Good day, everyone, and welcome to today's Bank of America Second Quarter Earnings Announcement Conference Call. At this time, all participants are in a listen only mode. Later, you will have the opportunity to ask questions during the question and answer session. Please note this call may be recorded. I will be standing by should you need any assistance.
It is now my pleasure to turn today's conference over to Lee McIntyre. Please go ahead.
Good morning. Thanks for joining this morning's call for a discussion of our 2Q 2019 results. I trust everybody has had a chance to review the earnings release documents, which are available on the Investor Relations section of the bankofamerica.com website. Before I turn the call over to our CEO, Brian Moynihan, let me remind you that we may make forward looking statements during this call. After Brian's comments, our CFO, Paul review the details of our Q2 results.
We'll then open up for questions. For further information on any forward looking statements, please refer to either our earnings release documents, our website or our SEC filings. With that, I'll turn it over to you, Brian.
Thanks, Lee, and good morning, everyone, and thank you for joining us to review our Q2 results. Many of you discussed, written about and engaged in debate about the perceived change in the forward environment that we all saw this quarter. However, what we saw in our client base during the Q2 of 2019 was solid consumer activity, pointing to a continued growing economy in the United States this year, albeit at a slower pace. In that environment, our company reported the best earnings quarter in the company's history. That is made possible through the hard work of my 209,000 teammates who are driving responsible growth.
We reported $7,300,000,000 in after tax net income and $0.74 per share. Both these items increased on a linked quarter and a year over year basis. Revenue on an FTE basis was $23,200,000,000 and grew 2%. We increased our return on assets to 123 basis points. Our return on tangible common equity was 16.2%.
And in the end, responsible growth continued to produce strong earnings, returns and shareholder value. As we look at Slide 3, we start to highlight how we achieved these results. Revenue grew 2% and expenses were basically flat year over year. We generated operating leverage of more than 200 basis points. Our credit costs remain low and stable.
So that resulted in year over year net income growing 8%. And during the past year, we bought back 7% of our shares. This reflects the model of combining solid operations with strong capital returns and then thereby driving strong core EPS growth. This quarter diluted EPS grew 17% from the Q2 of 2018. All the way along, our capital and liquidity positions are very strong and continue to strengthen.
Book value per share grew 10%. We also had important client growth and market share gains in our businesses. Client activity showed $75,000,000,000 of deposit growth, a growth rate of 6% year over year. We also had $37,000,000,000 of that deposit growth came from people consumers. At the same time, we saw strong investment flows from those customers.
Loans in our businesses grew $34,000,000,000 or 4%. Importantly, we saw progress in other focus areas as well. A year ago, I told you we'd continue to drive to regain our position in Investment Banking. That's a nice start. We saw market shares across many of the products in Investment Banking in the first half of this year.
One example is IPOs. We are number 1 in volume for U. S. IPOs in the first half. Matthew Koder and the team have done a good job and off to a good start driving this business.
All in, we're pleased with the results this quarter. We grew. We did it the right way. We stayed with our risk parameters and we continue to invest heavily in our franchise adding salespeople, more technology, increasing our marketing spend and improving expanding our physical plant in all dimensions. These results also led to the highest first half earnings in the company's history.
So as you look at Slide 4, we show you the last 5 years results for the first half. For the first half of twenty nineteen, we generated nearly $15,000,000,000 in after tax earnings. Compared to the first half of twenty eighteen, EPS was up 16% and you can see that growth has continued for the last 5 years. In those years, we have driven operating leverage. You can see that in the lower right.
This year, we saw that operating leverage continue in the first half. This led to 57% efficiency ratio. We used the excess capital beyond the need for growth and investments in our company to buy back shares, a trend which has accelerated and you can see on the lower left here. Now primary goal of driving responsible growth has been to produce sustainable results even if the environment changes. This requires us to drive operational excellence in all we do so that we can drive operating leverage and we did it again this quarter.
As you move to slide 5, you can see our we've extended our positive operating leverage straight to 18 consecutive quarters. In those 18 quarters, you've seen many different market environments, changes in interest rates, economic growth has sped up or slowed down, but we still managed to drive operating leverage for 4.5 years and successfully. Generating operating leverage doesn't get any easier after 4 plus years. However, with that strong expense discipline, we remain focused upon it. Now one of the things that you don't see here is and you see in our results is the improvement we're starting to see in some of the categories, especially consumer fees as you go through the quarters, the last 4 quarters.
Over the last decade, we faced service charge headwinds in consumer from reductions in accounts and other fees related accounts for many years. This was based on our consumer strategy to strive to have the best in class franchise, where lower fees because of changes in overdraft policies, but also most importantly, the drive we've had towards being the core relationship bank from an American consumer. Now in the recent past, we're offsetting those rate fee reductions by increasing the growth in the actual accounts, the number of accounts we have that are primary household relationships in the past last few years. We have much higher retention than we've ever had, and we're improving client satisfaction to levels that it hasn't been seen before. But most importantly, that focus on relationship debt has resulted in 92% of our households as primary and with an average balance of $7,000 plus.
Card income, we're seeing the consumer debit and credit card spending at a 5% plus level year over year. This seems consistent with us to a 2% plus growth U. S. GDP environment. We're still fighting the headwinds of the reward impacts that go on in that business and you see that in us and our competitors.
But at the end of But at the end of the day, we're providing great value for consumers. At the end of the day, when you look at the total relationship from those consumers, it's great economics to our shareholders. Now next couple of slides, we're going to do something we've done in each of the earnings reports for some time, but we're going to add a piece to it. We always have talked to you about our consumer banking digital usage, which you can see on Slide 6. But importantly, on Slide 7, we'll talk about how that impact is now being driven across our Corporate and Global Transaction Services business.
So first, let's start on Slide 6 with our consumers. Each quarter we've shown you these charts. In the Q2, we in the broadest context, we had 2,400,000,000 interactions in the Q2 alone with our consumers across all our channels. To show you how dominant it is by digital, 2 point $3,000,000,000 of those interactions were digitally our automated base. This explains why we have to be in our excellent both high touch and high-tech.
If you looked at our digital only clients, meaning customers have not used a financial center in the past year, we have 30,000,000 consumer customers across our platform who are primarily digital, who have more than $400,000,000,000 in balances with us today. Their entire relationship is managed digitally and a balance in activity continue to grow strongly. But that's not our business. Our customers want both physical and digital access. This is why we continue to invest heavily enhancing our number 1 ranked digital platform, while at the same time enhancing our best in class financial centers.
And again this quarter, you see the interaction of those 2 in the lower left hand side of the slide with a record number of appointments that were set up. 580,000 times a person took their mobile digital device set up an appointment to come into a branch in the quarter. And you can see that on the lower left. To better serve the 3 quarters of a 1000000 customers that come into our centers every day, This quarter, we added another 17 financial centers to help drive the growth in our consumer business. We renovated 45 more, bringing over 1200 that we've renovated in the last few years.
And we remain on track to not only hit the 3 year targets we established 18 months ago of adding 500 new financial centers and the targets we established to renovate over 3,000 of them. We also are adding many more relationship managers in these new centers and refreshed a lot of centers to bring them up to our modern high touch environment. Now one of the things that we hear a lot about is the millennial customer and the Gen Z customer. Our digital capabilities are one of the things that attracts millennials to our platform. Today, in our customer base, we estimate that we have 16,000,000 millennial customer.
Those are customers between the ages of 2541. These millennials are very important for our growth and they hold nearly $200,000,000,000 in deposits and investments with us. It's a powerful platform to all segments of the U. S. Consumer population.
Now turning to Slide 7. While many of us focus on the consumer digital trends, I think it's also important to recognize the significant activity of the digital transformation in our commercial space. Over the past decade, we've been investing continuously in our global transaction Services platform. And on Slide 7, we start to show the digital capabilities as part of that investment. We focus on making the business easier, faster, cheaper and more secure for clients and make it more convenient to access and be in business 20 fourseven.
We now have nearly 500,000 CashPro online users with double digit growth in mobile usage attached to that. Moment payment approvals by these users were $123,000,000,000 in the past year, doubling year over year and growing very fast obviously. 1 of the latest enhancements, the type of thing that shows the innovation we have is to have mobile tokens delivered through an Apple Watch to help corporate treasurers process payments. At the end of the day, the people who work with our companies in our companies want the same convenience that our consumers want to be able to deliver the services. So let me end up here by addressing a few questions which are on your mind.
