. We had a solid deposit growth and our rates paid is now at 5 basis points. Loans on a linked quarter basis increased seasonally, driven by U. S.
Consumer credit card. Our card issuance remains very strong at 1,200,000 new cards in the Q4 of 2014, of which approximately 67% of those were issued to existing customers. If we look at all of 2014, we issued 16% more cards in 2014 than 2013 and increased the percentage of the issuance to our existing customers, which is consistent with the overall strategy. Credit quality improved again as our U. S.
Credit card loss rate fell to 2.7% and continues to have a very strong risk adjusted margin at just below 10%. Our Merrill Edge brokerage assets grew to $114,000,000,000 which is up 18% year over year on new accounts, strong account flows as well as higher market levels. Our mobile banking customers reached $16,500,000 in the 4th quarter and now 12% of all customer deposit transactions are done through mobile devices. If we adjust for portfolio divestitures, combined debit and credit purchase volume was up 4% relative to the Q4 of 2013 and if we back fuel out was up 5%. To move to Consumer Real Estate Services on Slide 11.
The improvement in the results compared to the Q3 of 2014 was driven by the Q3 of 2014 DOJ settlement, which impacted expense, provision as well as income tax. Revenue did increase slightly over the Q3 of 2014, while expense, even after we exclude litigation, declined from the Q3 as both fulfillment costs on the production side and costs on the delinquent loan servicing side were down from the 3rd quarter. Core production revenue and servicing fees were both stable compared to the Q3 of 2014, while servicing income did benefit from better MSR hedging results. On the production front, 1st mortgage retail originations were stable with the Q3 of 2014@11,600,000,000 dollars and the pipeline was consistent with the Q3 of 2014 as well, albeit up on a year over year basis. On home equity, we're the number one lender and line originations during the quarter were 3,400,000,000
dollars in line with the Q3 of 2014 and
up north of 70% on a year over year basis. The credit quality of those 2nd lien of those 2nd lien originations remains very strong with average FICO scores over 7 90 and combined loan to value ratios at less than 60%. Expenses in the segment did include $262,000,000 of litigation costs in the 4th quarter versus $5,300,000,000 that we saw in the Q3 of 20 through and resolve our MBS securities litigation matters, including this quarter the FHLB of San Francisco matter. With the resolution of that, we now estimate that we've resolved approximately 98% of the unpaid principal balance of all RMBS is to which RMBS securities litigation has been filed or threatened against all Bank of America related entities. LAS expense ex litigation this quarter was just over $1,100,000,000 as we achieved our Q1 of 2015 goal a quarter ahead of schedule.
Importantly, the number of 60 plus day delinquent loans that we have dropped to 189,000 units, which is down 32,000 or 14% from the Q3 of 2014. If we turn to Slide 12, Global Wealth and Investment Management delivered another strong quarter. Pretax margin was strong. Net income was just over $700,000,000 but was down from the Q4 of 2013 as solid fee based growth was offset by lower net interest income and higher expense. Record asset management fees offset some weakness we saw in transactional activity and still drove a 7% increase in non interest revenue relative to the Q4 of 20 13.
Our asset management fees now represent 45% revenue within this segment, up from 40% a year ago. Non interest expense did increase from the Q4 of 2013 as a result of higher performance based incentives as well as increased incentive or increased support costs. We increased the number of financial advisors and year to date retention of our experienced financial advisors remains at record levels. Return on allocated capital was 23%. Client balances were nearly 2,500,000,000,000 dollars up $36,000,000,000 from the Q3 of 2014 and were driven by strong client balance inflows.
Long term AUM flows were $9,000,000,000 for the quarter and represented the 22nd consecutive quarter of positive flows. Our record loan flows during the quarter reflect $3,000,000,000 in growth over the Q3 of 2014 in securities based as well as residential mortgage lending. And our period and We turn to Slide 13. Global Banking earnings for the quarter were 1,400,000,000 quarter of 2013 on lower credit costs and to a lesser degree reduced expenses. Results were partially the net income was partially offset during the quarter on a year over year basis by lower investment banking fees off of what was a record level in the Q4 of 2013.
Return on allocated capital was strong at 18%. We look at the Investment Banking revenues of north of $1,500,000,000 we feel very good about the results. They were up on a linked quarter basis and our Investment Banking team executed very well in a tough distribution environment given the volatility of rates as well as energy prices. Provision was a slight benefit in the quarter and reflected continued low loss rates in a small reserve release compared to the year ago period, which included a reserve addition of $434,000,000 If we look at the balance sheet, we'd point you to average loans were $271,000,000,000 up 3 point The business reported a modest loss in the quarter, but that did include a $497,000,000 charge to implement FDA. For those unfamiliar with FDA, funding valuation adjustment is an adjustment to the fair value of uncollateralized derivative trades to account for the present value of funding costs.
This is an accounting practice many of our peers have also adopted. And as you all know, this is a onetime transition cost for implementation. Separately, net DVA for the quarter was a loss of $130,000,000 versus a loss of 6.17 $1,000,000 during the Q4 of 2013. Earnings are down from the Q4 of 2013 as a result of a decline in sales and trading revenue that was mostly offset by a decline in expense. If you recall, on our Q4 13 call, fixed sales and trading during that quarter included 220,000,000 dollars in recoveries on legacy positions in the Q4 of 2013.
Sales and trading adjusting for net PBA and FBA were $2,400,000,000 in the Q4 of 2014 versus $2,800,000,000 in the Q4 of 2013 after we adjust for the recoveries. On the same adjusted basis, fixed sales and trading revenues of $1,500,000,000 compare to $1,900,000,000 in the year ago period. December results were particularly challenging during the quarter with the toughest areas of performance being the credit sensitive businesses within FIC, most notably mortgages and credit trading, which are generally our largest trading revenue related businesses. On the positive side, we saw increases in both FX and rates revenues versus the prior year that were driven by increased volatility given global deflationary expectations leading to the U. S.
