Please stand by. Your program is about to begin. If you should need operator assistance, please press star zero. Good day, welcome to the Bank of America earnings announcement. At this time, all participants are in a listen-only mode. Later, you'll have the opportunity to ask questions during the question-and-answer session. You may register to ask a question by pressing the star and one on your touchtone telephone. Please note today's call may be recorded. I'll be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Mr. Lee McEntire. Please go ahead, sir.
Morning. Thanks for joining us this morning for our third quarter 2017 results. Hopefully, everybody's got a chance to review the earnings release documents that are available on the Bank of America website. Before I turn the call over to Brian and Paul, let me remind you, we may make some forward-looking statements, and for further information on those, please refer to either our earnings release documents, our website, or our SEC filings. With that, let me turn the call over to Brian Moynihan, our Chairman and CEO, for some opening comments before Paul Donofrio, our CFO, goes through the details. Over to you, Brian.
Thank you, Lee, and good morning everyone, and thank you for joining us. This was another strong quarter across the board for Bank of America. Responsible growth is delivering for our customers and for your shareholders with strong operating leverage, strong credit results, and strong expense management. We earned $5.6 billion or diluted EPS of $0.48 per share this quarter. That is up 17% from the third quarter of 2016. Thinking back and talking to a lot of you over the last year or so, as we met with you asked three basic questions: Can Bank of America actually grow while sticking to its responsible growth principles? Can we achieve the $53 billion 2018 expense goal? Can you meaningfully invest in the company at the same time you're reducing the cost?
What I thought I would do is use a summary on page two to answer a few of those questions. On the first question, you can see on page two, will responsible growth work? I point you to several of the metrics there. We've been operating on this model for some time. First, if you look at this quarter compared to a year ago, revenue grew 1% on a reported basis. Looking at the core lines of business without other, we grew revenue 4% despite the tough comparison with global markets. If you remove the global markets, you can see that the core annuity-oriented businesses of consumer banking, wealth management, and global banking grew revenue at 7%. If you look at what drives that revenue growth, average loans and business segments grew 6% year-over-year.
Average deposits grew 4% year-over-year, led by our consumer business, which grew its deposits 9% year-over-year. Assets under management, our wealth management business, reached $1 trillion this quarter, and flows into the assets under management were $21 billion in the quarter, bringing year-to-date flows to almost $75+ billion. Our mobile usage continues to grow. We had 1.2 billion mobile interactions this quarter alone, up nearly 20% from last year, and it's double in the last three years. Our investment banking fees are up 14% through the nine months this year. We all did this the right way, with net charge-offs still bouncing on decade lows. We are growing with our risk framework and driving a strong risk culture.
Non-Performing Loans at the lowest level since the first quarter of 2008, our market risk remains low. We are growing responsibly. The second question we get asked is, "Can you get to your expense target?" In the second quarter of 2016, we committed to achieving a goal of approximately $53 billion in total expenses by 2018. That's all in reported expense. At that time, our 12 months leading up to that point was running around $56 billion in expense. That means we had to take out $3 billion in costs. This reduction meant we also had to overcome a couple of years of normal merit increases, revenue-based incentive compensation increases, healthcare cost increases, and other inflationary costs such as lease renewals, et cetera.
We had to do all this while our volume increased because we're doing more with our customers and have more clients and customers to do business with. We remain on track. This quarter, you can see we reported a little more than $13.1 billion in expenses. Our efficiency ratio moved below 60% on an FTE basis. By the way, that is the lowest level expense since the fourth quarter of 2008. That was the last quarter before we bought Merrill Lynch. We reduced the cost in our company equivalent to the entire cost structure of Merrill Lynch over those years. Headcount is now down to 210,000, and it's down again this quarter.
The third question is, "Can you continue to invest in a franchise while reducing those costs?" The first thing to think about there is for the first nine months of the year, we spent nearly $2.25 billion on technology initiatives. That's on pure initiatives. Look no further than the branch in your pocket for evidence of that. Customers using our mobile have increased 47% in the past 12 months. Mobile deposits account for 21% of all check deposit transactions. Digital sales account for 22% of all consumer sales. In this quarter, Zelle came forward, the latest offering we have in the mobile area. Bank of America's volumes alone, our volumes through Zelle this quarter were $4 billion in the third quarter. We processed nearly 14 million transactions, the growth continues.
We recently processed a half billion dollars in a single week. Our customers are using Zelle, and we look forward to further growth in that area. We're also continuing to innovate. We're rolling out auto shopping across the country. Home loans, mobile deployment is following that. As we roll through the next couple of quarters, our AI, our artificial intelligence offering, Erica, will come out. We continue also to invest in our physical network by refurbishing nearly all our existing financial centers, which is well underway and will be completed over the next couple of years. We have been and will continue to open centers in markets where we have a strong commercial banking wealth management client base but lack financial centers due to historical issues. We continue to enhance our online brokerage offering, benefiting consumer and wealth management clients.