Number 1, many of you asked what we see if the expected forward yield curve comes true, I. E. The reduction in interest rates that is in the curve. I asked Paul to lay out our thoughts on that and he'll do that shortly. The second question is, can your strong asset quality continue to last?
Assuming economic conditions continue to move along, we think that net charge offs should remain low for some time and we've told you that for many quarters in a row. This is not because something we're doing in the Q2 of 2019. It's because the work we've done over the last decade to continue to maintain our risk profile on a consistent basis and drive towards it. We see no immediate credit concerns as evidenced by the volume or additions to non performing loans or delinquencies or any of the statistics around credit that you can see in the documents. The third question is, okay, given an environment where you may see a slowdown in the economy, do you have further expense levers to pull?
One of the questions we get is because we manage expenses so well, is there more things you can do? We believe that it's important to continue to invest in the future of our franchise. Paul is going to talk to you about near term expense guidance a little later. But importantly, the reason why we're investing is to produce these investments producing meaningful results. But our 2019 expenses are projected to be lower than 2018, and that brings us to every year in the last decade, we've had declining expenses except for for one.
But we as the managers you want us to be agree with you that if there's severe economic issues ahead, we have the flexibility to continue to reshape this expense base, obviously starting with revenue related costs, which would adjust quickly and automatically and then changing our investment strategies. I can share these areas we focus on and are on our mind just as they're on your mind. So with that, let me turn it over to Paul for a
few more details on the quarter. Paul? Good morning, everyone. I'm going to start on Slide 8 since Brian already covered the P and L. Overall, compared to the end of Q1, the balance sheet grew $19,000,000,000 driven by loan growth, which ended the quarter more than $20,000,000,000 higher in our business segments.
Liquidity strengthened in the quarter. Average global liquidity sources of $552,000,000,000 remained well above requirements. Sharehold equity increased $4,400,000,000 dollars as we issued $2,400,000,000 in preferred stock ahead of planned calls announced in July. And common equity increased $2,000,000,000 Versus Q1, the $2,000,000,000 increase in common equity reflects an increase in AOCI as the value of our AFS debt securities rose given the decline in long end interest rates. In total, we returned $7,900,000,000 in Q2 through common dividends and share repurchases, 112% of net income available to common.
As a reminder, we recently announced plans for a 20% increase in our quarterly dividend as well as an increase in our share repurchases to more than $30,000,000,000 over the next 4 quarters. With respect to regulatory metrics, our TLAC ratios remain comfortably above our minimum requirements. Our CET1 standardized ratio increased to 11.7%, remaining well above our minimum requirement of 9.5%. Higher capital levels drove the increased
AOCI
excuse me, higher capital levels were driven by the increased AOCI, improved the CET1 ratio, while higher loan balances and commitments mitigated some of that improvement. Moving to client activity and starting with average deposits on Slide 9. Average deposits grew nearly $75,000,000,000 or 6% year over year. This was the 15th consecutive quarter in which we grew deposits more than $40,000,000,000 Global Banking alone brought in more than 39,000,000,000 dollars Global Banking continued to benefit from strong customer demand, reflecting the additional bankers we have deployed over the last few years in the middle market franchise. We also continue to see a shift from non interest bearing to interest bearing deposits in Global Banking.
Deposits with consumers grew $37,000,000,000 or 4%. Within that, Global Wealth Management was up $18,000,000,000 year over year, reflecting client growth with a preference to hold cash amid market uncertainty as well as inflows of about $8,000,000,000 from the conversion of some money market funds to deposits near the end of 2018. Consumer banking deposits grew by $19,000,000,000 or 3 percent year over year. More importantly, checking balances grew while more expensive balances declined modestly. In fact, checking balances grew $22,000,000,000 or 6% year over year to $374,000,000,000 while rate paid remained low at 9 basis points, up only 5 basis points year over year.
Turning to average loans on Slide 10. Overall, our loans grew a little less than 2% year over year. Our all other portfolio is down to $45,000,000,000 and has been running off at a pace of approximately $2,000,000,000 per quarter, excluding loan sales. Looking at loans across our business segments, core loans grew $34,000,000,000 or 4% year over year. Consumer, Wealth Management and Global Banking segments each grew at a healthy year over year pace.
As you can see in the bottom right chart, we continue to demonstrate a fairly consistent pattern of responsible loan growth. Growth of loans to consumers was led by an increase in mortgages as lower interest rates stimulated more originations and allowed many of our customers to lower the cost of owning their existing home or buying a new one. Within Global Banking, we saw increased activity from middle market clients, complementing the continued activity from large global corporate borrowers. Turning to Slide 11, I'll not only review the drivers of our net interest income this quarter, but also provide a few perspectives on the future given the expectation of lower rates embedded in the forward interest rate curves. Net interest income on a GAAP basis on a GAAP non FTE basis was $12,200,000,000 dollars 12,300,000,000 on an FTE basis.
Compared to Q2 'eighteen, GAAP NII was up $361,000,000 or 3%. The improvement was driven by the value of our deposits as interest rates rose in 2018, as well as loan and deposit growth. On a linked quarter basis, GAAP NII was down 186,000,000 dollars In Q2, we benefited from an initial day of interest as well as loan deposit growth, which was more than offset by 3 factors. First, lower long term rates resulted in higher prepayments of mortgage backed securities, which caused higher write offs of bond premiums. 2nd, Q2 included higher funding costs from growth in non earning trading assets and other global markets assets.
And then lastly, lower short term rates reduce yields on floating rate assets such as commercial loans. As a result of these impacts, net interest yield of 2.44 percent declined 7 basis points linked quarter, but was up 3 basis points year over year. With respect to deposit rates, we remain disciplined and saw minimal movement in total deposit rate paid at 57 basis points, it increased just 3 basis points from Q1. With LIBOR rates lower than Q1 and the forward curve predicting further declines, we would expect client deposit rates to begin to move lower over the 3rd quarter. Turning to asset sensitivity of our banking book, we remain asset sensitive given the nature and size of our deposit base and the type of loans our customers have sought from us.
Our asset sensitivity in a rising rate scenario increased compared to Q2. This was driven by the decline in mortgage rates, which increases the likelihood of mortgages of mortgage prepayments in the baseline. The lower current forward curve also caused increased asset sensitivity in the falling rate scenario. In the second half of the year, we expect additional day of interest in Q3. However, lower rates are expected to have 3 primary negative effects.
1st, yields on floating rate assets should continue to decline from short term rate reductions. 2nd, lower long term rates may continue to stimulate mortgage refinancings, causing increased write off of bond premiums and third, reinvestment rates on securities and mortgages will dilute current portfolio yields. However, lower LIBOR rates should reduce the cost of our long term debt and other funding, partially offsetting these headwinds. Last quarter on our earnings call, we reviewed our expectations that net interest income could grow roughly 3% for the full year of 2019 over 2018. That was based on a relatively flat forward curve at the time of our earnings call.
Since that earnings call, on a spot basis, the 10 year rate has fallen more than 40 basis points and short term LIBOR rates are lower by 10 basis points or so. From here, if we were to assume stable rates, we think our NII for 2019 would now be up approximately 2% compared to 2018. Additionally, the forward curve anticipates 2 Fed fund rate cuts in 2019 and another in 2020. If rates follow the forward curve and the Fed funds rate were indeed to be cut twice this year starting this month, we think it would likely shave another 1% off NII growth for 2019. Turning to expenses on Slide 12.
We have now been pacing at our targeted level of non interest expense for several quarters and our efficiency ratio has improved 100 basis points year over year to 57%. At $13,300,000,000 we were basically flat compared to Q2 2018 with expenses up less than $50,000,000 While holding expenses roughly flat, we increased investment in our people, our brand, in technology and in office space. And as you know, we are adding and renovating financial centers, which serve not only consumer clients, but also commercial and wealth management clients. Investment in people included adding more sales professionals, increased merit and benefit as well as the shared success bonuses, which we have awarded for 2 consecutive years now. Since a portion of shared success bonuses vest over time, we are now covering those programs in our ongoing expense base.
Also in the expense base is the increase in early Q2 of our minimum wage to $17 an hour. And as you know, we announced our intention to continue to raise our hourly minimum wage until it reaches $20 in 2021. Compared to Q1, expenses are also up modestly as Q2's decline from the seasonally elevated Q1 payroll tax expense was more than offset by the increase in investment in initiatives and marketing in Q2. In the second half of twenty nineteen, we expect our expenses to roughly equal our first half expense of $26,500,000,000 We expect increased technology investment in the second half plus the cost of adding new client facing professionals to be roughly offset by the seasonally lower incentive costs. We previously projected that we could hold 2019 flat with our 2018 expense of $53,200,000,000 inclusive of these planned investments.