Dollar strengthening. Equity sales and trading was up modestly from the Q4 of 2013 as increased volatility was a positive for secondary flows across both our cash and derivative trading businesses. On the expense front, the decline reflects litigation expense of declined 5% from the Q4 of 2013 as the incentives were reduced to align with the revenue performance that we saw. On Slide 15, all other. The results in the Q4 of 2013 reflect lower revenue from NII, largely associated with the market related adjustments that we've discussed as well as lower securities gains and equity investment income, partially offset by gains on the sale of certain loans with long term standby agreements that were converted to securities.
Significant equity investment income is largely a thing of the past for us as we've reduced the size of the principal investing positions in the business as well as strategic positions and should be modeled accordingly. You'll also notice we took additional reserves for the payment protection insurance, but at a lower level than we saw during the Q3 of 2014. Our Q4 2014 expense is down year over year unless non mortgage litigation expense and lower infrastructure costs. Our effective tax rate for the quarter was 29% and I would expect the tax rate for the company in 2015 to be in the low 30s absent any unusual items. One other thing I want to mention before wrapping up is some movement in our business lines that you'll see as we report them to you in 2015.
In the Q1 of 2015, we expect to align Business Banking into our Global Banking business, which takes this more commercial business out of our core consumer and business banking unit. In addition, we expect to move the home loans portion of our consumer real estate services business to consumer business or excuse me, to consumer banking as this product remains integral to their relationships with us. So to conclude my comments, as we look at both 2014 and the Q4 of 2014, capital and liquidity reached record levels, which provides a solid base to support our businesses that hold leading or top tier positions in the industry. We continue our focus on expense and operating leverage after reaching significant milestones this year on both new BAC as well as LAS cost saving initiatives. We reported a quarter of much lower legacy assets in servicing operating and litigation costs, which have been burdening our reported results.
Asset quality continued its trend of improvement against the slowly improving U. S. Macroeconomic backdrop, and we continue to remain well positioned to benefit in an environment where rates start to increase. And with that, we'll go ahead and open it up for questions.
And we can take our first question from Betsy Graseck with Morgan Stanley. Please go ahead.
Hi, good morning.
Good morning. Good morning, Betsy.
Hey, I just want to talk a little bit about the asset sensitivity and how we should be thinking about that from here, in particular as long end of the curve has come down since the end of the quarter. So just wanted to understand is that FAS91 effect, Q to date given what the long end of the curve has done? And then maybe you could speak to what you're doing to try to minimize any further pressure? Sure.
A couple of things. So if you recall, Betsy, we've historically been saying that the 100 basis points is in the $3,100,000,000 to $3,200,000,000 range. And think of increase to $3,700,000,000 more or less just representing the recapturing of the FAS 91 that we saw this quarter. And that's why we referenced that there's been more asset sensitivity on the long side. The short end side really hasn't changed at all.
Sure. And then given the fact that the tenure is now yielding like 1.8 or so, should we assume like if we end the quarter in 1Q at 1.8 at the same type of 10 basis points down drives FAS91 effect is the same in Q1 as it was in Q4? Or is it because you're more asset sensitive there's a little bit higher impact?
No, it's a good question. I think when we looked at this last night that the movement that we've seen in so far in the Q1 of 2015 is almost identical to what we saw during the Q4. So if you were to snap it off of what we saw last night, it would be a comparable type number realizing we still have 2.5 months to go.
Okay. And is there any giveback in refi activity that you're expecting?
Yes. I'd say, if we look at we referenced in refi activity increased as a percentage of overall mortgage production in the Q4. And as I said in my prepared remarks, if we look at the pipelines and compare the mortgage pipeline at year end relative to the comparable period, it's up pretty significantly. And we'll just have to see how that plays out realizing that the Q1 does tend to be
a little bit seasonally slow. The other thing, Betsy, is that there's been in January to date, there's been a stark move in the amount of applications coming in, a very stark upward move due to this last rate fall off. So as those things close through, we'd expect to see some pickup in production this quarter from the refi.
Got it. Okay, that's super. Thank you.
We'll take our next question from John McDonald with Sanford Bernstein. Go ahead please.
Hi, Bruce. I just wanted to follow-up on the NII. On the core side of NII ex FAS 91, your core NII held up well despite what you'd indicated in October about kind of being conservative with the buy ticket. I guess, how did you kind of hold the core in on NII? And how are you navigating that now in what feels like even more difficult environment for kind of reinvesting cash flows today with the 10 year where it
is? Sure. It's a
good question, John. I think there are a couple of things. The first is, if you look at in the quarter, I think we did a good job with respect to the overall debt footprint, which was down $7,000,000,000 which helped us out a little bit. Secondly, if you look at we were able to get another basis point out on the deposit front. And throughout the quarter, we saw some loan growth that was a little bit better than what we would have seen when we spoke to you during the quarter.
The other thing that we did see during the quarter is we were able to invest and get some of the investments in the portfolio. And I believe it was in mid November when rates did back up. And as we go forward, we do have liquidity to invest in the second and third months of the quarter, and we'll be prudent with how we invest it relative to OCI risk. The other thing I would say just before we leave this, John, that I should have referenced with Betsy's point is that it's easy to focus on the FAS 91 because we're resetting the amortization of premium. I think the other thing you need to realize that we did see in the quarter is with the rate movement up, while you do have a negative on FAS 91, you've got a significant positive from a capital perspective where OCI in the quarter from the rate movement was north of $3,000,000,000
Got you. Got you.
So on the core piece Bruce, do you expect it to be more challenging to kind of hold into that 10.4% with the 10 year where it is? Does it make it more difficult? And what kind of how should we think about the risk to the 10.4% if rates stay low?