For our global banking customers, we've added the availability of CashPro on our mobile devices. We're using artificial intelligence to efficiently prospect business clients and offer client receivables management alternatives to our clients. We're investing also in enhanced wholesale credit underwriting operating model. In our markets business, we are redoing the trading platforms in total. In addition to the technology investments, we've added 2,000 primary sales professionals over the past 12 months, whether relationship bankers, financial advisors, commercial and business leaders. Yes, we're doing both investing and finding ways to be more efficient to pay for it, therefore, lowering our overall expense. We did all this in an economic environment that still feels very constructive, consistent with growth at 2%+. We expect moderate economic growth to continue this year.
We expect the U.S. to grow a little faster next year, above 2%, and outside the U.S. is growing a little fast, in the mid threes. For the year to date, interesting in our consumer payments, we're seeing consumer activity pick up. Consumers are spending, whether it's checks written, cash taken out of the ATMs, P2P payments, and all the different debit and credit cards, 5% more through the first nine months of 2017 than they did in the first nine months of 2016. That's up a faster growth rate than it has been in prior years. Debit and credit card spending are up 7% for the first nine months of the year, showing a strong consumer activity. Our commercial clients continue to perform well. They continue to remain optimistic. They continue to look forward to a continued implementation of a pro-growth agenda, particularly focused on meaningful tax reform.
Housing starts, home prices continue to remain on positive trends. Employment is strong and employers continue to search for skilled workers. That leaves a solid atmosphere and we see no near-term indications of any change to it. As we move to slide three, we show that growing responsibly is not new and is showing sustained progress. As you can see in slide three, we have delivered positive operating leverage on a year-over-year basis every quarter for the past three years. By the way, not every quarter had revenue growth. In those quarters, we reduced expenses more than revenue decline. That remains our focus, continue to drive growth, but on occasions where capital markets might be slower and there might be less growth in revenue, we have to manage our expenses well. We have to do all that while we continue to make the investments.
That consistent operating leverage shows up in our businesses. All total, we earned $15.7 billion for the first nine months of 2017, up 19% from the first nine months of 2016. On slide four, you can see how the businesses contribute to those results. The businesses are driving earnings improvement and returns above the firm's cost of capital, and they continue to drive their efficiency ratios lower. As you can see, global market results are actually down year-over-year for the nine months on a reported basis, but excluding some DVA and a prior year recovery, earnings would be up modestly on consistent revenue growth despite low volatility and low activity. As you look at the other businesses, beginning with the Consumer Bank, the years of hard work the team has put in is now clearly showing.
The business is driving operating leverage as we optimize our delivery network, continue to digitize the business, and follow the customer's behavior and as it changes over time. In our Wealth Management business, the team continues to do a good job, and you see earnings are up 10% on a year-to-date basis. We have industry-leading margins in the business at 27% and the leading brands of Merrill Lynch and U.S. Trust. Ahead of us, we have a lot of work to continue to deal with the industry-wide dynamics and margin pressures. Global Banking had a record-setting $15 billion in revenue year-to-date and has the company's best efficiency ratio, as you can see. As you think about that, all that sums up in allowing us to return more capital to shareholders.
For the first nine months of 2017, we have repurchased $7.9 billion in common shares and paid $2.8 billion in common dividends. This totals $10.7 billion comparing to $5.6 billion for the same period in 2016. With that, let me turn it over to Paul to give you some other details on the quarter.
Okay. Thank you, Brian. I'm starting on slide five. As Brian said, we earned $5.6 billion in Q3, up 13% from Q3 2016. EPS of $0.48 per share, up 17% year-over-year as we reduced diluted shares by 3% over the past 12 months. Revenue of $21.8 billion was 1% higher than Q3 2016 as NII improvement and higher asset management fees outpaced decline in Sales and Trading and Mortgage Banking income. Expenses of $13.1 billion were 3% lower than Q3 2016. We generated more than 3% of operating leverage. The efficiency ratio of 60% for the second consecutive quarter now, 59% on an FTE basis. Provision expense was $834 million, down modestly compared to Q3 2016, and we see continued improvement in Consumer Real Estate and energy.
Return on assets this quarter was 98 basis points, and return on tangible common equity was 11.3%, improving both on a year-over-year and a linked quarter basis. Turning to the balance sheet on Slide 6. Overall, compared to June 30, end of period assets increased $29 billion, driven by strong deposit growth that funded an increase in loans to customers with the remainder invested in securities and cash. Loans on an end of period basis were up $10.5 billion from Q2, led by commercial activity, while consumer loan growth was mitigated by the continued runoff of legacy non-core loans. On the liability side, long-term debt increased $4.7 billion during the quarter as we took advantage of favorable credit spreads to pre-fund upcoming maturities. Given that we are now compliant with TLAC requirements, our debt issuance over the next few quarters will likely be more opportunistic.
Liquidity remains strong with $517 billion in global liquidity sources, and our liquidity coverage ratio was 126%. Common equity increased more than $4 billion compared to Q2. During the quarter, Berkshire Hathaway converted its Series T preferred stock into 700 million shares of common stock per the terms of their 2011 investment. As a result of this conversion, common equity increased and preferred stock decreased by the $2.9 billion book value of their Series T preferred stock. This issuance does not impact diluted EPS in this or subsequent quarters, as the effect of this conversion was already accounted for in diluted EPS. The remaining increase in common equity reflects $5.1 billion in net income available to common, partially offset by the return of capital totaling $4.2 billion through both common dividends and share repurchases.