However, as you heard Brian say, we now estimate expense in 2019 will be modestly lower than that. Turning to asset quality on Slide 13. Asset quality continued to perform well, driven by industry received annual stress test results this quarter and once again, our loss rates in stress scenarios were lower than our major peers. Total net charge offs in Q2 were $887,000,000 a little more than $100,000,000 lower than Q1 and the year ago quarter. The decline was driven by the sale of $700,000,000 of home equity loans, which resulted in $118,000,000 of recoveries from previously charged off loans.
Absent this recovery, net charge offs were just over $1,000,000,000 or 43 basis points of average loans and consistent with the net loss off rate ratio in Q1 and the prior year quarter. Outside of the normal expected Q2 seasonality in our credit card portfolio, we had a modest increase in commercial driven by a couple of single name losses. Provision expense of 857,000,000 dollars excuse me, provision expense was $857,000,000 and included a modest $30,000,000 net reserve release. Our guidance on net charge offs for many quarters now has been roughly $1,000,000,000 per quarter and that remains unchanged. This guidance assumes current economic conditions continue.
Okay. On Slide 14, we break out credit quality metrics for both the consumer and commercial portfolios. With respect to consumer metrics, delinquencies trended lower, which we believe is a good indicator of future losses. Additionally, non performing loans continued to improve even after taking into consideration the loan sales this quarter. And in commercial, we also saw a modest decline in non performing loans, while reservable criticized ratios remained near historic lows.
Turning to the business segments and starting with Consumer Banking on Slide 15. Consumer Banking produced another strong quarter. Earnings grew 13% year over year to $3,300,000,000 revenue grew 5%, and we created operating leverage of more than 4 100 basis points. The efficiency ratio also improved year over year to 45%. Even as we invest in new markets and renovate financial centers, the all in 162 basis point cost of running the deposit franchise was relatively flat compared to Q2 2018 as the decline in the cost of deposits component offset the increase in rates paid.
Client activity remains strong with loans and deposits showing solid growth. Mortgage originations clearly benefited from lower rates. Customer satisfaction improved. Asset quality remained strong as the net charge off ratio was 124 basis points, decreasing 4 basis points
year over year.
And I would note that much of the loan growth that we have added to our balance sheet is high quality consumer real estate loans. We continue to add salespeople for consumer lending, investment advice and small business lending. And we also increased our spend in marketing via a campaign where our 91 local market teams around the country asked their customers what they would like the power to do. Turning to Slide 16, note that the 5% year over year improvement in revenue was driven by NII. While card income was down modestly year over year, card spending grew 5% more than the prior year, which on its own was a strong quarter given elevated spending driven by tax reform last year.
Versus Q1, we saw an improvement in card income driven by solid purchase volumes. We continue to expect higher rewards to dampen card income, but would also remind you that we use rewards to deepen relationships with a focus on total customer revenue, not just fees. Enrollment of preferred rewards increased to $5,700,000 and now represents 65% of the eligible opportunity and our retention rate of these customers is now 99%. Balances with these customers grew 11% versus Q2 2018. With respect to service charges, they were also down modestly year over year.
Again, this quarter, we faced the headwinds from actions we took in previous quarters that reduced customer penalty fees. However, as with card versus Q1, we saw modest improvement in service charges. Turning to Global Wealth and Investment Management on Slide 17. Strong results were driven by new investment accounts and more traditional banking products as well as the market's rebound in the quarter. Referrals from across the company also gained momentum.
Net income, which approached a record level, was just over $1,000,000,000 and grew 11% from Q2 'eighteen. Pretax margin was a record 29%. The business created 2 40 basis points of operating leverage year over year as revenue increased more than 3% and expenses grew 1%. Within revenue, positive impacts from banking activities and higher rates drove NII higher, while fee improvements from AUM flows and market valuations more than offset general pricing pressures. With respect to expenses, higher revenue related incentives, as well as continued investments in new advisors, technology and brand were modestly offset by lower intangible amortization and deposit insurance costs.
Digital use by affluent clients continues to gain momentum as mobile usage once again grew double digits year over year. For example, GWIM clients used e signature twice as much as they did only a year ago. Moving to Slide 18, GWIM results reflect continued solid client engagement in both Merrell and the Private Bank. Strong household growth in both businesses contributed to the $2,900,000,000,000 in client balances. AUM flows were $5,000,000,000 in Q2 or $24,000,000,000 over the past 4 quarters, contributing to record AUM balances, which rose 6% year over year to $1,200,000,000,000 dollars On the banking side, deposits of $254,000,000,000 were up $18,000,000,000 or 7% year over year, driven by client growth and the desire by some clients to hold more cash amid the market uncertainty.
Linked quarter deposit outflows reflected seasonal tax payments by our customers. Loans were 3% higher year over year reflecting strong mortgage growth given the decline in rates. We also saw good growth in custom lending. With respect to client activity, one thing worth noting is the increase in client referrals both to and from Mail and the Private Bank Advisors. This quarter, we had nearly 15,000 referrals to advisors from other parts of the company and advisors made more than 58,000 referrals back to our other LOBs.
In Q2, these introductions added $7,000,000,000 to client balances in GWIMs and helped us grow households. As you turn to Slide 19, I know many of you look at Global Banking and Global Markets on a combined basis. So to help you with your and earned $3,000,000,000 in and earned $3,000,000,000 in Q2, which is nearly a 16% return on their combined allocated capital. Looking at them on a separate basis and beginning with Global Banking on Slide 19, the business earned $1,900,000,000 and generated a 19% return on allocated capital in the quarter. Earnings were strong, but down 9% from Q2 2018, driven by the absence of reserve releases for energy exposure in the prior year.
Revenue was down modestly year over year as loan spread compression and ALM activities offset the benefit of loan and deposit growth. Strong deposit and loan growth reflects the hundreds of bankers we have added as well as continued investment in how we deliver our loan product and treasury services. With respect to expenses, lower deposit insurance costs mostly offset continued investment in technology and bankers. Looking at trends on Slide 20 and comparing to Q2 last year, as you heard Brian mention earlier, we have made steady progress in Investment Banking over the last few quarters. We saw a nice finish this quarter with IV fees of $1,400,000,000 for the overall firm, down 4% year over year but up 9% in Q1.
This performance has to be put in the context of overall industry fees, which according to Dealogic were down roughly 20% year over year. In fact, using Dealogic data, our market share has improved across most major products comparing the first half of twenty nineteen to the first half of twenty eighteen. Switching to Global Markets on Slide 21, as I usually do, I will talk about results excluding DDA. Global Markets produced $1,100,000,000 of earnings and generated return on capital of 12%. Overall, revenue declined 6%, while expenses declined 2% year over year.
Within revenue, a year over year decline in sales and trading was partially offset by a gain on the sale of an equity investment. Sales and trading declined 10% year over year, FICC was down 8%, while equity fell 3%. The decline in equities to $1,100,000,000 reflects weaker performance in EMEA and derivatives compared to a stronger year ago period. Fixed lower revenue was due to a weaker trading environment with lower overall client activity across most products. The 2% year over year expense decline was a reflection of lower revenue related compensation.
On Slide 22, you can see that our mix of sales and trading revenue remains heavily weighted to domestic activity where global fee pools are centered. Within FIC, revenue mix remained weighted towards credit products and we had no days with trading losses in the quarter. Finally, on Slide 23, we show all other, which reported a small net profit $358,000,000 better than Q2 'eighteen. There are two primary reasons for the improvement. First, provision benefit increased $136,000,000 from Q2 'eighteen, driven by the non core loan sale, which, as previously noted, resulted in a recovery of $118,000,000 2nd, we had an improvement in our tax rate compared to Q2 'eighteen.
The tax rate for the company was 18% in the quarter, a little lower than our expectations. We expect the tax rate in the back half of the year to be approximately 19%, absent any unusual items. Okay. I think with that, we're ready for some Q and A.
And we'll take our first question from Jim Mitchell with Buckingham Research. Please go ahead.
Hey, good morning guys. Good morning. Hey, just
might as well ask a
question on NII. Appreciate the guidance for this year. How do we think about, I guess, number 1, the impact of just one rate cut? Is it sort of half? Is it linear?
And I guess, number 2, as we think about next year, if the forward curve is realized over the course of the next 12 months, how do we think about that impact into next year? And given the strong loan growth you guys have seen kind of accelerated in 2Q, is there enough asset growth that you can still grow NII environment next year? Thanks.
