Good day, ladies and gentlemen, and welcome to the Bank of America 4th Quarter 2017 Earnings Announcement. Currently, all phone lines are in a listen only mode. Later, there will be an opportunity to ask questions during a question and answer session. Please be advised today's program may be recorded. It is now my pleasure to turn the program over to Mr.
Lee McIntyre. You may begin, sir.
Good morning. Thanks to everyone for joining this morning's call to review our 4Q 'seventeen results. Hopefully, everyone's had a chance to review the earnings release documents on the Investor Relations section of our bankofamerica.com website. I'll just remind you, we may make some forward looking statements in the discussion today. For further information on those, please refer to either our earnings release documents, our website or our SEC filings.
Brian Moynihan, our Chairman and CEO, will make some opening comments Paul D'Onofrio, our CFO, will review the 4Q results and then we'll turn it back over to Brian for just a few thoughts on the company as we head into 20 18 before we open up for questions.
Brian, take your questions. Sure, Lee. Thank you, and thank you, everyone, for joining us today. Good morning. This was another strong quarter and year for our company across the board.
We drove positive operating leverage consistently through the year. In fact, this is a 12th straight quarter where we have had reported a positive operating leverage on a year over year basis, and you can see that on Slide 3. And we did it the right way. We achieved it through fundamental operating excellence, driving revenue controlling expenses, combined with strong relationship and sales production. Full year revenue was up 5%, excluding the Tax Act impact, while expenses declined 1%.
Our business generated 6% loan growth for the year. We grew and remained true to our responsible growth operating model where there's a clear recognition throughout the company of who our targeted customers are and how we manage risk in our desired outcomes. Let me highlight a little of the progress. For the year, we reported $18,000,000,000 in after tax net income, Excluding the Tax Act impact of $2,900,000,000 we would have reported net income of $21,000,000,000 which is up 18% over a solid 2016. This represents the highest earnings run rate for the company in its history.
Paul will discuss the Tax Act impact in a little more detail later. Our company remains balanced with earnings coming relatively evenly from our Consumer and our Commercial Institutional segment businesses. On our More Businesses for People, our Consumer businesses and our Wealth Management businesses, together, they earned more than $11,000,000,000 and grew 14%. Where our Global Banking and Global Markets business together generated about $10,000,000,000 and they're up 7%. Excluding the Tax Act impact, our return on tangible common equity was 11%, and the return on average the return on assets was 93 basis points, pushing close to our long term targets.
Across the board in our businesses, our brand improved in every area recognized by many outside parties. And through a higher stock price and improved credit ratings, we saw tangible benefits of our progress. Shareholders not only saw share price improvement, but we saw we increased our dividend by 60% and reduced our fully diluted share count during the year by 3.4%. Average diluted shares were down $370,000,000 from this time last year and down nearly $1,000,000,000 from the peak. With an improved CCAR plus our additional $5,000,000,000 we'll continue to make progress in this At the core of our model is a talented group of teammates, our best assets.
Therefore, we continue to invest heavily in making our company the best place for our teammates to work. Not only do we continue to rank high in overall list of best companies to work for, we rank in the top fifty list of best workplaces for diversity, for parents, for working mothers and Hispanics, among others. You can see some of these accolades in a couple of the appendix slides we added to the package this time. This year, we also invested heavily in our teammates some improvements in starting minimum wages at where we put them at $15 this time last year. We had more we introduced sabbatical, family leave increases, bereavement leave policy extensions and wellness initiatives.
This lays an example of our announcement at the year end, we were able to provide nearly 70% of our teammates the bonus to share in the future success of the expected benefits of the tax savings. As Paul explained, this added about $145,000,000 in expenses in the 4th quarter. We did all this while investing to continue to lower our cost to make so we can make more money in our franchise. We also lowered costs when we continued our investments in digital capabilities security protection for our customers, which show in our online and mobile banking leadership rankings. We also rolled out digital shopping capabilities in auto and in home.
We're also heavily investing in capabilities of our investment clients across the wealth management spectrum through our award winning digital brokerage capabilities as well as our treasury capabilities for our commercial clients. Our Consumable Mobile Banking app became the first app in the Apple App Store to be certified by J. D. Power. We know there is much more to do to continue to drive this positive change in our company and for the benefit of our customers and clients.
So we as a team are proud of the outcome to date for sure but even more proud that we are proving that we can win and do it the right way through driving responsible growth, and we plan to do that in the future. With that, let me turn it over to Paul to give you comments on the quarter.
Thanks, Brian. I want to go back to Slide 2 to start. We reported net income of $2,400,000,000 or $0.20 per diluted share in Q4. Late in the quarter, we informed investors through an 8 ks filing that we expected an impact of approximately $3,000,000,000 from the tax passed. Our estimated impact came in just shy of 2,900,000,000 dollars lowering EPS by $0.27 Remember, the Tax Act is complex with several novel provisions.
Any clarifying guidance or new information could affect our estimated impact. And as noted in our materials, the impact was recorded in 2 places. 1st, in other income, there was a charge of approximately $950,000,000 to revalue certain renewable energy investments. Within the income tax line, this pre tax charge was offset by the tax benefit of this $950,000,000 charge plus the revalue of certain deferred tax liabilities associated with these renewable energy investments. In total, the tax line includes 1,900,000,000 dollars aggregate expense for the multiple impacts of the Tax Act, including the tax benefit of the charge for new energy investments that I just mentioned, as well as the revaluation of our deferred tax assets and deferred tax liabilities.
In our materials, we provide a chart reflecting results on a basis that excludes the tax impact. We believe this provides a more clear comparison to Q4 'sixteen. On that basis, net income was $5,300,000,000 with EPS of $0.47 per share, growing 20% year over year. Return on tangible common equity was 11 percent, return on assets was 90 basis points, operating leverage year over year was a strong 8%. Revenue was $21,000,000,000 improving 7%, and 11% improvement in net interest income drove revenue growth.
Expenses declined 1%, which included roughly $200,000,000 for the share success bonuses in late December that Brian mentioned, plus an acceleration of planned charitable contributions in late December as we looked to share some of the future tax savings with our teams and the communities we serve. Provision expense was $1,000,000,000 up $227,000,000 driven by a $333,000,000 impact from the charge off and reserve bill for a single commercial exposure. Negative news reports on that company caused significant market concerns, which affected the credit spreads and stock price of this formerly investment grade credit. Despite downgrades of this credit, both non performing loans and criticized commercial exposures declined from Q3. And excluding this specific loss, net charge offs remained very low.
Turning to the balance sheet on Slide 4. Overall, compared to September 30, end of period assets of $2,300,000,000,000 were mostly unchanged. Loans grew $10,000,000,000 but were offset by a $14,000,000,000 decrease in cash. On the funding side, strong deposit growth from Q3 of $25,000,000,000 was offset by reductions in market funding and lower equity. Debt levels were stable with prior period.
However, we did complete an $11,000,000,000 debt exchange offer in the quarter, which extended maturities and improved the structure of this debt from a TLAC perspective. Liquidity remains strong with average global liquidity sources of $522,000,000,000 and we ended the quarter with a liquidity coverage ratio of 125%. Equity decreased $4,800,000,000 from Q3. This quarter, through the purchase through both the purchase of our common shares and common dividends, we returned more than $6,100,000,000 to shareholders. That was $4,000,000,000 more than the $2,100,000,000 in income available to common, which included the $2,900,000,000 Tax Act charge.
The remaining decline in equity was mostly a result of the decline in OCI as increases in loan end rates decreased the value of our debt securities portfolio. We purchased 174,000,000 shares in Q4 and have repurchased 509,000,000 shares in the past 12 months. Remember, this quarter we received approval for 5,000,000,000 in share repurchases in addition to our previously announced $12,900,000,000 following CCAR. Tangible book value per share of $16.96 was modestly above Q4 'sixteen as earnings over the year, including the Tax Act impact, offset share repurchases and dividends as well as the conversion of Berkshire's preferred stock to common shares. Turning to regulatory metrics and focusing on the fully phased in impacts, our CET1 ratio declined this quarter.