Tangible book value per share of $17.23 was modestly higher than Q3 2016 but decreased 3% versus Q2 2017 as a result of the Series T conversion. Turning to regulatory metrics and focusing on the advanced approach. Our CET1 transition ratio under Basel III end of the quarter at 11.9%. On a fully phased-in basis compared to Q2, the CET1 ratio improved 40 basis points to 11.9% and remains well above our 2019 requirement of 9.5%. CET1 increased $4.9 billion to $173.6 billion, driven by earnings and the Berkshire Hathaway conversion. The CET1 ratio also benefited from a modest $3 billion decline in RWA as growth in loans and low RWA density assets was offset by continuing optimization of the balance sheet. We also provide our capital metrics under the standardized approach.
RWA increased $15 billion from Q2, driven by loan growth, but increases in capital more than offset asset growth, resulting in a CET1 ratio improvement of 20 basis points to 12.2%. Supplementary leverage ratios for both the parent and bank continue to exceed U.S. regulatory minimums that don't take effect until 2018. Turning to Slide 7. On an average basis, total loans increased to $918 billion. Note that the sale of UK Card, which was recorded in all other, impacted year-over-year comparison of average loans by $9.3 billion. Adjusting for the sale, average loans were up $26.8 billion 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, including the sale of UK Card, were down $28 billion. On the other hand, loans in our business segments were up $47 billion or 6%.
Consumer banking and wealth management both experienced solid loan growth of 8%. Both businesses continue to see good growth in residential mortgages. Consumer banking also saw growth in credit card and vehicle loans. Originations of new home equity loans was solid, but overall loan growth continues to be outpaced by paydowns. In wealth management, growth was also aided by structured lending. Global banking loans were up 4% year-over-year, led by C&I growth in the U.S. and abroad. On the bottom right, note that we grew average deposits by $45 billion or nearly 4% year-over-year. This growth was driven by consumer segments deposits increasing by $53 billion or nearly 9% year-over-year. Average deposits declined year-over-year in our wealth management segment as clients sought alternatives for their cash within brokerage or AUM. Deposit outflows here largely abated in Q3, and ending deposits were slightly up from the end of Q2.
Deposits in global banking experienced strong growth in Q3, driven by rate actions taken in the quarter to win and defend relationship deposits. Turning to asset quality on Slide 8. Credit quality continues to be solid with net charge-offs, NPLs, and reserve critical asset exposure all showing improvement from Q2. Total net charge-offs were $900 million. Or 39 basis points of average loans decreasing modestly from Q2. Provision expense of $834 million included a $66 million net reserve release. Provision expense was in line with the prior year, but increased $108 million from Q2 as a result of less net reserve releases. Our reserve coverage remains strong, with an allowance to loan ratio of 116 basis points and a coverage level three times our annual charge-offs. On slide nine, we break out credit quality metrics for both our consumer and commercial portfolios.
With respect to consumer, net charge-offs were down from Q2. Included in the quarter were recoveries on the sale of some consumer real estate loans. Partially offsetting this recovery benefit was the negative impact of clarifying guidance from the regulators on bankruptcies, which increased our consumer losses this quarter. The net effect of all these pluses and minuses was minimal. Consumer NPLs of $5.3 billion were the lowest they have been since Q2 2008. NPLs came down from Q2 levels. Keep in mind, 45% of our consumer NPLs are current on their payments. Commercial losses were up modestly from Q2, driven by a couple of names while observable criticized exposures and NPLs declined. With respect to the impact of hurricanes, first, let me say that our focus has been on those impacted by the storms, including our employees and customers.
One decision we made early was to provide a payment deferral to many of our customers in the impacted areas, delaying some potential net charge-offs in Q3. Since then, we have and we will continue to engage with consumers and businesses in the impacted areas to better understand how we can assist them. As it relates to credit, we have not seen any material impact. Our overall net reserve release for the quarter did include a modest build related to the storms for losses that are probable, and it goes without saying that we believe we are adequately reserved today. Turning to slide 10. Net interest income on a GAAP non-FTE basis was $11.2 billion, $11.4 billion on an FTE basis.
Compared to Q3 2016, which has the same day count and seasonal factors, NII is up $960 million or more than 9%, driven by an improving spread between our asset yields and deposit pricing. The year-over-year comparison also benefited from loan growth and excess deposits deployed in security balances. An additional benefit was higher long end rates from Q3 2016, which drove lower prepayments and therefore lower bond premium write-offs. The full quarter effect of the sale of UK Card negatively impacted the comparison. Focusing on net interest yield, it improved 18 basis points from Q3 2016 to 2.36% after adjusting for the impact of UK Card. Compared to Q2 2017, NII increased to $175 million as the benefits from an increase in short end rates and an extra day of interest, as well as loan deposit growth, was mitigated by a number of factors.
First, we lost the two months of interest income associated with the UK Card book. Second, we raised rates broadly across our wealth management business to offer clients a competitive deposit alternative to cash alternatives within brokerage and AUM. Third, we experienced a decline in long end rates in Q2 and early in Q3, which impacted reinvestment rates as well as increased the write-off of bond premium as mortgage prepayment speeds accelerated. I would note that we also increased deposit pricing for some commercial clients, which had a modest impact on NII in the quarter. Looking ahead to Q4, assuming no change in interest rates, NII growth will be dependent on loan and deposit growth and pricing. If we get a late Q4 hike, as expected by the market, this should mostly benefit NII in Q1 2018.