Well, I think as I said in my comments, the 10.4% you really need to start at with at about 10.2 because you've got 2 less days during the quarter. And I'd say there's a little bit of headwind to hold that on a core basis and we're obviously doing everything we can to keep it as close to 10.2% as we can realizing that we're not going to take outsized OCI risk.
Okay. And then shifting gears on expenses, you got the LAS target a quarter ahead of time. Do you have a year end target? I think you said you expect to continue to reduce the LAS to 1.1. Can you just clarify that?
Yes. I think as we look out and we look at the plans and actions along with the progress that we've made on the 60 plus day delinquents, I think broadly speaking, and as you know, you can this number can bounce around a little bit that we'd look to have the LAX expenses down to the $800,000,000 type area by the end of the year. And we're obviously working through plans as we look out to 2016 to continue to drive that number south of $800,000,000 as we go forward.
Okay. And how should we think about the kind of core rest of Bank of America expenses where you came in nicely at the 12.7% for the 4th quarter. Obviously, you mentioned the stock option expense stuff in the Q1. But as we think about 2015, what are you hoping to do on the core expense base?
John, I think just to call it sort of at a broad level and then Bruce can touch in. So if
you think about in the 4th quarter,
a couple of things happened. One is you got to remember the markets where the revenue was down. So be careful not to forget that as we see it coming back this quarter, expect it to rise as tradition the Q1, that would be an increased expense, which you should want obviously. But from the rest of it, it's basically a continuous process of taking out expenses and either bringing the bottom line or reinvest in the growth. So to give you a straightforward way, in the Q4, the reduction headcount of approximately 5,000.
I don't know, 1100 or so was LAS and the rest was core activity where we just keep grinding down the expense base. At the same time, we've added sales people during that quarter. So what we're trying to do is I wouldn't expect it to fall dramatically, but I'd expect you guys to be able to see us to continue to make strong investments in sales capacity, technology, products, while holding expenses relatively flat slight downward bias irrespective of you just got to careful of compensation related to revenue because we'd all want that to be higher.
Okay. Okay, thank you.
And our next question will come from Brennan Hawken with UBS. Please go ahead.
Yes. Hi, good morning.
Good morning.
So in FICC, it seems a little bit seems a little bit below what certainly what I was looking for. And I know you highlighted some of the difficult markets that you're large in. Was there any specific positional pain given what we saw in some of credit spreads and some of the movements there?
No, not at all. Gaff, go back to the core premise that we talk about, which is that the banking and markets businesses are run as an integrated business. And a lot of the activity that we see within the markets area is in Market Making and other things that are done off of the new issue platform from an underwriting perspective. And I think what we saw during the quarter, particularly in December, was that there was a significant slowdown as we saw overall volatility in the markets from both a new issue as well as a secondary market perspective that flowed through. But there were not any if you're looking at there were no losses or particular pain points within the global markets piece of the equation during the quarter.
Okay, thanks. That helps. And then can you guys add any comment to the press reports we've seen recently about you all rationalizing the PB business and cutting ties to 150 hedge fund clients?
Well, I think this is a customer profitability exercise that as we look at driving the franchise, the way Tom and Fab Gal and the team have done a good job of repositioning the equities business, we have to constrain the prime brokerage a bit due to size because it's lower balance sheet return as you'd be aware of. But importantly, it's a customer profitability. We're looking for customers who will use us with multiple products and services, whether it's fixed income, equities, in all aspects of fixed income. And so as we take the scarce resource, which is the GAAP balance sheet and the RWA balance sheet and allocate it across customers, we've got to make sure we get the returns and this was a natural reflection.
Should we expect to think about some revenue headwinds in your equities business as we model out 2015 as a result of some of those efforts?
I'd say no. It's all pretty much through it right now. And as you look at the revenue sort of quarter to quarter run plus or minus 1 $1,000,000,000 and Fab and team have done a good job of increasing the yields from the other clients at the same time. So I would expect that market forces to just I wouldn't expect it to have much an effect.
Terrific. Okay. And then helpful to hear about the target of around 8 100 for LAS by year end and then driving it lower in 2016. Can you help us think about how you think about that number to 0? Because I mean ultimately that's given the title LA the L and the LAS, right, that's got to go to 0 eventually.
How should we think about that?
Well, you've got to take those. There's an and in there. So it is all the servicing expense in the company is in that unit for all good loans and bad loans. So it doesn't go to 0, but it's got to get a lot better because if you start to noodle on the 4,000,000 or so units we have in 1st mortgage servicing and think about the annualized cost. We've got to get it down significantly to make servicing and mortgages make sense to us.
And so but that's the project that we're working against doing it the right way for the customer, doing it the right way for the regulatory environment and the consent orders and all the things that have gone on and you're well aware of. And so we just got to keep peeling that away. And so when we say 800 or so that is next weigh station on our train ride here, but it's got to go a lot further than that for the 3,500,000 to 4,000,000 of good units we have, so to speak.
Okay. So no indication about where that sort of settling out level might ultimately be, even if not a when, but kind of what the number would be?
Well, I think the we've talked about $500,000,000 but I'm not sure that's a great performance in that over time either. So just assume that there's nobody more interested in driving that number down to a normalized servicing cost than this company.
Fair enough. And then last one for me. You guys hit on in the Wealth Management business and the margin there, support costs and revenue related comp. Could you maybe quantify how much each of those factors impacted the margin change quarter over quarter?
Yes. I think if you look at the a couple of things. The first is that from a margin perspective, you had a little bit of a headwind with NII being lower than what it But I would as you look at the support cost during the quarter, I would think of that as being about 200 basis points on the margin during the quarter that we saw.
Great. Thanks a lot.