The primary cause of the decline was a return of capital to shareholders in excess of earnings, which obviously included the Tax Act impact. Focusing on risk weighted assets and starting with the advanced approach, RWA was flat from Q3 at 1.46 $1,000,000,000,000 as DTA reductions and the runoff of legacy loans with high risk weights offset general loan growth. Under the standardized approach, where risk sensitivity is less, funded and unfunded loan growth across the businesses drove a 22,000,000,000 dollars increase in RWA. The CET1 ratio under advanced declined 34 basis points to 11.5%. Under standardized, the ratio declined 53 basis points to 11.7%.
Both ratios remain well above our 9.5% requirement and supplementary leverage ratios continue to exceed U. S. Regulatory minimums. Turning to Slide 5. On an average basis, total loans increased to $928,000,000,000 Note that the Q2 sale of UK Card, which was recorded in all other, impacted the year over year comparisons of average loans by $9,000,000,000 In Q4, we also sold our remaining student loan and manufactured housing loans totaling approximately $800,000,000 Adjusting for these sales, average loans were up $29,000,000,000 or 3% year over year.
Loan growth continued to be dampened by the runoff of non core consumer real estate loans in all other. Year over year loans in all other were down $29,000,000,000 inclusive of the loan sales. On the other hand, loans in our business segments were up $49,000,000,000 or 6%. Consumer Banking led with a 9% increase with solid growth across mortgage, credit card and vehicle loans. Wealth Management strong growth of 7% was driven by mortgages and structured lending.
Origination of new home equity loans continued to be outpaced by paydowns. Growth in Global Banking loans and leases remained solid, up 4% year over year. Switching to average deposits and looking at the bottom right, growth was $43,000,000,000 or nearly 3.5 percent year over year. This growth was driven by consumer banking, which increased by $48,000,000,000 or nearly 8 percent year over year. Average deposits declined year over year in wealth management as clients moved cash to other alternatives within brokerage or AUM.
This decline was mostly offset by solid growth in Global Banking. Turning to asset quality on Slide 6. Total net charge offs were $1,200,000,000 or 53 basis points of average loans. As mentioned, the quarter was impacted by the 1 large single commercial charge off. Excluding the single loss, net charge offs and the net charge off ratio were consistent with Q3.
Also, due largely to this commercial loss, provision of $1,000,000,000 was up $167,000,000 from Q3 2017 and $227,000,000 from Q4 2016. Provision expense included a $236,000,000 net reserve release. The net reserve release reflects continued improvement in our legacy consumer real estate and energy portfolios. Our reserve coverage remains strong with an allowance to loan coverage ratio of 112 basis points and a coverage level 2.6 times our full year net charge offs. On Slide 7, we break out credit quality metrics for both consumer and commercial portfolios.
With respect to consumer, net charge offs of $769,000,000 were up $38,000,000 from Q3. The modest uptick in net losses is negatively impacted by the absence of some prior period recoveries, the Q3 2017 storm related payment deferrals and seasonality. The consumer credit card net charge off ratio increased to 2.78% as the portfolio continues its expected seasoning. Consumer NPLs of 5,200,000,000 declined from Q3 and are at the lowest they've been since Q2 'eight. And 45% of our consumer NPLs are current underpayments.
Commercial losses, excluding the one large credit already discussed, were stable. Reservable accretive exposure was down more than $1,000,000,000 from Q3. Turning to Slide 8. Net interest income on a GAAP non FTE basis was $11,500,000,000 $11,700,000,000 on an FTE basis. Compared to Q4 'sixteen, GAAP NII is up $1,200,000,000 or more than 11% driven by the spread improvement between our asset yields and funding cost.
Partially offsetting the spread improvement is the lack of interest income associated with the UK card portfolio, which was sold in Q2 2017. The increase year over year was also driven by growth in loans and other securities as well as lower prepayments and therefore lower bond premium write offs. Focusing on the net interest yield, it improved 16 basis points from Q4 'sixteen to 2.39%. Compared to Q3 2017, NII increased $300,000,000 driven by loans, securities and asset growth in global markets, as well as a run up of short end rates in anticipation of the Fed Funds high. With respect to the positive pricing, we raised rates modestly on selected wealth management products as well as for certain commercial clients.
Consumer rates paid remained stable. NII on a full year basis grew 3.6 $1,000,000,000 or 9 percent to $44,700,000,000 In 2018, we expect solid NII growth driven by loan and deposit growth and some net interest yield expansion, assuming the forward curve plays out as currently expected. But I would remind you that 2017 included approximately $500,000,000 of interest from the UK card business that we sold. This will be a significant offset to NII growth in 2018. In 2018, we also don't expect the same full year benefit from the reduced premium experienced in 2017, given the increase in rates that borrowers have already experienced.
More short term, as you think about NII in Q1 'eighteen, we expect to benefit from the December rate hike. Having said that, remember, there will be 2 less days in Q1 than Q4. That should reduce NII by approximately 100 and $75,000,000 Also, NII from loan growth in Q1 is normally muted by seasonal declines in card loans. One other item worth noting as you think about Q1, the Tax Act will lower NII on an FTE basis because the NII gross up will be lower. However, remember, NII gross up on an FTE basis is completely offset by higher tax expense, resulting in no change in earnings.
Still, on an FTE basis, NII is expected to decrease by approximately $120,000,000 each quarter. On a GAAP basis, again, NII is not impacted. With respect to asset sensitivity, as of twelvethirty one, an instantaneous 100 basis point parallel increase in rates is estimated to increase NII by $3,300,000,000 over the subsequent 12 months. This is largely unchanged from September 30 and approximately 2 thirds driven by our sensitivity to short term rates. Turning to Slide 9.
We had another solid quarter of expense management. Note this quarter includes an accounting change for the retirement eligible incentives. Previously, this expense, which was historically just over $1,000,000,000 was recorded in Q1 when awards were granted. We will now record we will now account for an estimate of next year's grant ratably over current year's 4 quarters. Prior periods in this quarter's supplemental materials have been restated for this change.
Non interest expense of $13,300,000,000 was down $140,000,000 or 1% from Q4 'sixteen. Note that this amount includes the 2 actions, which totaled approximately $200,000,000 that I mentioned earlier to share future tax savings with lower paid employees and the communities we serve. Excluding these discretionary actions, expenses were down 2%. In addition to cost savings associated with
the sale of our U.
K. Card business, year over year improvements in non interest expense were broadly distributed across expense categories as we continue to focus on SIM, understanding and improving our work processes and optimizing the company's consumer delivery network. We expect these benefits over the medium term to drive efficiencies that will help us offset inflationary costs and potentially increases in investments. Compared to Q3 2017, expenses declined by $120,000,000 despite the late quarter discretionary spend. The decline was driven by lower mortgage servicing costs and lower revenue related incentives in our global markets business.
Excluding the Tax Act's impacts on revenue, our efficiency ratio of 62% was above our target, reflecting the typical seasonal weakness in our sales and trading business. Okay, turning to the business segments. And starting with Consumer Banking on Slide 10. Q4 caps a tremendous year for this business. On a full year basis, earnings were $8,200,000,000 growing 14% over 2016 with operating leverage driving the efficiency ratio to 50% by the end of the year.
Focusing on Q4 results, earnings at $2,200,000,000 grew 14 percent year over year and returned 24% on allocated capital. Year over year, this business created over 600 basis points of operating leverage as revenue growth of 10% outpaced expense growth of 4%. Higher interest rates and growth in client balances drove the year over year improvement in revenue. Year over year, average loans grew 9%, average deposits grew 8% and Merrill Edge Brokerage assets grew 22%. Cost of deposits, which reflects non interest expense as a percent of average deposits, increased modestly because of year end discretionary actions mentioned earlier to share future tax savings with lower paying employees and the communities we serve.
Net charge offs increased $107,000,000 from Q4 2016 as we continue to experience modest and expected seasoning of our credit card portfolio and loan growth. Provision expense increased to $126,000,000 in Q4 'sixteen and net charge off ratio remains low at 1.21%. Turning to Slide 11 and looking at key trends. As I mentioned earlier, revenue increased 10% year over year. Within revenue, mortgage banking income was the only major category that was lower year over year driven by volume declines.
In Q4, we retained about 90% of our 1st mortgage production on the balance sheet. Looking at revenue more broadly, we believe our relationship deepening deferred reward program is improving NII and growth of balances and allowing cost savings. These benefits are more than offsetting headwinds in the non interest income line that our industry is facing. Spending levels on debit and credit cards were up 7% year over year, and we issued 1,100,000 new credit cards in the quarter, in line with last year. Spending levels and a one time partner rebate drove a 5% revenue increase in card income, which continues to be impacted by strong competition on the rewards front.