With respect to asset sensitivity as of 9/30, an instantaneous 100 basis point parallel increase in rates is estimated to increase NII by $3.2 billion over the subsequent 12 months. This is largely unchanged from June 30th and continues to be predominantly driven by our sensitivity to short end rates. Turning to slide 11. Our teams continued to deliver on cost management. Net interest expense of $13.1 billion is down more than $300 million or 3% from Q3 2016. Productivity improvements were driven by our focus on digitizing processes and lowering our cost to deliver for our customers. Keep in mind that we are seeing these expense declines while investment in technology and new sales professionals remains robust.
Compared to Q3 2016, in addition to overall operating cost improvements, we reduced personnel expense, which included costs associated with our UK Card business, as well as non-personnel expense, which included lower litigation expense. Compared to Q2 2017, expense declined by $600 million, with half of that decline driven by a Q2 2017 charge in anticipation of the sale of several data centers. Q3 also included modest declines from lower severance as well as revenue-related incentives. The remaining reduction reflects broad-based improvement as we drive operational excellence. The efficiency ratio hit our 60% target again this quarter. With respect to headcount, we are down from the prior quarter and continue to see a shift from non-client facing associates to primary sales professionals, which now make up more than 21% of our headcount. We've added more than 2,000 primary sales professionals over the past 12 months.
Excuse me, over the past, yeah, 12 months. Okay. Turning to the business segments and starting with consumer banking on slide 12. Earnings were $2.1 billion, growing 15% year-over-year and returning 22% on allocated capital. The business created over 800 basis points of operating leverage on revenue growth of 10%, which outpaced expense growth of 2%. Year-over-year, average loans grew 8%, average deposits grew 9%, and Merrill Edge brokerage assets grew 21%. Revenue growth was led by NII, driven by increases in client balances. Revenue was modestly impacted this quarter by the hurricanes as we took steps to help customers in the impacted areas. We expect the dip in fees and interchange weakness to be temporary as impacted communities begin to recover and rebuild. With respect to expenses, through continued efforts to drive operating leverage, the efficiency ratio improved over 400 basis points to 51%.
Cost of deposits and rate paid, which when combined represents cost of goods sold from a deposit perspective, remained steady at a combined rate of 163 basis points in the quarter. Consumer banking credit quality reflected moderate seasoning and portfolio growth, which drove a reserve build of $168 million in addition to the $800 million in Net Charge-Offs. The Net Charge-Off ratio declined modestly from Q2 to 1.18% of loans. Turning to slide 13 and looking at key trends. As I said 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 our strategy of holding more originations on balance sheet instead of selling to the agencies as we like the economics of holding these high-quality originations. In Q3, we retained about 80% of first mortgage production on balance sheet.
Looking at revenue more broadly, we believe our relationship deepening preferred reward program is improving NII and balance growth while mitigating industry pressures on fees as we reward customers for doing more business with us. This is why we continue to emphasize total revenue as opposed to fees and NII separately. Having said that, spending levels on debit and credit cards were up 7% year-over-year, and new issuance of credit cards was solid at $1.3 million. Spending levels on cards drove revenue increases but were again largely offset by the rewards to customers. We saw modest year-over-year improvement in card fees as well as service charges. Focusing on client balances on the bottom left, you can see the success we continue to have growing deposits, loans, and brokerage assets.
With respect to loans, residential mortgage continued to lead our growth, but we also saw good growth in auto as well as better growth in card than we've experienced in quite some time. We remain focused on prime and super prime borrowers with average booked FICO scores of at least 760. Client brokerage assets were up 21% year-over-year, driven by strong client flows as well as market performance. Net new accounts grew 6% from Q3 2016. At the bottom right, you can see deposits broken out. Our 9% year-over-year average deposit growth continued to outpace the industry, while the rate paid remained low and stable. Importantly, 50% of these deposits are checking accounts, and we estimate that 90% of these checking accounts are the primary accounts of households.
Expenses were up modestly compared to Q3 2016 despite strong revenue growth as optimization and digitalization savings were more than offset by investments in refurbishing branches and technology initiatives. Turning to slide 14, let's look again this quarter at digital banking highlights as they continue to shape the way we do business with our customers. As you can see, the year-over-year growth in these metrics is impressive. We remain the leader in digital banking. We now have nearly $24 million mobile users and another $11 million online with us. Within the $639 billion in total payments shown here, note how digital continues to grow as customers move away from cash and check. This migration is helping us lower expenses and reduce operational risk.
Further, digital growth of credit and debit card usage is accelerating as e-commerce grows and more payments are taking place within merchant applications like Uber and Starbucks. Within total payments is person-to-person. I want to spend a moment on Zelle as Bank of America has been one of the lead banks introducing this P2P capability for customers. Note the steady adoption by Bank of America customers of this online app, which makes it easier to spend, request, and even split person-to-person money transfers. Also note on the bottom left the growth in mobile channel usage. This quarter, we saw nearly 1.2 billion logins, which is up 19% versus Q3 2016. More than 21% of all check deposit transactions are now done on mobile devices. This represents the volume of 1,100 financial centers.