Thank you. Our next question will come from Glenn Schorr with Evercore ISI. Please go ahead.
Hi. Thanks very much. I wonder if we could get your best comment that you can give us on energy related exposures. In your Q, you have a general comment of energy and $20,000,000,000 But if you could talk break it down a little bit more, what's secured, what's not secured, what's investment grade, what's not, just how overall you feel you're positioned there would be helpful.
Sure. I think if
we look at the amount of funded exposure exposure across what we refer to as oil and gas that the amount of funded exposure, which includes derivative exposure, was roughly $23,000,000,000 at the end of the year. As you look at that $23,000,000,000 I would think of it generally as 60% that's directly reflected or affected by the price of oil. There are a lot of those that are not. So you've got roughly $22,000,000,000 $23,000,000,000 funded, 60% directly affected by oil, well north of 80% of that are investment grade borrowers. And for those non investment grade borrowers, they're obviously secured facilities and in most cases have formulas upon which they can borrow based on the value of the assets that were secured by.
I think if you think overall, the one of the things that to give a perspective that we see is in the consumer spending in January on debit and credit cards, basically we've seen the spending go up by 3%. And if you look at the fuel side of that, it's about 5% of that total spending and it is down 28% year over year. So the people are getting a benefit that our consumer customer are getting benefit, but they're resending that benefit and overall spending levels are growing through it. So there is competing there's a technical risk to the oil producing companies that Bruce just talked you through. But the overall economy, even the 1st week or so of January, we're seeing the benefit of the consumer very starkly in a year over year comparison.
I definitely appreciate all that. And you said that was the funded to oil and gas. Is commitments a larger number I think than that? And do you have any ability to pull back on the commitments?
Yes. Well, I think on average the fundings are roughly 50% of what the commitments are. As it relates to the pulling back of commitments, I think what I would point to and what our teams did a very good job with is we obviously have commitments in the originate to distribute piece, which if we look at, we ended the year, I believe, with 2 commitments of investment grade borrowers on an originate to distribute basis, one of which has had a significant positive event from a financing perspective already this year. The other is a single A credit that will get done in the Q2. And outside of the investment grade originate to distribute, there was a couple of $100,000,000 that still needed to get done.
So you're not pulling commitments from borrowers, but as it relates to commitments that needed to be distributed, the teams have done a very good job.
Okay. I don't want to put words in your mouth, but it sounds like you're semi comfortable with the positioning. There'll be some hits along the way, but this is not a major risk to the portfolio. Again, I don't want to put words in your mouth.
We're comfortable with the positions. You should assume as we're making these commitments in environments where oil is higher, we're continually running and stressing those portfolios to be comfortable with the commitments. And as Brian referenced, to the extent that we're in a prolonged period where these prices persist to the extent that there are costs that run through because of difficulties that a commercial or corporate borrower may have that as we look across the overall credit platform, you'd expect there to be offsets given what we're seeing with consumers and other people that are benefiting from lower energy prices.
Okay. That's helpful. Last one for me is, didn't hear anything on TLAC. If you could tell us where you think your ratio shook out net of the conservation buffer and the SIFI buffer that would be helpful.
Yes. I think if you look at where we are from a perspective, we're generally in the 21% type area. And embedded in that 21% type area is the fact that structured notes, we've assumed for that purpose that we would not benefit from structured note funding. And if we refinanced out those structured notes, you'd pick up another 1% to 2% based on the current size of the debt footprint.
Okay. And I just want to make sure that 21% is net of the conservation buffer and your SIFI buffer or gross of?
No, it's gross of. That's a gross of. So you're roughly 21 call it plus another 1 to 2 for structured notes. And then depending on the exact treatment of the buffers as we go through that, that number would be reduced by the buffers.
Got it. Okay, perfect. Thank you very much.
Our next question will come from Jim Mitchell with Buckingham Research. Please go ahead.
Good morning.
Just a quick question on the balance sheet and NII. Appreciate the efforts to keep PIM flat, but to really get NII growing, we got to start to see, I guess, the balance sheet on a net basis grow. I think your balance sheet was down close to $25,000,000,000 this quarter. At what point do we start to see the net balance sheet, the restructuring of the balance sheet start to give way to growth?
Yes. I think what you're going to see as we go forward is that as we look out into our forecast and models, we would expect there to continue to be strong deposit growth throughout 2015. And as we referenced before, obviously, the goal with that deposit growth is very much a focus to grow loans within our core customer segments. And as I referenced, we saw that within the Global Banking space this quarter. We saw it within Wealth Management.
We're seeing pickups in as deposits come in and as we look to grow loans. I just want to make sure though that we remind you that we will continue to see the discretionary portfolio that's got whole loans in it that in this rate environment they will continue to repay. So you judge how we do on loan growth, you need to look at the core businesses. As I said, we would expect to start to see the balance sheet move up. And at the same time, we're trying to get things that don't have a return and aren't core to what we do off.
But to your point, I think we're largely through that.
Yes. And I think if you think about it, say, 2 years ago, I think we cited about $100 odd 1,000,000,000 of non core loans that's down around the 30. And the dominant of that is still in the home equity area, quite frankly. So in the card business, in the business banking area where we had some stuff put on some by some predecessor companies that were largely through all that and that's why you're seeing some growth there. And then so the card you saw grow seasonal, but it grew and it started it's been stable for a number of quarters.
The good home equity side is growing quite strongly. The stuff of runoff in home equity starts high charge off content is a better decision economics for the company to run it. But the rest of the loan balances, we ought to see growth with the exception of the sort of discretionary residential mortgage holdings, which will continue to run down based on a better view of what we want to do for outcome management going forward.
Okay. And I think, Bruce, to your point, sort of the deleveraging around trying to improve the leverage ratio is the impact of that should be easing going forward?
That's correct.