Service charges were up a more modest 1%. And in 4Q, we modestly revised our overdraft policy by eliminating certain fees. This revision reduced overall fees, but has benefits in that it will improve customer satisfaction while helping to lower servicing costs. By the way, customer satisfaction in consumer banking reached an historic high with roughly 80% of our clients rating us 9 or 10 on a 10 point scale. Focusing on client balances on the bottom of the page, you can see the success we've continued to have growing deposits, loans and brokerage assets.
We remain focused on prime and super prime borrowers with average booked FICO scores of at least 760. Expenses were up 4% compared to Q4 'sixteen as the year end special bonus impacted this business more heavily than others. Otherwise, investments in renovating branches and technology initiatives modestly outpaced continued optimization and saving from digitalization.
To give you
a sense of the type and level of continued investment in our financial centers, let me highlight a few facts. During 2017, we opened 30 new financial centers with 25 of these in de novo areas not previously served by our retail network, but in areas where we have existing wealth management and or commercial banking presence. We also opened 41 student centers and 69 lending centers and branded 585 Merrill Lynch officers. We also renovated nearly 300 financial centers and replaced more than 3,400 ATMs. Turning to Slide 12 and focusing on the continuing improvement in digital banking trends.
As you can see, the year over year growth in these metrics continues to be impressive. We remain the leader in digital banking. We now have nearly 35,000,000 digital users, including 24,000,000 assessing their accounts through mobile devices. We process payments for customers valued at $669,000,000,000 in Q4. Annualized, that equates to over $2,500,000,000,000 per year.
And note the 10% growth of digital payments relative to non digital at 1%, as customers continue to migrate from cash and check, helping us improve efficiency and reduce risk. In particular, note P2P payments increasing. They doubled from Q4 2016 as the adoption of Zelle makes it easier to send request and even split person to person money transfers. Also note on the bottom left, the growth in mobile channel uses with 1,300,000,000 logins. Also noteworthy is the volume of mobile deposit transactions, which now represents 23% of all deposit transactions.
And while still small, half of all our retail direct auto loan applications are originated digitally following the recent rollout of our digital auto shopping capabilities last quarter. These digital trends and the investment behind them, plus the continued investment in our financial centers that I earlier listed, must be thought of together as you evaluate and we execute on our high touch, high-tech, high touch customer strategy. Turning to Global Wealth and Investment Management on Slide 13. GEO improved its earnings of $742,000,000 up 17% from Q4 'sixteen, a pretax margin of 26% and a return on allocated capital of 21%. Market appreciation and client flows were once again a tailwind for asset management fees offsetting modest spread compression.
At the same time, brokerage revenue continued to face headwinds as volumes declined and mix shifted. All in, revenue grew 7% year over year with strong NII improvement and 16% growth in asset management fees, partially offset by lower brokerage revenue. This activity, coupled with careful expense management, drove 4% operating leverage. This quarter, we saw AUM flows of $18,000,000,000 bringing flows for the year to nearly $100,000,000,000 Year over year expenses were up 3%, driven by revenue related incentives as well as investments in both primary sales professionals and technology. Moving to Slide 14, we continue to see solid overall client engagement.
Client balances rose to $2,750,000,000,000 driven by higher market values, solid AUM flows and continued loan growth. As we noted during reviews of previous quarters, clients started to more appreciably move deposits into cash investment alternatives within AUM and brokerage starting early in the year. In the second half of the year, trends improved after we increased rate paid on certain products. Average loans of $157,000,000,000 grew 7% year over year, continuing a trend of clients deepening their relationship with us. Loan growth remained concentrated in consumer real estate as well as structured lending.
Turning to Slide 15. Global Banking earned $1,700,000,000 dollars increasing 6% from Q4 'sixteen. Return on allocated capital was 17% and stable with last year, despite an increase in allocated capital. I want to talk about full year results for a moment to highlight the success of this business in 2017. On a full year basis, Global Banking set several records, including revenue of $20,000,000,000 and net income of $7,000,000,000 Full year earnings were up 21% on strong operating leverage.
Revenue grew 8%, while expenses were up only 1% as the business reduced overhead to offset increases in investments. And we added more than 400 new bankers over the past few years as we continue to deepen and expand local coverage in commercial and business banking. Returning to Q4 year over year comparisons, revenue growth of 10% was driven by improved NII reflecting solid loan and deposit growth compounded by rising short term interest rates. We also grew IB fees 16% year over year. Growth was led by advisory fees, but debt and equity fees were also up year over year.
The efficiency ratio improved 200 basis points to 43%. Provision expense of $132,000,000 increased from Q4 2016 as a result of the commercial charge off mentioned earlier. Half of the loss was recorded in Global Banking and half in Global Markets. Provision expense also included some release of reserves on our energy portfolio, which continued to improve. Growth of loans in Global Banking remained fairly consistent with the past several quarters increasing 4% year over year.
The outlook for loan growth, given tax reform, remains to be seen, but optimism among our clients is high. However, we also expect some of our clients to use repatriated funds and tax savings to pay down borrowings and other obligations. Looking at trends on Slide 16 and comparing to Q4 last year. With respect to average loans, growth of 4% was led by corporate borrowers, evenly balanced between domestic and international clients. Within commercial lending, C and I rose 5%, while commercial real estate was flat.
In Global Banking, loan spreads were down 1 basis point compared to Q3 'seventeen, continuing the trend we've seen all year, which modestly compressed spreads year over year by mid single digits. Average deposits rose $14,000,000,000 or 5% compared to Q4 2016 with most of the increase concentrated in the second half of the year, reflecting increases in rate paid in Q3 and Q4. As interest rates rise, the value of these deposits and the relationships they represent is best seen in global transaction revenue, which is up 10% year over year to nearly 2,000,000,000 dollars Total investment banking fees of $1,400,000,000 finished the year strong, growing 16% versus Q4 'sixteen. Advisory fees hit a new record. For full year 2017, we remain ranked number 3 in overall investment banking fees with fees totaling $6,000,000,000 up 15% from 2016.
Okay, switching to global markets on Slide 17. Will review results excluding DVA. Global Markets generated revenue of $3,500,000,000 and earned $500,000,000 Year over year, earnings were down by $238,000,000 driven by lower sales and trading results, higher technology investment spending and provision. Revenue was down 2% year over year as a decline in sales and trading revenue was partially offset by a gain on the sale of a non core asset recorded in other income. Sales and trading revenue held up better from the middle of the quarter and through the end of the year than it did in the prior year.
Sales and trading of $2,700,000,000 declined 9% from Q4 'sixteen. Fixed sales and trading of $1,700,000,000 decreased 13%. Within fixed, the decrease was driven by less favorable market conditions across natural products, successfully rigs. Equity sales and trading at just shy of $1,000,000,000 was stable year over year as growth in client financing activity offset declines in cash and derivatives trading, given lower levels of volatility and client activity. With respect to expenses, Q4 2017 was 5% higher than Q4 2016 as lower revenue related incentive costs were more than offset by continued investments in technology.
Moving to trends on Slide 18 and looking at trends across the last three years, we would highlight the following. First, starting in the lower left box, full year sales trading revenue has been fairly consistent over the last 3 years at $13,000,000,000 to $13,600,000,000 And note that we have achieved this stability while reducing bar and advanced
RWA. Now
a lot of things have been rolled over the last 3 years and that change was reflected in client activity and volatility that varied greatly from both a product and regional perspective over the last 3 years. Still, we will produce relatively consistent revenue on reduced risk over this time period. We believe this consistency shows that clients value the diversity and comprehensiveness of our global markets capabilities, including sales and trading as well as research in every major market across the globe. On Slide 19, we show all other, which reported a loss of $2,700,000,000 A few things to note this quarter, the $2,900,000,000 impact from the Tax Act was recorded here. So excluding that charge, all other would have produced a profit of a little over $200,000,000 Unrelated to the Tax Act, all other results also include the Revenue compared to Q4 'sixteen, excluding the impact of the tax refunds were down a little more than $130,000,000 year over year.