While important in terms of how we transact with customers, mobile has also become important in terms of how we connect with our customers. One example of that is the reduction in our call center volumes, which are down 13% over the past three years. We continue to innovate. This quarter, we rolled out an app in several states for mobile auto shopping, which will soon be followed by a mortgage shopping and fulfillment app. Excuse me, I meant mobile auto shopping, which will soon be followed by a mortgage shopping and fulfillment app that we call Home Loan Navigator. Still, even with all this digital activity, it is important to note that we still have 775,000 people a day walking into our financial centers across the U.S.
Many of these customers still use our centers to transact, but many use the centers as financial destinations where they can learn more about products and services, work face-to-face with a specialized professional, and generally improve their financial lives. That's why we continue our multi-year branch refurbishment program. It is also why we continue to add new financial centers in markets where we have never had a Bank of America center, but we have a strong presence in other lines of business. This quarter, for example, we opened centers in Denver, Minneapolis, and Indianapolis. In addition, we are testing advanced centers which utilize video assist ATMs and other video conferencing capabilities in areas where it makes sense to do that. Turning to slide 15, let's review Global Wealth & Investment Management.
We produced earnings of $769 million, up 10% from Q3 2016, a pre-tax profit margin of 27%, and a return on allocated capital of 22%. The market and client activity once again provided a tailwind for asset management fees, while at the same time, transaction revenue continues to face headwinds in the industry, as the industry evolves and adapts to new fiduciary requirements and the increasing adoption of passive investing. In all, revenue grew 6% year-over-year, led by NII and a 13% increase in asset management fees, partially offset by lower transactional revenue. We saw nearly $21 billion of AUM inflows this quarter, continuing the strength of $57 billion in the first half of the year. Year-over-year expenses were up 4%, driven by revenue-related incentives. Other expenses were managed well, creating modest operating leverage in this segment. Moving to slide 16.
We continue to see overall solid client engagement. Capital balances rose to nearly $2.7 trillion, driven by higher market values, solid AUM flows, and continued loan growth. Average deposits of $240 billion were down $5 billion from Q2. The increase in deposit rates at the end of the second quarter helped mitigate the movement of client balances from deposits to other cash investment alternatives within AUM and brokerage. The decline in NII from Q2 to Q3 reflects the cost of this rate increase. Average loans of $154 billion grew 8% year-over-year and reflect the continued trend of investment clients deepening their relationship with us. Loan growth remained concentrated in consumer real estate as well as structured lending. Turning to slide 17. Global banking earned $1.8 billion. This was a 13% increase from Q3 2016.
Return on allocated capital was 17% and stable with last year, despite a $3 billion increase in allocated capital. Year-over-year, revenue growth of 5% was driven by improved NII, reflecting solid loan and deposit growth, compounded by rising short-term interest rates. We also grew IB fees modestly year-over-year, led by debt and advisory fees. Revenue improvement coupled with lower expenses created operating leverage of 650 basis points and an efficiency ratio of 43%. This expense comparison versus Q3 2016 reflects savings offset by continued technology investment. We also added new bankers while keeping overall headcount relatively flat over the year. We're also deploying more AI capabilities in this business. The focus so far has been on improving client prospecting and more intelligent receivable processing for clients.
Provision expense of $48 million remains low and is down from Q3 2016 on improvement across most of the portfolio, particularly energy. Global banking grew loans 4% year-over-year. As Brian mentioned, our loan growth in global banking has been pretty consistent over the past three or four quarters at 4%-6% on a year-over-year basis. When compared to Q2, I would note an increase in loans near the end of the quarter drove end of period balances meaningfully above the average. Looking at the trends on slide 18 and comparing to Q3 last year, average loans of $346 billion were up nearly $12 billion. With the exception of CRE, loan growth was fairly broad-based with slightly elevated growth in Asia. Loan spreads were stable compared to Q2 2017, but compressed compared to the year-ago period.
Average deposits rose 3% compared to Q3 2016, with most of it concentrated in Q3, given the rate action this quarter. Total investment banking fees of $1.5 billion were up modestly from a strong Q3 2016. Debt underwriting remained strong while equity underwriting was down from a year ago. Growth in advisory fees also benefited the year-over-year comparison. Year to date, we remain ranked number three in investment banking fees with fees of $4.6 billion, which is up 14% from 2016. Switching to Global Markets on slide 19. The business had a solid quarter, although it's a tough comparison against a strong Q3 2016 for the reasons you all know. Global Markets generated $3.9 billion in revenue and earned $770 million after adjusting for a modest impact from DVA.
Given the tough comparison, we view this quarter as solid despite the fact that sales and trading revenue of $3.2 billion, excluding DVA, declined 15% from Q3 2016. Excluding that DVA and versus Q3 2016, FICC sales and trading of $2.2 billion decreased 22%. Within FICC, the decrease was driven by less favorable market conditions across credit products, especially mortgages, combined with lower volatility and rates products, in the current quarter. Equity sales and trading was up 2% year-over-year to a little less than $1 billion, benefiting from growth in client financing activity. Lower volatility also drove lower secondary market activity in equities. With respect to expenses, Q3 2017 was 2% higher than Q3 2016, driven by increased technology investment in our trading platform as well as numerous regulatory requirements such as MiFID II, Volcker, and UMR, among others.