Okay. So in terms of just isolating in on a 24 basis point cut on the short end, I guess a crude approximation is the $3,000,000,000 impact over the 12 months of 100 basis point down rate shock on the short end. The quarterly impact of that is a little more than 175,000,000 dollars but it will be even less than that because that $3,000,000,000 is measured relative to the forward curve, which already includes rate cuts. Plus that analysis is just on our banking book. If you include our markets book, which is modestly liability sensitive, you get to the approximately $100,000,000 levels that I discussed in the prepared remarks.
In terms of 2020, look, I would say it's a little early to be talking about 2020. We don't know rate cuts we're going to get. We don't know why we're going to get them, which is important. So I think as we get a little closer, we'll be more likely to be able to talk about that.
Thanks.
Jim, I'd add one thing. Remember, if you think about the industry's thought process over the last 3 years basically as rates rose, that was one thought process on how people price deposits and other things. And as that changes, you'll see a different thought process take hold at least in our company. And I think if you look at some of the statistics and the materials on the especially on the corporate GTS type business that the necessary increase for the highest balance customers and etcetera that's occurred will slow down and come back the other way. And that frankly is just the nature of a change in the rate environment, which the pricing is still catching up to.
And so I think so as you think about it, as you get out the longer term in 2020, you have to think about that situation sort of reversing back to a different framework than framework we had literally 200 plus basis points of short term rate increase.
Okay. Thanks.
We'll take our next question from Glenn Schorr with Evercore. Please go ahead.
Hi. Good morning, Glenn.
Good morning. One quick one on follow-up on cards. You mentioned spending up, margin compressed and the reward costs continuing to be there, but obviously producing some growth. Can you talk a little bit more about the reward dynamic? How long the current environment you think lasts and how you know that it's going to continue to fuel that growth, maybe something a little bit more of growth coming from current customer base versus new ones, things like that?
Thanks.
So just starting at the end of your question and working backwards, we generated another 1,000,000 plus cards this quarter. We've been fairly consistent doing that. What has really happened in our card business over the last few years has been the continued repositioning. It's really over now. And now you're starting to see it start to work its way up and grow just in terms of balances and numbers of cards and things like that.
If you think about on the rewards question generally, remember that and you mentioned it, Glenn, it's a relationship pricing piece. So our cards come with a relationship pricing across the whole relationship including deposits. So you could have $20,000 deposits from these customers and so you reward them with a card because that's the way you can do it, but you're actually getting the deposits. So we'll keep working that. But if you look at the more recent quarterly trend, you're going to see that you've seen the impact decline, although it's still going to hit, but you're seeing that help fuel our deposit growth in checking deposits, especially at 6% year over year in consumer and that is a huge payback for the reward price.
So you'll see the dynamic continue. We haven't seen big breakage fees and it's not so volatile. It's kind of steady. But the industry dynamics and how people are using rewards not only for the card activity, but also more broadly is I don't expect to change. But in the Bank of America context, we've been using it for the broadest part of the franchise and that's why you see the good growth in the other parts of the business.
Appreciate that. One other one, a follow-up on Wealth Management. You mentioned new household growth up 45% year to date. Are you doing anything specific on incentives to spur that growth? That seems like a big number for such an already big business.
And the related question is, do you think of there being a ceiling to margins because they're already huge at 29%?
A couple of things. 1, just on the way the incentive system works. Andy and team going back 2 years ago now basically added to a modifier for lack of better term in the incentive compensation construct for a requirement bonus if you grew your household beyond the numbers and obviously inverse that if you did not. And that's just led to the activity that you've seen in the pickup and Andy and team have done a good job. On the Private Banking side, we've been adding sales teammates and Katie and the team have been driving that.
It's been it's up dramatically year over year and that's critically important because that business profitability dynamics are much or even higher. And so it does come from modifying the system and also comes from the way we operate referral business that is in Paul's comments you heard that. There's a huge flow between the FSAs that operate in the Merrill Edge platform at the branch to the financial advisors. So somebody comes in as has the amount of assets and desires a financial advisor, we move them to the platform. That happens towards Merrell.
And we track that in every market. We make sure they get executed on. We count the success rate and that energy creates its gold in every market every year and this year we'll do $7,000,000 referrals across all the businesses in the markets that we're doing. And so and then on the margin, we've moved to 29%. As you see, the NII type activities, loans, deposits continue to grow.
That margin will continue to grow. We're fighting the fee compression on the pure asset management business that you've seen go on for years in this industry. But we have lots of advantage of scale and capabilities on the digitization of the operational side of that business and platforms and statements and things like that. We're getting to 50%, 60% digital statements in consumer. We're not anywhere near that in wealth management.
And all that is not some snap your fingers and overnight it happens, but all of the grind to make the business more efficient. So our industry leading margin we think we can keep pushing it up.
Thanks. Appreciate it, Brian.
We'll now go to Mike Mayo with Wells Fargo Securities. Please go ahead.
Hi. I was intrigued by your comments about 16,000,000 millennial customers, dollars 2 $100,000,000,000 of deposits. And I think that's the first time that you've disclosed that information. So I guess, what's the growth rate, profitability of those customers? And as you look at the millennial customer set, what's your assumption for how long they'll be customers with you since they're younger and you have more digital banking?
Do you now assume that will be with you say 20 years instead of 10 years? And if so, how do you change the pricing of products for that millennial customer set?
One of the things I don't want to sound per efficacious in terms of people's views that big banks don't do business with millennials. It's just to set the tone, we put the $60,000,000 to give you $0.01 to $400,000,000,000 of client balances with us. But if you look at our checking sales, Mike, and you look at the population representation of millennials in the population and Gen Z in the population, you look about 18 years old and millennials about 24% and people between 18% 24% is 11%. But if you look at the rate we sell to that class of our sales to millennials, it's 40% of our sales. So it's basically 1.5 times the rate in the population we're selling to.
And if you look at their holdings and balances today, just pure checking, nothing not into savings or investment, the millennials hold about $70,000,000,000 of checking balances with us and it's growing quickly. And so we are gaining share in that class. It's because of the digital capabilities and all the things we talked about. Are they profitable? All our consumers basically are profitable.
They represent a big part of our business today. The representation that are currently outstanding checking accounts is about 40% just from millennials. So we're gaining share in that segment. We got to be on our toes at all times and it's very valuable. If you think, Mike, you've been around this business a long time.
You think about just those checking balances alone provide tremendous value. Will they stay with us? The answer is they have in the past and we expect in the future as long as we keep driving the great experiences we have. And going back to the comments in the Page 6, I think it is in the slide deck on consumer strategies, just look at the activity levels. And those are generally would have a stronger cohort to younger below 40 year old people, but on the other hand across the platform wouldn't work.
But if you look at it with Zelle, the activity volumes, if you look at it with Erica in a year, 50,000,000 plus customer interactions. And if you look at it in terms of digital interactions at $2,300,000,000 in the quarter, mobile logins $1,500,000,000 This is as advanced stage as anybody. And so we are very pleased with the team's work in this area. And then if you go to Merrill Edge, if you look at the millennial balances, again, they represent twice the rate of the population and we're accumulating those balances, which when we compare them to other competitors, 64% of our new clients are in the millennial categories for Merrill Lynch and our preferred clients and things. So it's very good.
We're driving it, but it's the competency of the team's capabilities in those categories that drive it.
And the other question that I had, how long do you assume these customers will stay with you and how does that compare to the past? The reason I ask that, you look at some of the offers out there and you can get $400,000 $500,000 $600 simply for opening accounts at certain banks. And the assumption is that once you get these customers, they will stay with you longer than they would have say 10 years ago.
Well, that goes back to your colleague's question about the rewards and things like that. Our preferred base of customers in the consumer business is a 99% plus retention rate. And so they really all stay with us. And so I that's extremely powerful dynamic. So the assumption I don't have at the top of my head that the team puts in their models and stuff like that, but if you're retaining 99% of them, it's a pretty long duration.
All right. Thank you.
We'll take our next question from John McDonald with Autonomous Research. Please go ahead.
Good morning. The core loan growth continues to remain solid at 4%, Paul. Are you seeing some improved momentum in middle market and small business? And also the 2% reported has closed some of the gap to that core number? I guess, as you think about the rundown pace, could we continue to see it narrowing so that your overall balance looks closer to that core?
I guess
I'll hit the second one first. The answer is yes. I mean, we have $45,000,000,000 in the non core portfolio. Of that $45,000,000,000 half, I would say is sort of legacy home equity and residential mortgages that will run off and or depending on market conditions, we may see some more sales. The other half is mortgages that a previous treasurer or CFO bought many years ago.