Remember when comparing year over year, Q4 'sixteen included expenses and charge offs for the U. K. Card portfolio sold in 2017. The tax rate this quarter was impacted by the negative impacts of the Tax Act as well as the benefit of the unrelated subsidiary restructuring. With respect to tax rate in 2018, prior to tax reform, we expected our GAAP tax rate for 2018 to be around 29% before unusual items.
Now we expect the GAAP tax rate to be approximately 20% absent unusual items. And remember, when thinking about tax rates on an FTE basis, the difference between GAAP and FTE has now narrowed from 2 basis points to 1 basis point. This reflects our preliminary analysis of the nondeductibility of FDIC premiums, the global mix of our profits and other tax reform provisions. Okay. Let me turn it back to Brian for a couple of closing comments before we open it up to Q and A.
Thanks, Paul.
As we wrap up, we thought it'd be useful to hit a couple of questions from the top that Paul and I have been feeling as tax reform has become more of a reality. The first question we get often is how do our clients and how do we feel about the tax reform and the client activity. It's clear from what our clients tell us that tax reform will be a positive for our clients and customers in the United States. There are 2 key elements from the standpoint of corporate American tax reform: 1st, the lower competitive tax rate and second, the territorial system, and both these were accomplished in the tax reform. This, coupled with a continued regulatory reform agenda to balance regulation are well received by businesses, and this increased confidence will ultimately make it and undoubtedly make it into the business plan.
And as one of the largest banks in the United States, we will benefit that with that as our customers grow and invest. That being said, those customers, just as we look back in America will look and our other peers in our industry, are carefully evaluating alternatives to reinvest some portion of those savings to drive further business activity to help grow our company and achieve even more competitiveness. The second question we get is, does our focus change? Are we going to run the company differently given a lower tax rate? And the end of the day is no.
We're going to remain focused on driving responsible growth, continually trying to connect better with our customers, striving to make it easier for those customers to do business with us and for our employees to do business inside the company. We'll continue to drive operational excellence, lowering operational expenses as we've done for many quarters in a row and improving our competitiveness as we develop and invest in new products and services. We're also continuing to drive our share return model, and we expect that the largest portion of benefits from tax reform will be delivered to you, our shareholders. In the end, whether through increased investments, capital distributions or supporting our clients, all this will benefit the economy and shareholders and drive our activities consistent with responsible growth. The third question is do we think that the impact of tax reform will affect loan growth?
Near term, it will be tougher to judge as people repatriate money or receive more after tax cash flow. The question is, will they pay it on their loans, and perhaps they will. However, on the medium to long term, having more after tax cash flow can't put you good at the business, and we will benefit by greater loan growth as those businesses invest those proceeds. We believe the real test of our loan growth will be more of the general economy and how it's growing and less about that tax rate. Another question we often get is, does the tax reform change our commitment to the $53,000,000,000 goal for 2018?
I start out by pointing out that if you look at our expenses in the 4th quarter, we effectively reached a run rate expense in the $53,000,000,000 range. We reported $13,300,000,000 in the quarter. If you back out the $200,000,000 in additional bonuses and the accelerated charitable contribution, that leaves us just about 13,100,000,000 dollars You multiply that times 4, and that's $52,250,000,000 or so. If you add $400,000,000 in the FICA related tax that come in the Q1 and throw in on top of that a couple of $100,000,000 of potential incentives due to the 4th quarter being a lower trading quarter, you get to around a $53,000,000,000 run rate. So effectively, you've reached our goal.
In the Q2 of 20 16, when we first announced this goal, I want to remind you that the expenses that were trailing at that time were $56,000,000,000 It was in our business plan to hit $53,000,000,000 in 2018, and it still is. But as we look forward, we have no doubt, as I said earlier, that businesses, including our company, will have to look to take advantage of some of the tax savings to invest and improve their business and competitiveness faster than they would have done before the Tax Reform Act. So we continue to evaluate options for longer term value creation along the dimensions of the investments we've been making in branches, in technology and people. We will continue to assess as we move through the year. However, to be clear, we'd expect most of the benefits from tax reform will flow to the bottom line through dividends and share buybacks over time.
In addition, the investments we make will drive operational excellence and efficiency that will continue to play to our benefit over time. The next question I get is around capital return expectations, will they change given the tax reform? The simple answer is to that question is yes. In 2017, we reported net income available to common shareholders of $16,600,000,000 and returned $16,800,000,000 back through share repurchase and dividends. We don't need to make acquisitions in the company.
In fact, in the United States, deposit acquisition is not legal. So all growth will have to be organic and will continue to be so. We believe we have sufficient capital to absorb our risk as we grow, and in fact, we have excess capital. We have the capital also to support our customers' demand for financing, and we always want to use that capital first to help customers grow. So yes, we will expect to return more capital to shareholders given the tax act.
That brings us to the last question I have in the year for investors. How are you performing against your return targets? And do they need to increase with the tax savings implied in the tax reform act going forward that Paul spoke about. This year, excluding the impact of the Tax Act, we earned return on tangible common equity of 11% and return on assets of 93 basis points. They're just shy of the 12% and 1% targets that we laid out a few years ago.
Going forward, the benefits from tax reform will easily mathematically accelerate those and will reach those targets. The potential lift in returns can be seen by just adding the benefits of the lower tax rate, assuming 100% of the benefits go to the bottom line, this would equate to something north of 150 basis points of increased return on tangible common equity and more than 10 basis points of increased return on average assets. But as you keep in mind, we've always been clear that the long term targets were just a step to keep marking our continued path to driving this company's operating performance. So yes, our targets will be obtained, but that doesn't lower our desire to drive responsible growth and continue to improve the company and continue to improve the returns and return our capital to you, and we'll continue to do that. So wrapping up, we will stay focused on responsible growth for 2018.
It's what got us here and what will get us here going forward. We'll control the things we can do and drive operating leverage throughout the company. And with that, let me open up for Q and A.
And we can take our first question from Betsy Graseck with Morgan Stanley. Your line is now open.
Good morning.
Good morning. Good morning.
Brian, I just wanted to follow-up business where operating leverage has been very strong over the last 2 years. I wanted to understand from your prepared remarks, you're saying that $53,000,000,000 you've already met it and you'll retain it for the full year or may change your outlook based on how the customer demand evolves with the tax plan? And within that, just wondering if you're expecting that you'll be able to generate more operating leverage, in particular, in the consumer space, given the groundwork you've laid in digital payments and the branch network?
Sure. I think what we're saying is that just to start from the base principle, the vast majority of any increased after tax cash flow would go to the shareholders. The question that we have to look at, Betsy, as you referenced is, is there an amount of investment that we'd make to accelerate some of the things we're doing, especially around consumer business but across all the businesses, accelerate the branch build out in some of the cities that's proved to be very successful that we would do over 5 years. You want to speed it up a little bit. We invest a little bit more in technology, especially to make the next major move in the markets businesses, which Tom and the team are driving at, to get the even with stable revenues, to start to drive the profit back up again, or in the treasury services business.
So the debate is, is there some amount that you would invest to help accelerate growth, but it'd be along the dimensions that we've been doing, and it would just improve our ability to get them done and speed it up. It would be modest, I think, is the best way to say.
Okay. And then on the consumer business, the operating leverage, has obviously been extraordinary in the last 2 years. Is there more to come this year?
Yes. I think we want to focus all of you across all the business operating leverage, and they tend to they've shown good progress, the company as a whole, and each of the businesses. And consumer can continue to get operating leverage through they've done a great job. You see the branches are down 100 and some year over year. The digital transactions continue to go up, but there's a lot of room to go still, even though we think we've made great progress in digital and we have, only 23% of the deposits are made digitally and about 30% are made over the counter at the branches.
So as we continue to get customers to adopt these new and exciting technologies, we'll see more operating leverage. But it's been the team's done a great job there, but and I think they'll continue to improve it. Likewise, you're going to see some of the transformation we're doing in the Wealth Management business continue to grow. And Terry and Andy and Katie and the team are doing a great job. But we need to that business has grown, but we need to start to drive some of the digitization techniques that we use in other businesses, including commercial business into that business, which you'll see, and that will help the operating leverage there.