Moving to trends on slide 20 and focusing your attention on the components of our sales and trading performance on a year-to-date basis for just a moment. While the quarter is down from Q3 2016, as you can see in the lower left box, sales and trading revenue has been fairly consistent on a year-to-date basis for the last three years at roughly $10.5 billion. Note that we have achieved this stability while reducing VAR and RWA. Just as important, if not more important, this revenue consistency reflects the value to our clients of our diverse product set and sales and trading capabilities in every major market across the globe. Without this strength and diversity, one would have seen a lot more revenue volatility as client activity shifted from a product and market perspective over the last three years.
On slide 21, we show all other, which reported a net profit of $217 million. This is an improvement of roughly $400 million compared to Q3 2016. This quarter included lower litigation expense while reps and warranty expense increased a little more than $100 million over Q3 2016. Reps and warranty provision is recorded as contra revenue in mortgage banking income and was the result of advanced negotiations with certain counterparties to resolve several outstanding legacy issues. Also note that mortgage banking income in Q3 2016 included a benefit of roughly $300 million in net MSR hedge results. Also remember that this is the first quarter without the UK Card business, which was sold in June.
In addition to two months of approximately $250 million in normal quality revenue generated from U.K. Card, Q2 also included a $795 million benefit from the sale of U.K. Card that was mostly offset by tax expense in that quarter. When making expense comparisons, remember, in addition to lower litigation, Q2 also included a $295 million impairment charge on three data centers that we are in the process of selling. Lastly, note that the effective tax rate for the quarter was 29%. Just a few summary points to wrap up. This quarter, we created positive operating leverage by growing revenue while lowering expenses. As Brian pointed out, this continued a trend of many quarters of positive operating leverage. For years, we have been focused on growing responsibly while improving operating efficiency and making our growth more sustainable.
Importantly, we have stuck to and not compromised our client and risk frameworks while doing so. NII growth is benefiting from the value of our deposit franchise and continued loan growth in a modestly improving world economy. Asset quality remains strong as Net Charge-Offs, NPLs, and commercial reserve-like criticized exposure all declined. We continued to invest in new technologies and capabilities while adding sales professionals in certain businesses. We did all this while nearly doubling the amount of capital we returned to shareholders this year versus last year. This tells us that responsible growth is working, and that we are well-positioned to continue to invest in and grow with our customers and clients as the economy continues to improve. Thank you. With that, we will open it up to questions.
Thank you. As a reminder at this time, if you would like to ask a question, it is star and one on your touchtone telephone. We'll go first to the line of Nancy Bush with NAB Research. Please go ahead.
Good morning. Brian, I have a question on digital banking. I guess right after the crash, when you guys first began to emphasize digital and mobile banking, you were sort of the leader in the industry in that regard. Do you still feel that you have that leadership position? Is it important that you keep it? What are your thoughts about what you need to do to do that?
I think we have the leadership position as told to us by other people and how they rate people in terms of activities and capabilities and things like that. Most importantly, it's how your customers use you and what you see going on. If you look at page 14 that Paul took you through.
Right
You can see the growth in transactions and trends in activity. You mentioned that the drive after the crisis, the reality is the drive started before the crisis, and we were one of the first apps available on smartphones way back to the start of the iPhone. That helped us grow quickly. It is a core platform for us. The question is how do we drive all its feature functionality? The deposits that go through on a daily basis are equivalent to 1,000 branch activity and deposits, to give you an example. It's moved major amounts of activity.
We're excited about the Zelle payment levels because at the end of the day, we have $5 billion that we spend a year on cash currency, checks moving around our company in the system, that the way we're going to get there is by digitizing those and eliminating cash and driving that. Things like Zelle, while they're small numbers compared to all the other payment forms today, the pace that they're growing at with the digital wallets and other things will help drive it there. We feel we're a leader. We expect to be a leader. The activity grows faster. I think you put it against any kind of mobile digital person out there. 1 billion to customer interactions in the quarter shows you that people believe that it must be pretty good.
Is there a direct relationship, or is there any kind of quantification that you've done of X mobile transactions means Y fewer branches? Is there that direct a relationship?
Yes and no. Yes, in the sense that we know the cost of the various things. A branch transaction for deposit is 10 times more than a mobile transaction. Remember, at the same time, we're investing heavily in the high-touch side of our house. 2,000 more salespeople, a lot of those in consumer, refurbishing all the branches, building out branches, and things like that. Because at the end of the day, 20-odd% of sales are on digital and mobile, but 80% aren't. Because of the nature of the intimate customer discussions, because of the nature of what customers want to discuss and have face-to-face help on, the branches are critically important to that. The real question is you have to have both to be successful.
The model doesn't work if it's solely one or the other, and the model of having both works, and that's where you can see the activity growth. Think about the deposit growth year-over-year in consumer of $50-odd billion and start to think about that in the context of activity.
Okay. Just one quick follow-up for Paul. Paul, you mentioned in global banking that all categories of loans grew except CRE. Is that a self-selection, or could you just expand on that a bit?