Okay. And just one last follow-up on I don't know if you mentioned this where you guys are in the NSFR?
Yes. We've done a lot of work. We've not put anything out public on that. But as we've looked through it and sorted through it, we do not see that being a constraint as we go forward.
Okay, great. That's it for me. Thanks.
Thank you.
And our next question will come from Matt O'Connor with Deutsche Bank. Please go ahead.
Good morning.
Good morning.
The capital ratios grew more than expected. Obviously, the decline in kind of more of the same? Or is there kind of more of the same? Or is there, call it, optimization overall, not just the loan runoff that you addressed, but as we think about you've had final rules for the last few months. There's still some adjustments to the business throughout.
How should we think about the capital build? And if you have an estimate for 15, that would be interesting as well?
Sure. We're not going to provide an estimate. But what I would say is that as you look at overall capital levels, if you start with the numerator, as we project out and look at the earnings stream, we think that at least through 2015 and possibly into the 1st part of 2016 that on average and you can have some quarterly bounces around based on timing and payments, but that generally we should accrete capital over the course of at least 4 and up to 6 quarters largely based on the pre tax earnings of the company as opposed to the after tax earnings. And that's what you saw during the Q4. The other thing on the numerator, as I referenced that there is and if we were to snap a quarter today, there would be OCI benefit from the downward movement in rates.
As it relates to what we're seeing on the risk weighted asset side, I would say generally we continue to benefit, although it declines a little bit each period. We continue to benefit from the runoff of some of the global markets positions that would have been put on in the 2,005 to 2,008 timeframe that tended to have tenors of 7 to 10 years. In addition to that, as we continue to have payoffs and as we continue to move out some of the tougher consumer real estate assets and put higher quality
real estate assets on that
are better credit borrowers, while the asset levels may stay comparable, you do have an RWA pickup from that as well.
On RWA, any numbers you could provide in terms of how much benefit you get from the I guess, it's probably from the credit correlation book and some of those contracts and the real estate running off, those two pieces?
No. I mean, I think as you look forward, I mean, these tend to be, I think outside of op risk this quarter, we had roughly $30,000,000,000 of risk weighted asset benefit under the advanced approach. Roughly half of that was in the consumer books, half of it was in the wholesale books. I think you'll continue to see benefits, but I don't think you'll see the quarterly benefit of that magnitude on a go forward basis.
Okay. And then just separately, the home equity charge offs increased a fair amount versus 3Q. Obviously, 3Q is a very low level. But remind me what's going on there. I think there was an accounting or methodology change a year ago.
Has that fully worked through? Is there a seasonality or reset? What's going on?
The biggest thing you had in home equity this quarter is that I believe it was roughly $150,000,000 that went through charge off that was related to the DOJ settlement. So realize you have $150,000,000 of charge off, dollars 150,000,000 of reserves. So from a net P and L perspective, it was a push. But you did have that during the quarter. And it's the reason that we wanted to give you the core charge off number Q3 to Q4 because as we implement the DOJ settlement, you will see both charge off and reserve release come out in each of probably the 1st and second quarter then we should be largely through that.
Okay. Thank you.
And we'll take our next question from Steven Chubak with Nomura. Please go ahead.
Hi, good morning.
Bruce, I was hoping you can maybe help explain what prompted the increase in operational risk RWA. The 34 percent, I guess, makes you an outlier relative to some of your peers, whereas previously you were more in line. And I know the process typically is you submit the models to the regulators and or the Fed and then they give you feedback. And I want to know was the increase prompted by the feedback from the regulators themselves as part of the annual review? Or was it what you determined based on your own internal models?
To answer the question slightly differently, which is that as we've worked through operator's perspective that we are adjusted and the amount of op risk RWA that we have now is consistent with what you would need to exit Parallel Run.
Okay, understood. So we shouldn't expect any further increases as a percentage of RWA going forward or is it simply too early to make that determination?
We think with respect to op risk RWA that we're there, we obviously need to get through those elements that are the rest of Parallel Run. But from an OPRA perspective, we feel like we're there.
Okay. That's really great. And then just one more quick one for me. I don't I didn't hear in the prepared remarks, any color on the investment banking backlog and didn't know if you can give us an update there as well.
Yes. It's interesting and we have to be a little bit careful. I would say as we looked at the backlog in the pipeline, particularly from an M and A perspective that we feel very good about where the pipeline was at year end, it's one of the stronger year end pipelines that we have. I think the only tone of caution I would say is that we've obviously seen a little bit more volatility in both the fixed income and equity new issue markets. But as it relates to the amount of business that we're winning that's getting queued up and is in the pipeline, we feel very good about that.
It was a good backlog at year end.
Okay, great. That's it for me. Thank you for taking my questions.
Thank you.
We'll take our next question from Eric Wasserstrom with Guggenheim. Please go ahead.
Thanks. Good morning. Good morning.
I just wanted to follow-up on a couple of topics that have been touched on already. And maybe just starting with the risk weighted asset discussion once more. I just want to make sure I understand all the puts and takes of what's going into the risk weighted asset calc. It sounds like on the positive side, obviously, there is the benefit of GAAP balance sheet reduction as well as the trade off between lower quality and higher quality assets. And it sounds like the operating risk component is now sort of fully baked in.
But are there any other components that could drive that up in a way that's different from what's going on, on the GAAP balance sheet?
I think the only thing that's out there is that as part of exiting Parallel Run, we're working through with our supervisors that the different wholesale and other credit models that you need to exit Parallel Run. So we're working through that. But I think absent that, you're largely at the point of looking at and you'd expect that the RWA is going to largely follow the GAAP balance sheet. The one thing that I think you all know this that where you could possibly diverge from that is that there is a pro cyclicality to the extent that you have volatility in the markets businesses as it relates to the stress far calculations that go into the risk weighted asset. But outside of that, you would directionally expect it to follow the GAAP balance sheet.