And in the commercial business, it's very efficient, so it's very hard fought to get much expense. But even then, they still have done a good job of taking the expense leverage through the change in some of the underwriting ways we do business, how we underwrite centrally versus decentrally and things like that. So it will be across the board, and we expect more out of consumer.
Okay. And then just last question on the dividend payout ratio. Realize that earnings up with a lower tax rate, do you expect you'll keep that dividend payout ratio flat? Or how are you thinking about the dividend and overall capital return?
We basically said we're moving towards a 30% type payout ratio of earnings, and think that would mathematically follow your what you just laid out, that after tax earnings go up, it would be a higher number. But we're not quite there yet, but we're pushing that towards that direction.
And we can take our next question from John McDonald with Bernstein. Your line is now open.
Hi, good morning. Brian, thanks for the comments on expenses and how you're thinking about some of the tax impacts and maybe accelerating investments. So I guess kind of just coming back to that, if we think about you got to this $53,000,000,000 you're kind of there now. Is this a level where you feel like you can run the company and kind of have some kind of maybe just core inflation associated with the economy? Are you still reinvesting cost saves, but you're still taking out cost some places, reinvesting other?
As you think about 2019 and beyond, is $53,000,000,000 kind of where you want to be? Or should we think about an efficiency ratio set of goals for the next year? Is that a better way to think about it?
I think the as we said before, the key is to drive operating leverage, as Betsy referenced, John, and continue to drive that across the businesses. A couple of things. We've been clear that leave aside the discussion about the investments on the proceeds of tax. But basically the $53,000,000,000 was a rate that we could kind of sustain around, I. E, continuing to invest in operational improvement over time and keeping it relatively flat.
And you are dealing with inflation and things like that, that creep up on you. And so we had a pretty good dynamic going. The sole question is, do you want to invest a bit to speed up and that would just increase that number by a little by a bit and then play over the next couple of years. But the basic principles of running the company relatively flat through continued investment and cost effectiveness is still we still got a lot of room ahead of us. I always come back, John, and you follow-up it closely.
We have we will continue to have the same rigor around the way we run the company. Just because the tax rate is lower doesn't change how we're going to do it. So we're going to be driving that analysis that says, how much can we invest in building this operational excellence campaign we're on. We just see tremendous opportunity to keep applying digitization to paper and the work in the company and continue to drive that. So a lot of some of those investments will be a lot of the some of those investments will be branches or people or salespeople and have been in the businesses.
But on the other hand, we're investing tremendously in effectiveness, and the company will continue to do that.
Okay. And then just for Paul, on the overdraft policy, understanding the long term franchise value of the new policy, trying to think about the near term financial impact. Is there any kind of pull through or continuation of drag on deposit fees that might come from the new overdraft policy? Or is that impact maybe fully in the 4th quarter numbers yet?
I would say you're going to see that next year. If I were modeling it, you probably want to sort of low single digit impact.
Relative sorry. It came in partway through the Q4, so you just got a good chunk of it's in there, John. So it will be a modest impact beyond that.
Beyond that, okay. Thank you.
And we can take our next question from Steven Chubak with Nomura Instinet. Your line is now open.
Hi, good morning. So wanted to start with a question on credit outlook. Delinquency trends remain quite favorable. Brian, you noted that NPL has declined both consumer and commercial. I'm just wondering how we should thinking about the provision outlook in the coming quarters.
Is it still reasonable for us to expect that to traject in line with charge offs and maybe some upward growth as the loan portfolio continues to season. So maybe somewhere in the range of like $900,000,000 to $2,000,000,000 is that a reasonable expectation?
We expect credit to continue to perform in line with the way it performed in the 1st 3 quarters of 2017, which we would characterize as solid, if not excellent. We would expect provision to roughly match net charge offs with reserve releases moderating over time as we continue to build allowance in support of loan growth. Those releases are being driven by non core consumer real estate and energy.
Got it. And just one clarifying question for me on the expense side. I know that Betsy and John had already touched on this a little bit, but I just wanted to clarify the guidance that you guys had actually given on the last earnings call. Brian, it was in the Q and A where you alluded to the fact that you expect expenses to be flattish in 2019. I know you're very focused on digitization, automation.
I just want to confirm whether that's still a reasonable expectation just because it looks like most people are contemplating some expense ramp from 'eighteen to 'nineteen?
We'd say that we'd expect them to all things being equal, they would be flattish, and that's what we've told you. The question is, we took a little bit of money in Accelerate's investment to kind of run through a couple of years and probably drop back off, But it'd be very modest in the greater context. A lot of those investments get capitalized, so the near term P and L impact is different. But basically, from a conceptual framework, we think we can run the company in the low $53,000,000,000 yes, dollars 53,000,000,000 approximately $53,000,000,000 on a consistent basis over the next couple of years, with a caveat that we may look to invest a part of the tax savings on top of that, and we'll be very clear that we do that.
Got it. And one final one for me, just regarding the remarks on the wealth management side. Brian, you talked about efforts to invest in technology to drive improved profitability. In the past, you had alluded to a 30% margin target. I didn't know if that was still a reasonable expectation that you guys could get to.
Yes, I think we're at 27% this quarter. 26%, 27%, we've bounced around that. It's a target to get to. I think it mechanically is some things that help us over the next couple of years in terms of some stuff running off that pushes us up. So we continue to do that.
What we're talking about is a more fundamental reset on a couple of things. Obviously, in the lower end lower affluent businesses, we're driving Merrill Edge and things as a more efficient platform by definition. And then secondly, there is a lot of paper in this business and a lot of work and even the and the adviser themselves, there's a lot of automation work they do that will make it easier for them to do that they can become more efficient and handle more clients and handle them well. But if you think about the core pretax margin, it will move up and we can get it we still believe we can get up around 30 in the deposit side helps that as the arbitrage from rates goes through that business.
And our next question comes from Glenn Schorr with Evercore ISI. Your line is now open.
Hi, thank you.
Hopefully, this is simple that I know you can't talk for the regulators, but all else equal, have you thought through how the Tax Act might impact the CCAR process, meaning I see just a lot higher PPNR and shouldn't impact anything else in a vacuum, but just curious if I'm missing something there?
I don't think you're missing anything. There's going to be I think all companies, all banks are going to have more are going to keep more of what they earn. That's going to increase our profits. And so we're going to be in a better position to return more capital to shareholders in the form of dividends and buybacks.
Good. And then just switching over to Wealth Management, couple of little questions on like number 1 is where's all the growth coming from? Meaning you noted the strong flows, curious what's current versus new clients? And you also noted advisors are up 3%. Is that training or is that recruiting?
Just curious.
Yes. Look, the FA grew, reflects really our continued investment in the training program. Some experienced hires offset by sort of the normal kind of attrition, which has been very low, particularly in competitive losses.
Paul, just to remember, just to be clear, we have changed our recruiting. We announced that, I don't know, 6 months ago where we have been recruiting in sort of the traditional way. So most of the growth is coming through our advisor training platform, which we consolidate between the people who work in the branches, the people who work in the Merrill office, and brought into one big training program again for effectiveness. And we think there's great prospects So that will take a few years for that
to play out, obviously. So as you think about the numbers, it's just AUM growth, which is being driven by market levels, it's being driven by increased flows, it's being driven by some new households and we're very transactional revenues that we've been seeing now for a couple of years.
Okay. Last follow-up, if I could. Your decision to stay in protocol is a little different than a handful of the large peers. Just curious the thought process and experience so far.
I'd say it's been the experience so far has been relatively modest in terms of anything. It was people have been changing their opinion. But again, we continue to monitor the market, and we'll figure out what we want to do, but we haven't changed our position yet.
Okay. Thank you.
And we will take our next question from Matt O'Connor with Deutsche Bank. Your line is now open.
Good morning.
Hi, Matt.
Good. Thank you. I was hoping to follow-up on the outlook for net interest income for the full year. You mentioned some of the drags from the card business. But I guess in the grand scheme of things, I mean, it doesn't seem like the $500,000,000 drag from card is really that material.
Obviously, you had good NetAI growth year over year. So I was trying to get a little better sense of maybe the magnitude of NetAI that you're looking for. And then if you want to give us the bond premium amortization, how much benefit that was this year versus last? That might be helpful in the pieces.