It's they're good mortgages. They're going to run off as well. Together, they're running off at about $2,000,000,000 a quarter. So yes, I mean, you can just do the math. It's becoming a smaller component of the overall picture.
And as you point out, look, when you look at our LOBs, they were up 4% year over year this quarter. And we are seeing, I think, good growth in small business. In fact, I think we're the largest lender to small business companies in the U. S. Now surpassing a competitor recently.
We're seeing in middle market this quarter, we saw a pickup in growth that really complemented the consistent growth that we've been seeing for many quarters now from large global corporations. I mean, we don't see anything on the horizon that suggests that we can't continue to grow kind of what we've been telling you, which is kind of the low mid single digits for the company from the business segments.
I'd just add 2 thoughts to that. One is Sharon Miller, our small runs our small business for us in the consumer business and Alistair, Borthwick who runs middle market, they've got their team sort of moving along and as you said growing at a consistent 5%, 6%, 7% depending on the product set type of what's real estate lower versus core middle market. And so we feel very good about that. You remember that the runoff pace in the all other book has been accelerated by the sales over the last few years and that was to reduce our potential credit risk and stress and you've seen that be reflected including last year asking for the extra capital return based on selling a bunch of loans during the year which had higher charge offs in the CCAR process as you might expect. And then secondly, operating risk of the company comes way down because those loans would have a tenancy and we sell them servicing release.
So we're getting to the bottom of the barrel and it's now 4% of the 5% of the portfolio used to be 8%, 9% of the total portfolio and maybe 10%. So we feel good about that impact really narrowing now. And the sales are largely we always chipping away this quarter was a relatively modest balance, but the sales are largely through the money and the stuff we have now is actually 12 years current pay and the thought that none of these loans were made since the crisis. So we feel good about that. And the last thing is think about in the Merrill side in terms of in the private banking side in terms of loans growth, we're seeing a solid performance there and the integration in Middle Market Investment Bank, we feel good.
Great. And Brian, I know you touched on this a little bit, but could you talk about your feelings about your ability to maintain the strong checking account growth that you've had given the stance on rates paid? What's your outlook for that checking account growth to continue maybe relative to GDP or the industry?
If you look at it, we have maintained that pace. If you look at retail deposit growth since the beginning of 2016, I think our gross balances have grown about 20%. The peer group's grown about 12%. And so that's significant difference. We've been pretty consistent growing $20 odd 1,000,000,000 in checking.
That is a core transaction account. So if you look at the what we're seeing now is the average balance in our checking accounts, I think, are 7,500,000,000 7 point 5,000 7,500,000, 7,700,000, something like that, 92% current. Yet, we're still, in the last couple of years, starting to net accumulate. And so we feel good that we can keep that checking balance growth. It's not dependent on rate pay because it's a core transactional account.
So even though there's some payment toward the interest bearing checking, the dominant part is non interest bearing and it's just the core transaction account. If you look in the money market and stuff and see the rates, that's where the people get paid for the excess balances. But this is the money that's flowing through the household on a daily, weekly, monthly basis. And we feel very good about it and figure we can continue it because we have in all the environments and all the rate changes.
Great. Thank you.
We'll now go to Saul Martinez with UBS. Please go ahead.
Hey, good morning, guys. Couple of questions. First, I wanted to key in on something you said Paul on the rate sensitivity. You mentioned I know it's a crude approximation, but 25 basis point cut on the short end. It's about $175,000,000 a quarter, but that's just the banking book.
And you're liability sensitive in your trading book. And I think you mentioned it's $100,000,000 if you kind of net that out. So should we is my math right in suggesting that you get something in the neighborhood of a $75,000,000 benefit per quarter for every 25 basis point cut in your trading book? Because obviously in the past, sometimes we've kind of looked at your NII growth in your NIM expansion in a rising rate environment and maybe it hasn't grown as much as we thought because of the headwinds in the trading portfolio. But as short term rates move down, should we see the opposite of that also occur in some of those headwinds get mitigated by expanding margins in your trading book?
Well, I think you're close, but the one piece you're missing is that in addition to being modestly liability sensitive in the trading book, when you look at those disclosures about the impact of 100 basis point shock on the down rate scenario on the short end, remember that's below the forward curve. Right. So you're looking you're literally talking about a scenario where short end rates would be shot down to 75 basis points and the long end would be at 1 percentage point. So that $3,000,000,000 obviously, it gets you have more and more impact the lower and lower rates go. That first 20 basis points is not going to be $3,000,000,000 divided by $60,000,000 So you got to factor in both of those things.
No, understood there. But is the logic right, I guess, is my question that you'll get an offset and that offset is sort of in that magnitude of for every 25 basis points something in the neighborhood of 75,000,000 dollars on the trading book?
Yes. I don't think we're prepared today to give too much guidance on the how liability sensitive to the trading book is. But when you put all the factors together, you kind of get to roughly 100 basis points, I mean, dollars 100,000,000 on that first rate cut. And remember, when I went through the script and talk about how that we'd still end up growing year over year 2019 versus 2018, you got to factor in loan and deposit growth. We got a day coming in the quarter.
So all those things impacted.
And you're also baking in a little bit of a benefit, a little bit of an offset then from expanding margins in the trading book on the rate cuts in that guidance?
Yes, in that guidance, we're putting in a little bit, yes.
Okay. Changing gears and apologize if I missed it, but did you disclose the size of the gain on the sale of the equity investment?
We didn't disclose this the equity investment on our trade quest, yes. No, it was $200,000,000
$200,000,000 Okay. Awesome. Thanks so much.
Thank you.
We'll now go to Steven Chubak with Wolfe Research. Please go ahead.
Hey, good morning. So I wanted to start off with a question on the investment banking business. It was pretty nice to see fee share increasing in the quarter. We had seen some share loss in some of the more recent quarters. I was hoping you could speak to some of the factors that may be driving some improved business momentum, whether it's leadership changes or anything else that you could attribute it to?
Sure. So just a quick review, year over year the market fees according to Dealogic were down I think 21%. Our reported fees were down only 4% And if you look at the deal logic fees for us, maybe 11%. So clearly, we picked up at least in this quarter meaningful, I would say, in market share. I think this is a result of all the things that we said we were going to do, not that we ever had a problem in Investment Banking, but we think we should be top 3 and there was a little bit of slippage there.
And so we just reinvigorated the focus. We decided to add more bankers, particularly to cover the middle market. Remember, we have an army of corporate commercial bankers out there. They have great relationships. They've been making loans to clients for years.
And there's certainly an opportunity when those companies need to do something, need to use investment banking products for us to be there. We just needed to probably add a few more bankers dedicated to that segment. We've done that. We've got regional bankers now all around the U. S.
We're going to be adding more. They're in the market with the commercial bankers. And that and I think just a reinvigoration from the leadership team across Global Corporate Investment Bank and Commercial Bank and Business Banking, I just think is having an effect.
Got it. Helpful color. And then Paul, just one more for me and it's on the topic of NII. I'm going to take a slightly different tack. There's obviously pretty heavy reliance across the industry on the 10 Q disclosures, which I know are inherently flawed.
It's a very static snapshot.
I was hoping you could
just speak to some of the factors that are driving more benign impact in terms of the rate sensitivity that you cited versus what's explicitly disclosed in the 10 Q, whether it's volume growth, some issues relating to you're comparing it versus the forward curve, deposit offsets or anything else you could speak to?
Just one thing to be precise that Paul said a couple of times, but it gets lost sometimes and I'll let Paul get into the broader statement. When we disclose the minus 100 basis points shock or down 100 basis points across the curve, that is on top of what the forward curve has in it. And so sometimes people get confused by that because they think it's from the current rate stable rate environment we see today minus 100. It's actually in the case of Foraker having the rest of the year or 2 cuts in it, it's 50 off and then another 100 off. And so that dynamic Paul has mentioned twice to sort of make sure people don't get ahead of us.
But Paul can take you through the broader factors, but just be careful that you're not making that miscalculation, which we've seen other people do. We're not saying you have, but other people
have. Thanks, Matt. Sure.
Look, I'm not sure what else I can add. I mean, if you think about our clients, right, you've got G1 client and Global Banking clients where if rates change, the pass through rates on those clients are going to be roughly the same up or down, right? And you've got consumer clients where because of the great job we've done on rate paid in the cycle, there just isn't a lot of room on the downside, but if rates go up, there probably will be a little bit more pass through. So that's the dynamic we're living with. On top of that, you've got to factor in when long term interest rates go down, the quarter later or the month later, you're going to see an impact.