Okay. And with respect to the GAAP balance sheet, what is your overall expectation about the net growth over 2015?
Yes. I think you're probably going to largely see it in the zip code and probably be most correlated to the overall deposit balances. And if you look at the range that we've been running at over the last 12 months, it's been in the 2.1 to 2.15, 2.175 type area and I'd expect that area or that range to hold for 2015.
Great. And then just to talk about the asset quality for a moment. Obviously, it was the lowest provision that we've seen from you in some time. And many of your peers are sort of inflecting from the point of asset quality improvements to some modest now deterioration and the rebuilding of reserves. And I just want to get a sense from you about where you think you are in that spectrum.
Sure. Well, I think if we go back and let's start with the fact that we saw during the quarter that if we back out any impact of loan sales as well as the DOJ settlement, charge offs in the Q4 came down from $1,200,000,000 to just over $1,000,000,000 I think as you look at charge offs when you're at virtually 0 from a commercial perspective, it's hard to see getting much better than that. I do think what we're probably a little bit different is that as we continue to work through and we had another solid improvement of a couple of $1,000,000,000 from an NPL perspective within the consumer real estate space that we continue to work through and reduce those tougher consumer real estate credits. But I think that if you look at this $1,000,000,000 charge off type level that we've seen, you're probably we're probably in areas where you're going to see that flatten out. And I think as we look forward, there may be a little bit of reserve release on the front end on the first half of the year and you probably expect that to flatten out and go away as we get through 2015.
Great. And then just finally on the OES expense, which I know you've touched on several times. But I'm just wondering if the pace of that improvement changes at all as you're getting sort of into the later stages of delinquency and foreclosure inventory improvement?
Yes. It's that the plus side is that you sort of have an ability to push the numbers down faster as economy continues to improve and the market continues to improve and the opportunities for borrowers and time passes frankly. The flip side of that though is in the states that in the areas where the process is slow, you're sort of boiling the beaker and what's left is in the really slow areas. So we've sort of caught up in the states where the process goes through to a reasonable fashion and we're still have the laggards in places that process is traditionally oriented. So I think you're absolutely right.
There's a bias that as you get better at it and get lower, it starts improving. But against that, you get to some of the rocks that are hard to move because the process is so slow. Secondly is, remember, we had we took up to almost 58,000 employees in that business and there's a lag to getting the real estate costs out and letting off the buildings and all the stuff that we have to do. And so we got to be a little careful getting ahead of ourselves. The headcount comes out 1st, the facilities then come out 2nd.
And so we're working hard on that. So you're right that once you you can see the pace of improvement continues almost nominally or even nominally better than the past. But they're obvious, there's just some things that work against you in terms of assets left or harder. And then secondly, there's a lag to the hard costs over and above the people costs.
Okay, wonderful. Thanks very much.
We can take our next question from Guy Moskowsky with Autonomous Research. Please go ahead.
Good morning.
Good morning.
I just want to go
back to the net interest margin of the asset sensitivity to more of a balance between long term versus short term rates. And I was wondering if that is strictly a function of the FAS91 issue in a falling long rate environment or is there something more structural that you've been doing with the portfolio that has caused that to happen?
It's the FAS 91 guy, you're absolutely correct.
Okay. And then if
we can just
take a look at that one sort of historically for a second, Obviously, over time that has caused quite a lot more volatility in your NIMs than it has for a lot of the peer groups. I seem to remember that for regional banks say that have often have the same issue, there is a difference I guess in the way they accrue versus doing the constant resets that you do. And I was wondering why you do it in the way that you do, which seems to create more volatility?
We probably wondered the same thing this quarter. I'll tell you, I think if you go back, you're right. There are 2 ways that you can do this. The first is the way that we do it, which is you have the premium, you look at the average life of the premium in each quarter, you reset it and basically retroactively make that adjustment from when it started. And that was the termination that we had made a number of years ago.
But you're right, the other way that is allowed and provided for under GAAP is that you just basically adjust as you grow and take it through the P and L as you go. And you can do it either of 2 ways and we obviously do it the way that we do.
Would you ever consider changing that? And if you were to do so, would there be a significant one time charge that would be associated with that?
No, I think it goes the other way. The reality is that we run through the P and L that amortization to catch up for an effective rates ended up being lower than when the premium was set on. So I think the way we do it is absolutely appropriate. And keep in mind, the other thing and I referenced in my earlier comment is that as you do this from a balance sheet perspective, you're always adjusting the valuation of your AFS securities to be the fair market value at the time that you publish your financials and obviously that flows through OCI.
Yes, fair enough. You also talked about changing line items or lines of business where certain things are booked as we move into 2015. And that was fairly clear except I was wondering will this also entail moving the very large investment portfolio of your mortgages from all other into the consumer category?
It will not result in a large portion of mortgages being moved. There may be a smaller amount or a percentage of it that we continue to evaluate because the one thing that we want to make sure that we do is to have the geography of the financial statements motivate the behavior of the people that serve the client base that they do. So there may be possibly a relatively small amount of home equity loans that could travel into the consumer business, but it's not going to be anything that distorts things in any meaningful way.
Got it. Thanks. And then final one for me. You talked a little bit about the Investment Banking backlog at the turn of the year, but more broadly for Global Markets and Global Banking kind of taken together, can you give us a sense now that we're a couple of weeks into the year, how the in particular say trading activity has started off? And given some of the increase in volatility especially with big moves like what happened with the Swiss franc today, are you instructing the global markets business to pull back on risk or generally are you seeing that some of those volatility levels are in some way beneficial?