Yes. So look, we expect solid NII growth in 2018 from continued sort of NIM expansion as well as loan and deposit growth. I think the size of the increase is going to depend upon the amount of loan growth, the realization of rates increasing along the forward curve and obviously our ability to manage deposit rate paid. With respect to bond premiums, what I would point out was that in 2017, we got a benefit of approximately 700,000,000 dollars from lower bond amortization driven by slower prepayments as long end rates moved up at the end of the year, at the end of 2016. So you really can't expect that to repeat itself this year, given that that curve is not linear, it's convex and we've already had a big increase in rates.
And so we're not going to get the same decline in the future of prepayment speeds. You noted and I would also note that 2017 included half of the UK card, and then you got to factor in FTE. But all that said, we feel good about 2018 NII growth. We think it's going to be solid. It's going to be back to basics, growing loans, growing deposits, managing deposit rate paid well.
Okay. That's helpful. And then just separately on the retail deposit side, you mentioned essentially no repricing there. And it's consistent, I think, with what we're seeing for most of your big gears. But just wondering what your thoughts are in terms of when there does start being a little bit of upward pressure there.
I mean, being the biggest deposit player, you might be one of the kind of setters on the price there as we think about rates going forward?
Yes. I'm not sure how helpful I'm going to be to you. I would just make a couple of points that we've made many times. The industry really hasn't that we've made many times. The industry really hasn't seen on the retail side deposit rates increase sort of much or at all on traditional accounts.
And I think it's important just to remind everybody that Bank of America delivers a lot of value to the depositors. You've got transparency, convenience, safety, mobile banking, nationwide network, advice and counsel. I think all of this, plus the lack of market pressure that so far has kept deposit rates relatively low. You've seen rates rising GWIM and Global Banking. Look, at some point, rates are going to rise.
My guess is we're getting close to that point given the expected Fed fund rate hikes here in 2018. We just don't know though. What all I can tell you is that we're going to balance our customer needs and we're going to balance the competitive marketplace with our shareholders' interest and we're going to do the right thing for all
the parties. Paul, I'd just add a couple of things. 1, the pricing strategy in consumer is already driven on depth of relationship. And so as we look at pricing tiers and how we do it and step by market, set by product, set by type customer depth and relationship, the rewards programs that reward deposit balance along with lower rates on loans and other types of things. It's an integrated business, and a lot of people focus on the one aspect of it and try to isolate it, but it's actually a very integrated business.
But to give you a couple other things, what holds us down is if you look at the deposits year over year and consumer up $47,000,000,000 the checking, which is always going to be very low, was up $30,000,000,000 of the $47,000,000,000 or $29,000,000,000 of the $37,000,000,000 And CDs are down $4,000,000,000 again. So even we run off CDs. And so that dynamic is always going to lead to all in deposit price, 4 basis points looks lower, but it's the quality of the checking franchise and core franchise we have. I think we had the average checking balance in consumer reached $7,000 this quarter. They're all prime core transaction accounts for the household, which means the paychecks coming in, come out.
That's what's driving the overall structure of the business, and we'll continue to do so.
Okay. Thank you very much.
And we will take our next question from Mike Mayo with Wells Fargo. Your line is now open.
Hi. What is your total technology spending, let's say, for 2017? How did that compare to 20 16? Where do you expect that to be for 2018?
Well, we to be comparable, you have to understand what you're talking what the components are. But the component most people focus on is what we call technology initiatives or code and new programming. That's about $2,700,000,000 and relatively flat.
Relatively flat 2016 or 2017. What about for 2018?
Relatively flat for 2017 2018. We are getting, even in the way we program, a little bit efficiency. The nominal number for 'seventeen would be higher than that. The number for 'eighteen will be lower than that, but it's largely getting the same amount of work done for a little less efficiency, a little less cost per dollar per programming unit for lack of better term. So that's been fairly constant across time, and we continue to evaluate that level of spending at all times.
So going back to Slide 12, for the consumer banking digital trends, Are you spending more money in those areas as you get more traction? I mean, you see, 23% mobile deposit transactions that are digital. I mean, where do you want to take that 23% number? And do you need to spend more to get there?
Well, I think the when you talk about technology, the consumer bank has benefited by a lot of technology spending across a lot of dimensions, including the way we distribute the environment to the branches, use of tablet type technology branches to interface with customers, better call center technology. It is a tremendous investment in the consumer. On the digital side specifically, we will travel with the customer. And we are getting the customers to understand the value of, instead of going to the ATM deposit check, do it with their phone or instead of going to branch deposit, do it with their phone. But we can't get ahead of them.
We have to walk with them and help them do it and help them grow. And that 23% number up from 3 or 4 years ago, you can see on the page, Mike, at 12%, it was a meaningful amount. It's about 1,000 branches of activity that goes through the phone. So we'll continue to drive that. But I think, yes, we've invested, but it's not necessarily what we invested this year.
It's the $1,000,000,000 we probably invested in mobile technology over the last 5, 6 years to get us here that now we're taking advantage of. And then as you know, Eric, it comes out that Merrill Edge capabilities continue to be improved to help in the affluent mass affluent America. So there's a lot of stuff behind it. But yes, so think about suspending $2,500,000,000 to $3,000,000,000 in technology. Think of us having done that for a long time and think of some of those benefits now coming through.
So it's not like we have accelerate spending to get the mobile behavior. It's actually a change in customer behavior, which is less about the technology. It's more about getting the customer move their behavior.
You guys have said take a look at all these trends collectively on Slide 12. Don't look at 1 in isolation. So what sort of metric should we monitor externally to gauge your progress? Would it be, for example, the consumer banking efficiency ratio? Or is there one encompassing number?
Or how would you suggest that we think about this?
Well, I think the efficiency ratio, when the team tells me that they're going to get it they have it down to 50 and they're going to get below 50 and they take great solace in that, I tell them, don't take great solace in that because it could be we don't know how low it could go. But the one I think that I'd argue is that we've always looked at is the, if you look on Page 10, Mike, the average cost of deposits. If you take the entirety of running this system as a percent of deposits, which you can benchmark to people relatively clearly in the industry. You'll see that we run about 160 basis points. That's the phones, the mobile, the technology, the people and all that stuff against the deposit base.
That has come down over the last 7, 8 years from 300 basis points to 161 basis points. That is a simple way for people to think of the impact of all this transformation activity in your effectiveness and efficiency in the business. Also, you wouldn't want to do this if your customer scores are suffering during that time frame. The customer scores have risen, as Paul said earlier, to record heights. So it's that you can't get ahead of the customer and you can't push the customer to do something they don't want to do.
And the challenge is to keep that cost efficiency. That 161 basis points would be the benchmark while improving customer experience.
Mike, I'd just add, you got to focus on operating leverage. That's a key thing that we're looking at all the time and holding people accountable to in addition to efficiency and then all the other individual metrics of growth across mobile adoption and digital sales.
Last follow-up, just on that last point, Brian. A lot of investors have voiced concern that all the Internet digital banking will be the demise of the deposits, that deposits will flee more quickly. And what's your short answer to that concern?
I think year over year the consumer business grew $47,000,000,000 of organic deposit growth. I think that sort of speaks for itself, Mike.
All right. Thanks.
And we will take our next question from Ken Usdin with Jefferies. Your line is open.
Thanks. Good morning. I think I'd follow-up on the loan side, 6% year over year in the core business, pretty decent rate and you're seeing growth across. Just wondering what your expectations for loan growth are as you look out? And in a bigger sense, any sense of just movement in commercial and corporate America in terms of starting to think about investing more in their businesses?
Loan growth, We feel very good about loan growth. So excuse me, we feel really good about loan growth. Clearly, tax reform is going to make businesses and individuals have more money in their pocket and we think that's going to stimulate economic activity. We think tax reform has made America stronger. There's going to be more investment here because we've leveled the playing field.
So medium, long term, even short term, I think we're very optimistic about loan growth. I mean, with the slight caveat that people are repatriating some funds, so we're going to see what effect there is in the short term on really our large corporate international kind of borrowers. On a more at a more detailed level, we feel like we've been growing well in mortgage and we're going to do that. That's going to be offset by home equity runoff. Cards been growing well.
It grew well in the 4th quarter. I would note that seasonally card balance is usually down in the Q1. Auto has been growing strongly historically. That's going to soften or has softened. Again, I would remind everybody that we are focused on prime and super prime and we didn't follow the market out to extended durations, but we're still holding our own there and expect slight modest growth next year.