That doesn't continue forever. It's only an impact when the rates go down, you get a lag effect on some increase in write off of premium. So that's what's
going on. Paul, just on that this quarter, a couple of basis points of the compression is due to the amortization of the premium, which goes away next quarter if rates if the 10 year doesn't fall by 50 basis points again during the quarter. So in another basis point sort of seasonality. So when Paul talked about some of these sort of spot issues earlier on, of that 7 basis points, 3 of it is really just literally a quarterly effect that goes away. And so that's where you think as you think about it, go back to all the factors listed loan growth, deposit growth, deposit pricing, loan pricing, but then the twist in the market when things change instantaneously can have a quarter effect and go away next quarter as long as don't move at the same velocity if they move this quarter.
And those are that's why that we are always careful about these estimates to make sure people understand the online basis. Now one of your colleagues said earlier, the cold clue of this is we've got to grow loans and deposits. We grew $70,000,000,000 in deposits year over year. Year we grew $30,000,000,000 in loans. The rest of deposits go into securities.
That is the core business and that will drive the earnings power of this company and average earning assets are growing. And that's what we're up to. That will ultimately make NII grow. The question is the twists and turns along the way can be a little different.
Very helpful color, Brian. Thanks for taking my questions.
Our next question comes from Matt O'Connor with Deutsche Bank. Please go ahead.
Good morning, Matt. Good morning. You mentioned earlier about some of the puts
and takes on the expenses and gave guidance for this year to be a little bit below what you had thought a few months ago. But what are your thoughts kind of beyond this year? I think at one point you had said try to keep costs relatively flat at 53,000,000,000 dollars And then you did mention if I think you're alluding to call it capital market related or volume related areas if those were weaker there are some levers to pull on costs. But if it's just a lower rate environment is there other area on the cost side that you can pull in? So I guess the question is like a stable rate environment in your base case, what are you thinking on costs?
And then if the revenue shortfall is just rate driven, are there some areas that you can tighten? Thanks.
So I think if you think about it over the last two years plus, I think we've run around $13,100,000,000 $13,200,000,000 $13,300,000,000 in quarterly expenses except for 1 quarter we had $13,800,000,000 in quarterly expenses except for 1 quarter we had $13,800,000,000 which is sort of the seasonality of a strong markets quarter plus it was the Q1 with the FICO and stuff like that. So basically we got this thing at a run rate. And so but you got to remember in 2019 that run rate has picked up. If you go back to when tax reform came through, we said we'd put $500,000,000 more in the technology investment platform. A chunk of it ran through last year and about $200,000,000 or $300,000,000 of it's running through this year.
So that was increased expense. We said we did the share for success. We did over $1,000,000,000 in the 2 programs. There's a near term cost to it and then there's an amortization of the deferred parts of their stock. That's all in the P and L today.
And then you have incentives and create rent and all the other stuff that benefits. And with all that, we thought we'd be 53% to 53.3% this year. And Paul has told you basically to assume that we'll be closer to 53 with all that going on and all that extra investment. So if you go back to 2016 when we said we're running 50, I don't know, 7 or 6 or whatever we were, we told you it'd be 53, no big low 53s. Nobody believed us we got here.
We've invested a lot more and we still are running at 53. That is the inherent ability of the new BAC, SIEM, operational excellence, org health, which not doesn't mean a lot to all you, but the teammates who are listening will understand all that, that allows us to keep driving the relative efficiency of the company. And even in an environment where the world just kind of goes on, you have 2% growth, we know there's more we can do. What we don't want you to do is to get ahead of us because frankly the investment year over year in marketing was $150,000,000 last year's Q2 this quarter, additional in the quarter. That won't sustain at that kind of level, but it's part of driving that customer satisfaction delight scores through the roof, which then means those that the millennial accumulation accounts at twice the rate of the population, which then turns into customers to Mike's point of the future that the digital competency allows us to serve more efficiency, which then drives down the efficiency ratio.
That is the operating model. And so those investments pay back and they'll redound our benefit. But that said, we're saying we gave you flattish from 2018 to 2019 to 2020. And we're basically saying you don't push 20 down yet in your models because we we'll see what happens. But right now we think 2019 is going to come in a couple of $100,000,000 under what we said which is just good by the teammates here is good management.
We didn't do anything. We didn't pull any lever. We just kept driving the basic efficiency of this platform through, and we'll continue to do that. And if that comes in to be lower than the number we're talking about for 2020 and we get there, it's going to go to you. But importantly, as we shouldn't change our investment strategy, our belief and our Board's belief and our shareholders' belief, frankly, is don't change your investment strategy because right now you're seeing the market share accumulations come that you wouldn't change to pick up expenses by $100,000,000 in a quarter.
A penny wouldn't make good, but the investments are long term strategic drives that are happening. And just on the Investment Banking, adding 50 middle market investment bankers and adding doubling that again over the next couple of years, those are paying us
back. Okay.
That's helpful. And then just separately the CCAR ask and approval impressive of the $30,000,000,000 as you mentioned earlier. Do you plan to use all of that? And should we assume the timing, if you do plan to use all that is spread even? Or do you have flexibility to front end it if you wanted to?
Yes, we plan to use all of it and it's spread equally over the quarters under the way the method works and sort of the guidance they give you. So it's spread evenly over the 4 quarters and yes, we plan to use 100% of it.
Okay. Thank you.
We'll now go to Ken Usdin with Jefferies. Your line is open.
Thanks. Good morning, guys. Brian, you mentioned in your opening remarks just how strong credit is and expected to continue. And you guys have talked about charge offs kind of living in the $900,000,000 to $1,000,000,000 range a quarter. We went under that even this quarter.
So can you just talk about, is there any reason why we should see any change in this kind of 900 ish run rate even with card losses or barely even moving as is? Just an update on what you're expecting would be great. Thank you.
I'll let Paul hit that one just because he talked about it. Go ahead, Paul.
So you're right. I mean net charge offs were lower than $1,000,000,000 this quarter, but that's because we wrote back up charge offs we took earlier associated with the loans we sold this quarter. So if you back that out, it's approximately $1,000,000,000 of net charge offs. And that number, we think, is a good number. Approximately that number, it will bounce around because we're bouncing around the bottom on commercial.
So one commercial client or another can always move things. But it's been $1,000,000,000 now or up to $1,000,000,000 now for many, many, many quarters. And if we see the environment stays the way it is, that's what we think it's going to be.
And then provision will follow that. And you think about it, card's the number, right? And if you look at our lag charge off rate, because sometimes growth we're basically consistent with our current charge off rates, so the stable portfolio, stable credit. At the end of the day, it's 80%, 90% of all the activity, and you've seen that basically be fairly consistent. And this year is the lowest increase in card year over year since 2013.
So that prime focus book, that primary customer account basis through the combined rewards program leads to a very, very strong customer base there. So we feel good about credit and our view of the economy continues to move along in the low to mid-2s is what the research team has and then next year around 2. And given that, we would not see a change.
Okay. Got it. And my second question is just on the preferred stack. You guys did some issuance and I think some either pending or calls. Can you talk about just at least where you expect the preferred dividend to land going forward and is there more opportunities to refinance that part of the capital stack?
Well, we never really like to talk about planned stuff. But in terms of the preferred stack, we're going to end up roughly in the same place where we started because we're just reducing the cost of that preferred stack by calling some higher yielding preferreds and replacing the lower yielding preferreds. So in terms of the dividends in the Q1 and the Q3, we're kind of approximately in the $4.40 range. And in the Q2 and the 4th quarter, we're kind of in the 2.40 range. That could fluctuate a little bit because it's based upon some of them are based upon floating rates.
But on the other hand, some of those get
floored after a while as well.
Got it. Okay. Thank you.
Thanks. Thank you.
Our next question comes from Gerard Cassidy with RBC. Your line is open.
Good morning, Gerard. Good morning, guys. How are you? Paul, I may have missed this. I apologize if you addressed it already.
Can you share with us how you're managing the CET1 ratio with the stress capital buffer that may now be included in next year's CCAR? Have you guys run the numbers and where does your CET1 ratio come out comes out under that SEB?
Well, our CET1 ratio ratio right now is 9.5%. And we don't know what the final rule is going to be yet. But if you look at the past 4 years and you run using those scenarios, CCAR scenarios, our SCB would be below the 2.5% floor in 3 of the last 4 years. And that's just a reflection of responsible growth and how we run the company. We've got loans to consumer that are prime and super prime.