Yes. I think there's a couple of parts to that. The first is, I think if you look at overall risk levels that we ran within the Global Markets business and if you look at our that even with a little bit of a pickup in volatility at year end, VAR was at low levels and overall balance sheet levels were at low levels as we exited the year. I think we're 9 trading days into the quarter. So I think it's a little bit early to forecast what you would expect for the quarter for the overall sales and trading businesses.
The only thing I would say is that clearly the activity levels that we've seen that it's been more of a return to normal than what we experienced in the month of December. But I wouldn't want anyone to draw any conclusions when we're 9 days through 62 trading days in the quarter.
Sure. It's early. Thanks very much. I appreciate the color.
Thank you.
And we can go next to Paul Miller with FBR. Please go ahead. Hey, thank you very much. And most
of the questions has been answered. On your legacy assets, I know and you talked about this a little bit where your default numbers have dropped roughly to 189,000 dollars from a roughly I think $220,000 Did you sell anything? Or is that all improvement in just credit in the quarter? In other words, did you move the houses out? Or did you also sell?
Yes. My recollection is there was roughly a third of that came from the sales of both servicing as well as the underlying loans themselves. And then in addition to that, we saw continued improvement in net new 60 pluses. And then we obviously worked others through the normal foreclosure process as well as for those borrowers that cured.
And one of the things that because I on your you made a comment about that the low oil prices has improved some of the consumer credit consumer spending and all that. Are you seeing any improvement in working through the 60 day defaults from that? Or those loans are just so old relatively speaking in the default bucket that the oil lower oil prices really doesn't help out?
I mean, I'd say it's much too early to figure out what the lower price impact would have on mortgage defaults. So we're saying is you actually see consumers spend the money they're getting and you're seeing the consumer credit quality stay strong, but you project out a period of low prices, you would see a benefit on the consumer side offset by the commercial side. So I'm not sure and Paul in the context of what's in that 60 day bucket, don't have a meaningful impact. It hasn't had any meaningful impact so far. It's just it's pretty early days.
But the good news is if you look at our delinquencies in the 1st mortgage portfolio, they keep coming down and that's what drives long term production.
And Brian and I missed I was writing it down as fast as I could, but you talked about how that you're seeing consumer balances increase over the last couple of months, I guess, or last month. Can you go over those numbers again?
The consumer spending increases that is a bit like your reference, Paul. So far, January of 2015 versus January of 2014, spending on credit debit cards is up about 3% year over year and that's overcoming a drag effect of about 1.5 percentage from lower fuel prices.
Okay. Hey, guys. Thank you very much.
Thank you.
And we can take our next question from Marty Moser with Vining Sparks. Please go ahead.
Thank you. I wanted to kind of drill into the markets business a little bit. In the sense that we've seen pressure on fixed income the last two quarters, is there anything in the drivers of that weakness that would jeopardize the seasonal uptick that we usually see in the
Q1? I think if I understand your question, I think that the answer to that is no. If you go back and look at with the exception of last year, the 4th quarter does tend to be the weakest quarter of the year seasonally. It was obviously a little bit more so this quarter. But structurally, there's nothing that would lead you to that.
It would just obviously, it's a market that ebbs and flows. But no, there's not anything structural that would lead you to believe that that should be different.
And there's a lot of noise in the markets business and I've tried to take out as much as I could. What I'm trying to look at is expense elasticity relative to the revenues. From Q3 to Q4, it looked very effective with about 80% in relation to expenses to revenue reduction. But over the last year, when you take out the litigation expense, it looks like operating expenses only declined about 20% of what revenues declined. So I was just curious what you thought maybe the right elasticity number would be there.
Well, I think largely we saw in the Q4 was a reflection of the change in incentive levels due to the lower revenue and you'd expect that to happen. But let me bring that up a little higher to a more broader point, which is about 2 or 3 years ago, Tom Montag and team made a fundamental restructuring of that business to drop its expense base to where as long as we get $2,500,000,000 more revenues more or less, we start making some money. And if you adjust the FDA charge, which is the one time charge, they made out somewhere around $300,000,000 this quarter to give you a sense. So in its worst quarter, it earns 300,000,000 and best quarter earns over $1,000,000,000 and that largely is really marginally profitable when you see the revenues go from the high $2,000,000,000 to the $3,000,000,000 level up to the $4,000,000,000 level. Most of that comes through for the tariff on compensation of around 19%, 20% or something like that.
So there is elasticity, but as you
get to lower level, you start to
hit the floor on the fixed cost structure.
That's very helpful. And then Brian lastly, you've talked several times about the core expenses and the investment you're making. A lot of the core businesses really all except banking showed declines in net income sequentially and year over year. Do you feel like you're investing to try to kind of reignite some of that growth going forward?
Yes. So one of the things you got to be careful of is they reflect this all these charge that we talked about in NII get pushed out to all the businesses. So there's some elements that really aren't in the business of control for lack of better term. And then secondly, you're still seeing as we move from a period where reserve releases were going on at the business level, you're seeing provision changes across the board of Habit. But by and large, if you look at the fees and the direct expenses, which are two things they control the most, you see a pretty good relationship going on and pretty good stability.
And I'd say as you look across the businesses, the consumer bank continues to make good progress on sales capabilities and its actual sales. You can look at some of the later pages, you can see it. I'd say wealth management, we got to make sure the expenses and the revenue stay in line there. We talked about that last quarter and John Theel and the team especially in Merrill Lynch are doing a good job of getting after that. And then in banking, I think you've seen a pretty good relationship if you back out sort of the fundamental impacts of FAS 91 and the provision
We'll take our next question from Mike Mayo with CLSA. Please go ahead.
Good morning, Mike. Hi. So you highlighted that the expenses are at the lowest level since the Merrell merger and we estimate that they're down almost onefour over 5 years. So that's certainly good. But we also note that revenues are down quite a bit over that timeframe too.