And on the commercial side, we've been growing loans at mid single digits. And again, subject to what happens with the repatriated funds here in the short term, I don't see any reason to change our expectation around loan growth.
And Paul, is there any change in the rate of runoff in the all other bucket from that $71,000,000,000 bucket? How fast are you expecting that to still run off?
It's been running off the way I would characterize it going forward, it's going to run off sort of 4 to 5 to 6 per quarter, call it 5.
Okay. One quick one, just mortgage, it's a small line, but it had a big obvious swing, dollars 300,000,000 to a negative, especially that other line. Can you just talk us through what that couple of $100,000,000 negative
Yes. Yes. So we had a rep and warranty provision of approximately $200,000,000 to resolve some claims. If you exclude that and you look quarter over quarter, the decline in mortgage banking income reflected lower production volume in a smaller mortgage market as well as lower servicing income as the size of that portfolio continues to decline. Keep in mind that mortgage banking income line is just simply becoming less relevant since we are now retaining 90% of our originations on the balance sheet.
And coming back to that reps in warranty of $200,000,000 resolve a claim, take a look at the litigation line this quarter, it was a little bit lower than normal. So we're resolving claims. Sometimes they show up in litigation, sometimes they show up in reps and warranty, but there's a little bit of geography there.
Got it. All right. Thanks a lot, Paul.
And we will take our next question from Raul Martinez with UBS. Your line is open.
Hi. Thank you. Saul Martinez. Couple of questions. Just wanted to go back, Brian, to the comments on your ROTCE and your ROA targets, obviously, with the bump from tax reform, you hit and you exceed the 12 percent, the 1% target that you previously laid out.
But as you go forward, you benefit from the lower tax rate, you sort of right size your efficiency, get to the $53,000,000,000 and drive positive operating leverage from there, rates normalize. It does not to put words in your mouth, but it seems like it's pretty easy to get to sort of to a mid to high teen ROTCE and ROAs well in excess of 1. But do you have a view on where you think your ROTCE can get to over the next couple of years and where ROAs can get to over the next couple of years as things progress as you think they might?
I think that you and your question sort of stated for yourself, which is, yes, there'll be a mathematical bump that will make a quote easy to get there at the 12 when you're running right around that now. But the reality is what we're trying to say earlier is we don't look at 12% as being, geez, let's we made it, now we can stop. The answer is we'll drive that number as high as we can driving responsible growth. And as we start to get rid of more equity than we earn because we have excess equity that will help. We continue to improve the earnings that will help as we continue to drive operating leverage, all the things you said will help.
So we're going to do it on a sustainable basis. So the point was when we talked about those targets, we were probably running around 8% or something like that. And so we said we had a path over a couple of years to get us close to 12 percent and 1% ROA at the time, and we've made it there. It'll be easier by tax reform, but that doesn't mean we're stopping. That's the we just drive this company the same way and it'll come out to be higher now and we'll see those levels and we expect to continue to exceed.
Okay, fair enough. I guess just a follow-up and it's I guess more of a maybe a little bit more of a philosophical question. So Larry Fink, obviously, as you know, sent a letter indicating that management should look not only at maximizing profitability and returns for shareholders, but at the social impact of their actions. And I think for good reasons, you guys take pride in being a good corporate citizen. But I'm curious if you have any thoughts on that and whether you think there is a trade off between maximizing profitability and doing good for society and other stakeholders?
And with the tax windfall, do you feel like maybe there is or there will be greater pressure to invest in things or to provide products or take actions that you may not have taken if tax reform hadn't happened?
I don't think it will change the way we run the company. We've been running it on a responsible growth with the 4 elements. You've got to grow no excuses, got to do it with a on a customer focused organic basis, got to do with the right risk and got to be sustainable along the best place for people to work, drive share our success with our communities and drive operational excellence, that format won't change. And so what Larry wrote about and what we've been working on for years, the idea of ESG and those types of things as part of our sustainable part of our sharing of success with our communities is not new for banking. I mean it goes back to we were our banks, all those legacy banks that came together all were formed to help communities grow.
And so we've had a long history investing because we're already successful with economies and the communities we do business within are successful. So I don't think it's a major change in our industry frankly, dollars 200,000,000 a year charitable giving, dollars 2,000,000 volunteer hours, dollars 1,000,000,000 of dollars of low and moderate housing investment and earnings, dollars 7,000,000,000 plus out to the CDFIs. We can rattle off all this stuff, dollars 100,000,000,000 commitment we're halfway through. These are things we're doing long before tax reform came and we'll do long before tax reform when tax reform goes away someday or something else changes. These are things that make this company great.
And as you said, it's a philosophical viewpoint, but it's also the public role of banking is just a little
different. And
we can take our next question from Marty Mosby with Vining Sparks. Your line is now open.
Thank you. I wanted to drill into the expenses just a little bit to get some clarity. Seems like there was 2 kind of not unusual, but kind of a standout, dollars 200,000,000 worth of compensation that would have been in the Q1 now is accelerated into the Q4. And then Brian, you were talking about $200,000,000 of charitable foundation and the extra bonus payments. Just want to make sure those were 2 separate items and that those numbers were correct.
Marty, I think we've got it a little confused. So in the Q4, in the $13,300,000,000 expenses, there's about $145,000,000 $150,000,000 of a one time $1,000 bonus to people under $150,000 in our company, plus we accelerated $50,000,000 of charitable donations in the Q4 of 2017. That's the 200,000,000 dollars That's what we're talking about. So the $13,300,000 becomes $13,100,000 if you back up those two items. And then I did the math and multiplying times 4.
I think the acceleration, I think I assume that what you're talking about there is a change to FAS 123, which is that it was simply to think that we used to take $1,000,000,000 in the Q1, now we take $250,000,000 per quarter. It moves around a little bit, But that's a phenomenon we announced earlier this quarter that we're going to last quarter we're going to take. And so that number is in that $13,300,000 also the 2 $50,000,000 for that. It's not an acceleration. It's just the way it used to be done all at once in one quarter and now we spread across 4 quarters.
We made that change in the 4th quarter. So you're seeing it in the 4th quarter numbers.
And the earlier numbers have been restated, so the relative difference year over year is the same. Does that help Marty? Does that make sure I got your question? I want
to make sure those were 2 separate items and that reconciles where I was getting to. And then if you look at the securities portfolio, you had 2 things that kind of popped up. 1, you took just a very modest or slight loss in security sales. And then also your ALCI, you had that OCI adjustment as rates went higher that you mentioned earlier. Will you be actively restructuring because it does kind of drop through capital anyway and taking those losses as you have the opportunity to kind of round up earnings?
So just was curious how aggressive you wanted to be in that kind of in that push?
The short answer is no. We're not in any way restructuring our securities portfolio. There was a very modest, good nice find there, dollars 23,000,000 loss on some securities we sold in the Q4. That was basically just some legacy stuff that got to a nice price that affects our CCAR results and we wanted to get rid of it and we think it's a good trade off.
It's not it wasn't related, Marty, to the core sort of way we can pass the excess deposit proceeds on a given quarter. This was legacy stuff we're just trying to clean out.
Got you. It's just one of the things we're anticipating is that banks can actually accelerate the benefit as we do get any uptick on the back end of the curve by doing some of that aggressive restructuring. So just was curious if you had been kind of thinking of that or kind of moving in that direction?
We feel really good where we are in terms of our securities portfolio.
Yes. And Marty, always remember, the reason why we have a securities portfolio is we have that deposit franchise growing $40,000,000,000 $50,000,000,000 year over year. Loans grow at a more modest rate, especially due to the runoff. So, you just have to put the money to work and we put it into an investment portfolio to extract the value of that great deposit franchise. Yes.
And remember, we're only putting them in treasuries, mortgage backed securities or cash. We have a very high quality securities portfolio.
Operator, we have another question.
Certainly. We'll move to the next question. It comes from Gerard Cassidy with RBC. Your line is now open.
Thank you. Hi, Brian.
Good morning, Gerrard. How are you?
Good. Thank you. Your 4th quarter results were good and the outlook looks quite good for you folks as well as your peers. Can you share with us what risks you're kind of looking out for on the horizon? Obviously, again, things are looking very good for you folks.