Yeah, sure. Up to a year ago now, if not longer. We pulled back a little bit on CRE. We're still servicing customers there. We're still making loans, but we're just being a little bit more cautious. You're not seeing a lot of growth in our CRE balances. I would point out that kind of makes a 4% growth all that more kind of interesting given our stance there.
Okay. All right. Thank you very much.
Thank you. We'll go next to the line of Glenn Schorr from Evercore ISI. Please go ahead.
Hi. Thanks.
Morning, Glenn.
Good morning. A little drilling down on your comments on deposit cost rise. We go from, I guess, eight basis points last year to 24 this or 11 to 24 over the last quarter. How much of that increase is what you mentioned in wealth management? I heard your comment on bringing them a competitive cash alternative. I'm just curious, is it CD versus money market? Is it all coming from current clients? Thanks.
Mostly in wealth management, I wouldn't say it's in one place or another. It's cut across a lot of the different deposit products we offer to that community of investors and depositors.
Glenn, if you go to page 10 of the supplement package, you can see the comparison of the third quarter last year to this year, you start to think about some of the numbers you were citing. If you look at the different categories, you're going to see that most of the movement was in the Now Money Market, which that's where the wealth management business is. Of the $240 billion odd number in there, about $140 billion of it is really people's invested cash. If we make an allocation like we did in the second quarter to less cash and more equities, that actually brings deposits out, then people are obviously thinking it's investment cash. These are accounts that might have $5 million in securities in it and $500,000 of cash. Obviously, the rate structure moves in that.
If you think about it across a year, there's been a 75 basis point increase in Fed funds, you start to put these numbers against it, even wealth management's relatively modest in terms of change in the overall. The other thing that drives our profitability is if you look at that page, go down and remember that the non-interest-bearing account deposits are still zero, they grew. There are $436 billion of non-expiring accounts. If you look in the consumer side of that, you know that drives the profitability, that's where it comes from.
Got you. There's a competitor or two had put out some high price or high rate CDs in an effort to gather new client money. This is more of just compensating clients for being good clients, sharing a little bit of the love.
I would not say.
CDs are down $4 billion at Bank of America year-over-year.
I appreciate that.
This is about providing our GWIM clients with an alternative, a deposit alternative, if they want to take it. Since they have options in AUM and brokerage for some of their excess cash.
Okay, cool. I'm just curious to follow up on the comment you guys have in the slides on targeted growth in client financing activities and equities. Is that just growing PB with the clients?
Yeah, we talked about that last quarter where we made a decision to add some balance sheet to our equities business. We see an opportunity there. We've made a lot of investments in technology. We've got great relationships. There's an opportunity to add a little bit more leverage to that business if we provide some balance sheets. We did that last quarter. We continued that this quarter, and it's having an effect. Like you said, it's PB, but it's also synthetic PB in Europe. It's both synthetic and physical.
All right. Thanks very much.
Thank you. We'll go next to the line of John McDonald with Bernstein. Please go ahead.
Hi, good morning. Wanted to ask about expenses. The magnitude of improvement was nice surprise this quarter. I think you were targeting kind of $100 million year-over-year improvement, you got something closer to $300 million or more. Just wondering, where did you kind of outperform your own expectations on expenses this quarter? Is this run rate ballpark kind of a good jumping-off point, Paul?
Yeah, I would say we feel great about the work we did. We've always talked about expenses not being a straight line, the same line every quarter. This quarter we did maybe a little bit better than other quarters. You're right, it was down about $300 million year-over-year, those expense reductions were broad-based across personnel and non-personnel.
In terms of next year, when you think about the $53 billion target, doesn't look like you might need it, but do you have any expectations that the roll-off of the FDIC special assessment kind of will help you get to that target? Just maybe a reminder of how much that expense stepped up for you.
It's a good question. I think the industry was assuming that that would end in the second quarter. It looks like it may extend to the third quarter because they're not going to get to the level they need to get to. That actually hurts us. That's why we always say we're going to get to approximately $53 billion for full year 2018. There's a lot of things that can happen. I don't know the exact amount. Is it roughly around $100 million quarterly? It's around $100 million quarterly. It's a material number.
Okay.
I think it's a little more than $100 million, frankly, but I can get back to you on that.
Okay. I guess just on capital return, Brian, with that CET1 growing nicely, anything that you could see now that would stop you from approaching more of a peer capital payout next year? Could you just remind us what kind of CET1 ratio would be a good target for you in knowing what you know now about regulatory minimums?
A couple of things. One, we would expect to keep moving up the ladder in terms of capital management this year. 88%, I think, is the number, and you'd expect us to keep pushing forward. Two, on the levels, we're nine and a half. You'd add 50, 75 basis points on top of that. The SIFI buffer levels can bounce around on you, but if you think about somewhere around 10 to 10 and a half, and if you subtract that from the 12, that's a pretty good amount of excess capital.
Okay. Just one quick follow-up, Paul, on that FDIC expense roll-off. That's in the numbers now. You're kind of running close to almost the 13 per quarter. It's almost at 53 annualized. You're just saying that if you didn't get that step down, it gets a little tougher to get to the target?