So how do you evaluate the trade off between more aggressive restructuring and investing in the franchise? And specifically, you're pretty much done, I think, with new BAC. Would you have a program, maybe even newer BAC or a new restructuring plan?
Yes. I'd say, Mike, the other piece of that is obviously the credit cost you got to think about in terms of if you look back and look at the higher revenue levels at the time, the charge off run rate was $2,000,000,000 $3,000,000,000 a quarter and 1 quarter it was $10,000,000,000 if you remember for cards especially. So be careful about that. But I say your point really is what do you do from now forward? And we see that's we've talked about in the core expense base, we decide the LAS, litigation, all that stuff, but just the core expense base.
Basically, what we continue to do is to take out non productive expenses and invest part of that back in a franchise and bring part of that to the ability to see that core line continue to move down, nudge down. Remember that when we're doing this, we're absorbing health and cost increases, wage and salary increases, incentive comp increases. So we are heavily focused on focused on maintaining a rational balance between the core revenue and the core expense dynamic going forward. And so you should expect assume that there's a continuous program looking at this, just to continue to simplify our company, continue to take out the vestiges the cost of the crisis and as we have downsized the company to take out the overhead that was harder to shake out as you're well aware. So we're laser focused on it.
But I think on the other hand, we continue to invest in sales capacity and you see that reflected in things like card sales and home equity sales and auto loan sales, direct auto loan sales all increase.
So don't expect another new program with expense targets as more of a day to day perspective now?
No. Remember, we absorbed if
you think of 60% of our cost being people costs and you think of inflationary level of cost increases of 3% on those Basically to keep costs down and flattish, you've got to work your tail off and whether and that's the sort of process going forward. We had to drop the cost down get into a reasonable level. We'll continue to make improvement relative to revenues. And if the world gets different, we will then have to revisit it. But right now in this revenue environment, even slow growth environment, we can keep the costs flat as revenue start to rise.
And then a separate question, what are your key financial targets for 2015? I know you've expressed some of your targets assuming interest rates increase, but if interest rates don't increase, what should investors evaluate you on at the end of 2015? And all I had to go on without the higher interest rates is Page 42 of the proxy that talks about the PRSUs and it says as long as you get over a 50 basis point ROA, you go in the money on the PRSU. So I'm not sure if I should be looking at the 50 basis point number or it's 80 basis points, 100% in the money or the 1% number that you've talked about before? But again, assuming rates don't go up, what's your ROA and ROE target for 2015?
Mike, we don't give specific projections, but our goal is to continue to take earnings from $3,000,000,000 level this quarter and drive them forward. And our view is that based on everything we see as we see the impact of all the work we're doing plus the rollover the cost base, the reduction in LAS costs, the litigation falling back to the kinds of levels we saw this quarter, you'll see us move towards that those long term goals of 1% ROA and 12% return on payable common equity.
One last try. And so that 1% 12% that assumes higher interest rates. If your forecast do not expect higher interest rates as soon as they do right now, At what point would you take additional action with expenses and how do you think about that?
We take additional action expenses every afternoon. In other words, we had 4,000 production Feet in the Q4 of 2014, Mike, out of the core franchise to keep getting efficient. So we work on expenses every day and we have teams of people working to do all the things they expect us to do.
All right. Thank you.
And we can take our last question from Nancy Bush with NAB Research. Please go ahead.
Good morning, guys. Two questions. Brian, I'm a little bit confused about the card growth. I think you said you've got 1,200,000 new cards out in the 4th quarter. Is that and then you mentioned something about it being seasonal.
I mean, you've got lots of ground that you can gain in that business. I just kind of want to clarify whether this is something extraordinary going on here and what your projections are for the future for growth there?
Nancy, sorry if we confuse you. Let's talk about the production of new card units. That's the $2,200,000 if you look on Page 19, you can see that and you can see it building from the quarter $12,000,000 to $830,000,000 So the first is production of units and the second was balances. In the card business were up in the Q4 almost $3,000,000,000 $2,500,000,000 to $3,000,000,000 that we got to be careful because Christmas season people and borrow and then they pay down. So the point there is that has a little seasonal help to it.
But if you look back in prior quarters, you've seen a stability in our card balances, which as we continue to sell more units and people continue to use the card, we ought to expect positive growth there. But it's units at 1,200,000 dollars balances grew at $2,500,000,000 to $3,000,000,000 and the balances of common seasonality units have been above 1,000,000 new production units each quarter for the last several quarters.
Is there one particular card that's proving to be very popular? I mean, I see your ads for the cash back cards, etcetera. Is that the card of choice at this point?
Yes. The cash that is our core card offering. We've simplified our offering to 3 or 4 core products and that's the biggest one. And it's contributing to sort of card income up being up year over year by about 7%, Bruce. And so it's that card selling well.
And the good news as you can see is 67% came through basically our web online sales process and our brand sales process in the core customers, so we continue to drive it.
Okay. Secondly, the 25% margin in Wealth Management, I mean, I think back to the old days when you had much fatter margins in that business. What do you see as kind of a normalized margin in Wealth Management? And number 2, to what impact is the Wealth Management margin being maybe impacted by sort of high liquidity levels that customers are maintaining and do you see that changing?
I'd say a couple of things to that, I think. The first is that we've said that over the course of a couple of years that we need that wealth management margin to get to 30%. I think you've got a couple of things going on right now. In the low rate environment, that business has an artificial drag because as you know, you don't tend to pay out compensation, which is a significant portion of the expense to those things that are net interest income related. So we would expect we also have in 2016 some deferred comp and other programs running off.
So as we go through over the course of the next couple of years between the business growing, a normalization of environment and some other things that that should be a 30% type pre tax margin business.
Okay, great. Thank you very much.
Okay. I think we're through all the questions. So thank you very much for joining us and we'll look forward to speaking next quarter.