We've got very prudent training and we've got a legacy portfolio that's running off. So we're below we've been below for 3 out of the last 4 years. And to be clear, the
CET our CET1 was 11.7% and our minimum requirement, which is what he was referring to, is the 9.5%.
Very good. And then Brian, I know you talked about the economy from what the research has said at Merrill Lynch, But can you share with us what your business customers are saying to you about their outlooks? Obviously, the consumer numbers speak for themselves. We all see the employment numbers, which are very strong. But what are you guys seeing both in small business and midsize and larger businesses?
So the core loan growth is strong. The usage of lines is good. It's running near the high levels and stuff. So the activity is there. I'd say that depending on the type of commercial customer, the more they're in the global trade international supply chain, whatever words, the more they have China slowed down.
If that's 20% of business, they're dealing with that. But they're all sanguine. They all feel good. They all would wish the discussions of trade would come to a resolution and reestablish the relationships and the flows because the fact that the current impact is one thing, the fact that the belief that there's future impact. So I'd say they're optimistic.
They're struggling to get people because that's the thing we're lacking in the U. S. Especially. They see their business plans not being as robust as they were in 2018, but still solid growth. But they continue to watch the headlines daily trying to figure out if these situations will resolve.
And I think there's pent up enthusiasm if these situations start to fall in place that you'll hear more investment in business and things like that. On the other hand, there are the indices in our surveys about their confidence are basically more consistent where they were as they were coming up to the peaks they hit in 2018 right after tax reform I. E. Where they were in 2017. So they've kind of come down a little bit, but the levels are as high as any time they've been other than there's tremendous business enthusiasm came out of the year end 2017 and early 2018 between regulatory reform and tax.
That has been mitigated by the trade discussions and uncertainty around them. But overall, they're solid. And I think they're sort of waiting for this to resolve and then they'll get back and they'll push back on accelerate again. Right now, they're staying within the speed limit, let's just say that. Thank you.
And we'll now go to Brian Kleinhanzl with KBW. Your line is open.
Great. Thanks. Yes, just a quick question on the NII sensitivity that you gave. What were the deposit beta assumptions behind those? Are you being conservative?
Just trying to get a sense there.
Sure. So again, the way to think about it and I'll give you a little bit more detail, but just to get the concept down, we've got GM clients, we've got Global Banking clients. The pass through rate in an up and down scenario are roughly similar. Then we've got a consumer franchise where we have not passed through a lot of rate increase in the form of rate paid. That's obviously going to have a different sensitivity in the up scenario than in the down scenario.
That's just the basics. So if you look at the pass through rate and the down scenario on average, we're talking approximately 40%. And again, consumer would be a lot lower, G Women Global Banking would be a lot higher kind of in the kind of 60%, 65% range.
Okay, great. Thanks.
Thank you.
And we'll now go to Kevin St. Pierre with KSP Research. Please go ahead.
Hi, good morning. Thanks. Going back
to the mobile and digital trends, which are obviously really strong, but looking backwards over the last several quarters, your tech spend has been pretty flat. Now you mentioned that tech spend is likely to increase. Is that a reinvestment, constant investment in the mobile and digital channels?
Yes. We've been consistent. It's been I think what I said is we elevated tech spend after tax savings and then we've been relatively consistent. One of the things I'd say that we're receiving a benefit as we think about that number. If you think about the combination of the money spent on Brexit, the broker dealer separation for resolution planning and a bunch of other initiatives like that, we can reposition that money more towards offense over time and that's been good.
And as we look forward to the next couple of years, a flat number actually provides more pop for lack of better term and our teammates are always happy to hear that. But these things are impacts that compound. And so I'll give you an example. If you look at digital mortgage, which the $3,000,000,000 were digitally originated this quarter of 2018. So it's growing.
But it took us a year a little over a year to do the first $1,000,000,000 It took us 8 weeks to do the second $1,000,000,000 It took us 6 weeks to do the $3,000,000,000 So what happens with these implementations is that the technology investments made and then it ramps up. And what's really happening in digital mortgage, remember, is it's actually saving us a lot of money in the origination process as well as be a good client experience. And so you take that or take Erika which has now moved to several million customers. You can see with 50,000,000 interactions 1st year, but each month it's growing. Business small businesses went out and it's going to 50% a week type of numbers even though we haven't told people it's out there and things like that.
And so Zelle growing $100,000,000,000 year over year, checks written are coming down more effectively. All this really points to the compounding effect of that digitization. So that consistent investment, we're under the benefits 2, 3, 5 years out and that's what we're driving at. So we'll be consistent on investment. There's only so much you can do.
We do about 1,000,000 lines of code in every weekend and conversion, so to speak. And there's you've got to be careful you don't have a problem. And we've knock on wood Cathy and the team have done a great job and we haven't seen any issues that we've implemented tremendous new codes so to speak over the course of years here. And so we are bound more by what we can get done and getting the benefits out of it than we are by money.
Great. And I noticed the digital appointments continue to grow really strongly. Are you at a point where and I noticed that sort of year over year and sequentially your financial center numbers are pretty stable. Can we assume that the foot traffic that's being driven makes you think that you're at the right critical mass of financial centers or can we expect over time continued consolidation and rationalization there?
We will see the numbers not be as dramatic from the 6,100 to the 4,300 obviously. But it's a complete distribution system. So the ATMs have gone from 16,000 up to I think 18,000 or something that number now. Braces have come down. The tracks the branches are completely different.
They're bigger. They have more people in them. People go to them because of more complex needs, etcetera, versus take the transaction side to take the check and deposit. So we're driving more co location. But if you think about the real interesting news is remember at the end of the day, we have the number one retail deposit share in the United States.
We're growing faster than anybody else, but we're still not in several markets in the top 30 markets and that's what we're building out whether it's Indianapolis, whether it's Minneapolis, whether it's Denver, whether it's now Cincinnati, Columbus and we are in Pittsburgh and there's many other cities in the top 30 and top 50 that we have to figure out how we drive a configuration against them over the next piece of time here. So the actual branch count may have different elements than you would have thought going back to the constant down. But you see it drift down a little bit net net net because even in major cities, the consolidation branches into bigger enterprises, the co location with Merrill teammates or business banking teammates or small business teammates and private banking teammates is part of the drive. So don't get so focused on that. What I would get focused on is actually the cost of operating the platform.
And if you look at that year over year, it fell by 4 basis points as a percent of deposits. That is phones. That is everything. And if you think about that, if you add that in the cost of deposit rate paid, you're basically flat year over year in total cost of goods sold, for lack of better term, to produce this wonderful transaction, franchise and consumer, and then you throw the loans franchise on top of it and the investment franchise on top of that. It is a powerful engine, but it's a combination of everything that we that I just talked about not 5 less branches or 4 less this.
Great. Thanks very much.
And we'll now go to Vivek Shneja with JPMorgan. Your line is open.
Hi. Thanks for taking the questions. A couple of questions. Firstly, since there was you pointed out Brian and Paul a couple of times about making sure that we take account of the fact that your NII guidance is based on over and above the forward curve. So let's step back given that that may not be as realistic or likely to happen.
What is the outlook for NII if the forward curve is realized when you look at over 12 month period? I know you've given us second half, but since these things are not linear, can you give us a sense of what would that be on NII what would NII do with the forward curve being realized?
I'm not sure I quite follow your question Vivek, but just to be very clear. The activity of the company, those disclosures that you read in the Q, that is in excess of the forward curve. When we were talking about earlier in this call, somebody asked about what was the next 25 basis points and we went through what we thought the impact of that was.
Great. And I think Paul's statements earlier in the prepared remarks are exactly what you're saying, which is stable rates and follow the forward curve for the rest of 'nineteen and he gave you the 3% to 2% to 1% growth 2018 to 2019.
Right, right. No, you give that for 2019 and I'm I guess asking for a fuller 12 months rather than just simply the second half Brian?
Well, we said that as we watch what happens over the next few months, we can do better. We'll have a better view of giving you 2019 2020 excuse me. But you think of the run rate exiting 2019 at that level and you can add 2 more quarters to it. But loan growth, deposit growth, whether the cut comes, when it comes, those are all factors in there. So I think Paul said, we'll talk about that next quarter when we know a little bit more.
Okay. Okay. So let's move to another one. Residential mortgage loan growth accelerated sharply this quarter far more than we've seen in the last couple of years actually probably in dollar mark double of what you've seen in any quarter. And that's despite lower rates and more refi.