And we always have to watch out from left field for some type of risk. Anything that you can identify that you guys are just keeping an eye on?
Yes, I think, Gerard, obviously, the parade of horribles that you can go through, whether it's geopolitical risk, whether it's markets changing risk, whether it's credit risk because unemployment levels rise. They're all going to come back to this economy going to keep moving along and even accelerate or decline and we don't see a lot of risk in that, but we do watch those risks. How we avoid them is not what we're doing today. In fact, it's what we've been doing over years to stay in the high prime quality in the consumer business, balancing the consumer business versus commercial exposure, maintaining our tough discipline in commercial credit in this situation this quarter. Obviously, it's always a wake up call that some things don't turn out well and we got to go back and what are the lessons and what we do right or wrong in that and how do we avoid that in the future and the team has spent significant time doing that.
We weren't happy with it from the top of the house through to the actual people who are involved in it. But even with that, the credit cost year over year relatively flat and the team is doing a good job. So we think about all those risks and cyber risk you can you know the list as well as I do. The question is how do you balance and how do you keep yourself ahead of those so that you won't be immune from them, but they'll impact our company less. That is what we define as responsible growth quite frankly.
Okay. Thank you. And then you guys mentioned that your commercial customers were optimistic about the future. Can you share with us in the investment bank, what the pipeline looks like at the end of the Q4 coming into 2018? And then second, within the Investment Banking division, I think you mentioned you hired 400 bankers.
What sectors are you really doing well in? Is it healthcare, technology, financial?
Those bankers are in the commercial banking segment. So they're middle market and just banking, just to be clear. They are successful, but they're across all industries. Paul, why don't you talk about that pipe?
Sure. The investment banking pipeline ended the year lower than Q3, mainly due to the completion of some large transactions in Q4 combined with the postponement of or cancellation of some other large transactions. Having said that again, I think we're very optimistic about 2018 given the Tax Act, which again has leveled the playing field here. And we think companies are going to be interested in more M and A transactions and ultimately are going to be investing in raising capital. So down a little bit, but that's kind of normal for cleanup at the year end.
Your other question regarding sectors, we're number 3 globally. And when you look at across all of our industry groups, we are plus or minus around that range pretty consistently. Obviously, you have a couple of groups that are stronger than others, but we feel like there are no weak spots in investment banking and all the groups are very strong.
Gerard, one thing that I thought you were going to go to was what the consumers feel. It was interesting that the spending for the full year of 'seventeen, whether it's credit cards, debit cards, ACH wires, payment of bills, cash LA ATMs over the tower line checks written was a 6% growth over 2016 and 2016 to 2015 was a little under 3%. So the consumers are feeling pretty good and spending very strongly out there. And it is broader than just the credit and debit card spending. That is up 6%, 7% as Paul said earlier, but it's the broader use of cash, which shows that consumers are putting money out there and spending on things.
So we feel good about the consumer side and the month of December was faster than the year in terms of the growth rate of 7% versus
6%. No, that's a real good insight. And then just lastly, I think you talked about getting the dividend payout ratio to 30%. And I recognize that, and this is a Board of Directors decision, if the regulators give the green light to the SIFI banks that 40% dividend payout ratios are okay. Philosophically, how do you think about that if, again, the green light is given by the regulators?
I think we'll have to think about that when we get there. I'm not sure for our Sperry's largest banks are not going to always be a little more circumspect or whatever the right word would be in terms of governing our dividend. They just don't want us to ever have to cut our dividends. And as you do look at it mathematically across time periods, the idea of us not earning 70% of our earnings, therefore, I. E.
Being able to pay for the dividend is a fairly low probability and that's where they came up with that number and I think it will just be we'll see it play out. I don't know what they'll do, but our strategy inside the company is to continue to move up the dividend on a rational basis along with the earnings and get it closer to that number.
Great. Appreciate it. Thank you again.
Thanks.
And our next question comes from Vivek Juneja with JPMorgan. Your line is open.
Hi, thanks. Couple of questions
for you folks. Paul, you've mentioned that NII, you some puts and takes. Just want to tie them all together and say net net, do you I mean, I recognize the day count issue in Q1. Would you expect some growth going from Q4 to Q1 given the December rate hike even adjusting for the day count?
I think it's too early to give you that sort of guidance. I've given you everything that I want to give you at this point. Again, we've got 2 fewer days. We've got the card loans, which are usually a little bit lower. Forget it, get rid of the FTE, I don't know how you look at it.
And remember that at the end of Q4, there was a run up in LIBOR in anticipation of the rate increase. So we got some of that benefit in Q4. It's really just going to depend on loan and deposit growth and what happens on deposit pricing. That's why I'm not really willing to tell you higher or lower because I just don't know how deposit pricing is going to play out over the quarter.
Okay. Okay. Thanks on that one. Brian, a question for you. 1 of your peers set a goal of 2% of net income for corporate philanthropy.
Are you thinking of setting anything like that?
We have what you call as pure charity. We've kept our levels consistent from before the crisis now about $175,000,000 $200,000,000 a year and we expect to keep it there. In addition to that, we do tremendous volunteer work, dollars 2,000,000 a year and other things. We feel comfortable with that level. I haven't even done the math lately, but I think that's 1% after tax at this point.
But our view is that we can have a lot of impact there and it ebbs and flows depending on what's going on at the moment, but I don't expect us to change that dramatically.
Okay. Thank you.
And we will take our final question from Brian Kleinhanzl with KBW. Your line is open.
Thanks. Yes, I know you do want to give any commentary about deposit betas in the quarter in that, but what's the ability that you have to remix? I know the LCR was up to 125%. So to the extent that you don't want to get as competitive on deposit rates, I mean, is there still plenty of opportunity to remix from short term into loans?
On deposits, it's a very sophisticated question of how you price. We price literally by every market, by every product, by different customer sets. And so, as Paul mentioned earlier, in the Wealth Management business, we move pricing up because the people with $10,000,000 in investment assets with us, obviously, the cash in there accounts as an investment asset as opposed to in the retail business, it'd be their household daily flows. So it's a very sophisticated question and you're seeing us work that question across time and you saw us raise rates in the wealth management business. Consumer business raised rates albeit slower.
The corporate business responds a little more instantaneously, but it's a methodology for paying for services. And so it's a very complex thing. So it's hard to sort of give you a single answer. And when we model, we use a number, but frankly, we've done better than that model every single quarter. So but we have to be conservative on modeling for NII and other purposes.
Okay. And then just maybe just one follow-up on the expenses in the 2019. I mean, is there a big opportunity to do investments? I know you said you would give further details later on as you looked across to maybe pull forward some investments in in lower expenses. But it seems like if you were to go on some kind of accelerated investment, maybe there would be a chance to get below that $53,000,000,000 in expenses in 2019?
I mean is that still possibly something you're actively pursuing?
Our job what we told you guys was we got to $53,000,000,000 for 2018 to be relatively flat there on absorbing 6% medical care costs increases, raises and things like that. And that comes through ability to continue to invest in effectiveness and efficiency. So, we don't that's not that's an operating strategy level on the exact number that we're focused on and we continue to focus on that. So, there's no change to that. The question would be, do you want to accelerate some investments given the higher after tax yield.
And we will look at as I said and we'll look at across time. You have to be able to get the value of those investments. We've been as one of the caller's questions referenced a little bit earlier, we added 400 Commercial Bankers. We have to make sure if we added 400 more tomorrow, you might not be able to get to speed. So you have to make sure they're coming in and we use techniques to divide the portfolio up to give them deeper client penetration to get the customers per the products per customer up.
That takes time and you just can't snap your fingers. So the ability to accelerate those investments were largely based on what we think we can do, but it will be modest in the sense that even a fair increase at the margin is not a big number in the overall scheme of things at the $53,000,000,000 expense level. At the end of the day, our challenge is to drive operating leverage and we continue to do that within 12 quarters in a row and we'll continue to do that going forward and that's good for
our shareholders.
Okay, thanks.
This does conclude the Q and A session. I'll turn it back over to our presenters for any additional comments.
Thank you to all of you for joining us. We had a good 2017, and we look forward to a great 2018 and we're going to do that by driving responsible growth, delivering value for our customers and for you, our shareholders, and we continue to do that. Thank you again, and we look forward to talking to you next time.