So are you holding on to some conforming? Or is there such a sharp increase in jumbos?
We have held all mortgages for 6, 7 years now. Meaning even the conforming? We sell the we basically sell the FHAVA that and everything else goes on the balance sheet because frankly the risk in our mortgage portfolio isn't worth passing to someone to take the risk away from us. And so the increase is just due to purely the origination platform basically went from $8 odd,000,000,000 last year second quarter to $18,000,000 this quarter, maybe $9,000,000 last year. So that all goes on and increases the growth rate.
And then we're not also in the aggregate sense, remember we're not selling as much out of the portfolio in the current environment. But we have not sold mortgages to the secondary market for years other than the FHAVA.
And remember, we're focused on prime and super prime. These are our customers. We feel good about the risk.
Okay. Got it. One tiny detail. Tradeweb game, I know $200,000,000 was the amount you gave. Is that included in other income or is that actually in trading?
That was not included in the external sales and trading numbers that we presented in the that I discussed today and we presented in the materials. It's in other income in global markets. So it's in their revenue, but not in civil and trading.
Okay, great. Thank you.
Thank you.
We'll now go to Andrew Lim with Societe Generale. Please go ahead.
Hi. Thanks for taking my questions. I'm just looking for a bit more color on the net interest, sorry, the deposit side in terms of mix and rates. So, this is related to Slide 9. So, we see here non interest bearing deposits struggling to grow, interest bearing deposits growing quite nicely.
And that's very much emanating to what's going on in the global banking side. So just wondering if you can talk a bit more about competitive dynamics as to why it's a bit more difficult to grow your non interest bearing deposits, especially on the global banking side? And then my second question is relating to the interest bearing deposit side. So if we looked at a settlement, then the interest rate paid has gone up by 4 basis points. Could you talk about what's driving that?
Is that simply the beta is going up there? And then how would you expect that to develop in the declining rate environment? And then my third question is that your interest rate guidance and on the yield, is that based on a static deposit mix? Or do you take into account some further mix shifts as we've seen there?
Okay. Well, let's start with non interest bearing deposits.
You'll have to
help me remember your questions as we go through here. So on non interest deposits, we are growing non interest bearing deposits in consumer. We're growing low interest checking in consumer. Those are that's really where you find conceptually the non interest bearing deposits from the company. In Global Banking, we have interest bearing deposits and non interest bearing deposits.
But remember, we pay an ECR on the non interest bearing deposits. The as interest rates rise, corporations that were very comfortable leaving excess funds in their non interest bearing account when rates were lower, they just get a little bit more careful and they only leave what they in their non interest bearing accounts what they need to do their transactions. Think about it as like the daily sort of transactions that those clients need to do. And any excess liquidity, they are probably pushing into non interest bearing. Plus outside the U.
S, they don't really have the concept of non interest bearing and interest bearing. It's all interest bearing. So what you should focus on is the fact that we grew deposits in Global Banking 12% year over year. That reflects the sophistication and value we're bringing clients from that treasury services platform and it reflects the bankers we've added and the relationships they have in the U. S.
And around the world, 12% growth in economies going at 2% feels good to us. So that's how I'd answer the first question. What was the second question?
The rates on your interest bearing deposits, so if we look to your settlement disclosure, then I think we're looking at say U. S. Interest bearing deposits, the rate going up 4 basis points from 73 to 77?
Yes. I mean, that is probably just reflects the mix shift that we've just been talking about in Global Banking. That's a there wasn't a lot of increase, other than maybe a little bit of exception pricing in Consumer. GWIM, I think, was relatively flat. And in Global Banking, when you have a mix shift, you're going to see since more deposits are going into the interest bearing, you're going to see an increase in the overall deposit rate of the company.
And would you expect that mix shift to continue going forward?
I don't know if it's going to continue. It depends on the rate environment, Todd.
Remember, it really is a question of looking at the different businesses because consumers had checking growth 41 consecutive quarters. So you should expect the trends there to continue, like we said earlier in the call. With the institutional business, the Global Banking business, as rates moved, you saw a movement and then that movement will stabilize as rates stabilize. Or if they come down, you actually see the thing come back the other way a little bit. And if you look in the Wealth Management, it's sort of halfway between and you have to then think about the use of cash.
Some is transactional, some is investment oriented, either trying to get a yield on it and where people put money depends on that and that becomes more exacerbated, more prevalent in the wealthier part of the consumer client base than in obviously institutional client base. So we do use when we make our estimates, I think was the 3rd part of your question, we estimate mix as deposits, deposit growth by category, deposit growth by business line, deposits and we think of all that and all that's factored in into the question Paul discussion Paul had with you. I don't want to be stubborn here, but you got to remember that you back up and think about it, dollars 70,000,000,000 of deposit growth all at a hugely advantaged cost of funds all with core customers is what we drive in this in one part of our business here. That is a tremendous impact and half of it from the consumer side and then $20,000,000,000 in checking in our own consumer deposits segment. These are massive growth engines that exceed the size of many institutions.
That's great. Thanks very much.
Our last question today is a follow-up from Mike Mayo with Wells Fargo Securities. Please go ahead. Hi.
Your AOCI, I guess, it got better by what $2,500,000,000 late quarter, so that's good. You guided for lower NII growth this year. Investors don't necessarily like that. So I guess I'm asking you this environment with lower interest rates, I know investors don't like guidance lower for spread revenues, But how do you think about it? Because while you have lower guidance for spread revenues, you also have better values of those securities, better AOCI, better capital and better book value.
So when you look at that trade off, how do you think about it? Do you think of monetizing from those securities gains? Do you get as worried as investors? Do you say, hey, this is fine. We look at the economic value of the firm.
We're not paying attention to a few basis points here or there?
We look at the long term, Mike, as you're well aware and going back to your earlier question. So we always look at what's the most efficient use of all the dynamics you talked about. But we're not here to trade the balance sheet. We're here to let the customer activity come through it and then optimize that for the shareholder. But and so the AOCI came up this quarter.
People always forget about that. That's the offset to the NII debate with lower rates going forward is the current long term securities you have are towards more and we invest every quarter about half treasuries, half mortgage backed and those treasuries are now advantaged when from the last whatever period of time. And so we don't try to say let's try to get a penny here as you said because at the end of the day we're driving that long term value of the franchise. So I think the spirit of your question is, do you manage a company for the long term value? The answer is absolutely yes.
And do we are we mindful of trying to optimize things on a given day, month, week, quarter? Yes. But the reality is, is that we always make the decision for long term value of the company. And the real solve here that you've referenced is our capital keeps growing even though we're returning 100% of it and we have an excess for many of the constraints in the CCAR that is tens of 1,000,000,000 of dollars and we're going to return part of that. That's driven by how we run the company for the last decade not how we ran it this week and we're getting the payback for that.
And then last follow-up. Just this whole discussion of low interest rates assumes that maybe
we're going to head into
a recession, maybe activity is slowing down. You have better data than we have. So what's your read on the economy? What's your overall read just on the conditions for you to do business?
We don't see any in this year. If you think of the U. S. Economy is 2 thirds driven by the consumers. And if you think about the employment levels, the job counts, you think about the wage growth, you think about the wage growth in our firm, which exceeds the national averages by 2 and 3 times.
A lot of my peers I talk to and probably in our industry outside is that wages are paying their teammates are much higher, they're sharing the benefits of their success. We do not see anything that says the U. S. Consumer in our business is spending 5% more than plus than they did last year for the Q2. It has grown Q1, Q2 is accelerating and we are borrowing in good shape.
We don't see anything consistent with a recession. What we can see is it's consistent with a 2 percent plus growth rate versus a 3% growth rate largely due to the impacts of some of the benefits of tax reform and other things running through the economy last year. And so we feel very it's very solid. And so yes, there's a slowdown, but that slowdown was predicted by everybody. And now you're seeing it evidenced, but you're actually seeing it pick up a little bit in the consumer side from Q1 to Q2 and we'll see how that plays out Mike.
All right. Thank you.
We have no further questions at this time. It is now my pleasure to turn our call back over to Brian Moynihan for closing remarks.
Thank you very much for your time and your interest in our company. We had a strong quarter of record earnings. We have continued to manage it the right way, growing responsibly by driving customer growth, by managing the risk well and by investing in the franchise on a sustainable basis. We'll continue to do that. We're monitoring environment as the question Mike just said in terms of focused on any industry we see where we have to change the operating model.
But we continue to deliver good shareholder value and plan to push the capital back to you that comes off this wonderful franchise that we have. Thank you.