Yeah. Look, the target now goes back to the middle of 2016. We said at that time we would achieve approximately $53 billion for full year 2018. Obviously, it's just a little harder if
FDIC doesn't roll off in the second quarter and extends in the third quarter. We're going to get there either way.
Got you. Okay, fair enough. Thank you.
Thank you. We'll go next to the line of Betsy Graseck from Morgan Stanley. Please go ahead.
Hi, good morning.
Morning, Betsy.
A couple questions. One, as we go towards the $53 billion, can you just give us a sense to the source of the improvement, consumer versus corporate?
Betsy, I think if you look at the quarterly progression across all expense categories, it comes from everywhere. It comes from the data center configurations that we took a charge to move a lot of stuff last quarter. It comes from continuing to shed real estate occupancy costs, and it comes from lower headcount. That was down 1,000 this quarter. It comes from taking out the spans and layers for a thing we call organizational health. If you think of it more strategically, it comes from basically applying technology and digitizing processes. Across the wholesale banking credit underwriting initiative that I talked about, we've been able to save about 20% of the headcount there by consolidating our activities and bringing their activities together. We'll have another big chunk as we go to apply the technology that we are developing that is not yet deployed.
It's 1,000 ideas. I mean, thousands of ideas. It's literally across the board, and the team does a great job of just going after piece by piece by piece. We can manage the sort of repositioning cost by getting ahead of it and doing it on a rational basis so that attrition, we'll hire 8,000 people this quarter to maintain our headcount sort of neutral or down a bit. We have lots of chances not to hire people and continue to shrink the company when we apply this technology.
I'm just thinking about the digital efforts. Obviously, you've put a lot of time on the call on the
Yeah
consumer side. Just wondering, rate of change on corporate, is that where you think the digital efforts are picking up?
Yeah, there'll be more there because of trade finance. We started digitizing more processes. If those processes prove out, we'll drive it. There's a lot in the back office of the securities clearance capabilities that is going on. The consumer always dominates in terms of the numbers in a lot of ways, just if you think about it. GWIM has a bunch of digitization efforts, a bunch that save statements. We send out 12 statements. If we can get people to take e-statements, that saves 12 times a year times whatever it costs for that particular statement. These things are never. If there's some silver bullet you could shoot and take care of it all at once, we'd have shot it already. This is just hard work.
The follow-up is a question I get from people a lot of times, which is, we get the expense improvements. Are there any fee pressures that we should also be baking in here? When you talk about cash management, fee rates, some of the fintech disruptors look at these fee pools and say, "Oh, this is too high. I'm going to go after that." I'm assuming that you're staying ahead of that threat. I'm just wondering, is there a fee rate that we should be making sure that we're including when we give you the expense side?
Yeah. I think we've given you guidance on the expense side. If you think about something like in the global transaction services platform, cash management, as people call it, there has always been this loss in revenue that you're fighting against when paper, which people pay us more to process, turns to digital. We lose revenue, but we save expense at a faster rate. That has been going through the numbers for the last several years. The revenue growth we see in cash management takes that all into account. It's more customers, more activity, fighting off where the customers are converting cash to digital. Yes, that's a part of it. You're seeing in our run rate. There's nothing sort of ahead of us that's unusual compared to the quarter to quarter sort of picking away at us that goes on in that regard.
Consumer expense ratio of 51%, as you're getting more people onto your Zelle platform, et cetera, is there line of sight to that going sub 50 at some point?
I think through both the revenue lift they get as the rate structure rises and good expense management, we'd expect that it should move down below 50 at some point. We never say to people where do we think it can get to as some big target. The consumer team has set some targets. I said, "Don't give people targets because then they'll think that that's success." We don't know where it goes. In other words, I'm not talking about next quarter, but over multiple years, when you continue to drive the revenue expense play here because the accumulated core transaction deposit account and getting it from $2,000 over the last eight, 10 years to $6,000 per account is a tremendous revenue lift by focusing primary accounts as the number of accounts actually fell by 10%. That dynamic is what we're after.
Yes, it'll move down, we never put it as a success because then people will quit working.
Got it. Thanks, Brian.
Thank you. We'll go next to the line of Mike Mayo with Wells Fargo Securities. Please go ahead.
Hi.
Good morning, Mike.
Your branch count continues to go down. It gets down 3% year-over-year, but deposits are up 4% year-over-year. I'm trying to get a distinction between retention of deposits when you close branches and retention of customers. According to your 10-K from 2015 to 2016, the number of Accounts declined by about 2%, but at the same time, deposits continue to grow just like the entire decade. My question is, what is your retention rate of deposits, and what is your retention rate of customers when you close a branch today, and why the difference?
The deposits of consumer, just Mike, which are more in small business, which are more related to your thing, we're actually up 9% year-over-year, not 4%. That's the all-in corporate level, including GWIM and commercial. If you look at it across time, it really depends on where you're closing the branch, obviously, what's nearby. The retention rates continue to go up over time because the physical plant becomes less dominant and irrelevant to the customer. What we're doing is fine-tuning the branch count and often consolidating into a bigger branch that we've invested heavily in to the quality of the branch itself, the numbers of people there. Our branches are getting bigger in terms of numbers of people in them and smaller in terms of count.
When you think about it, the customer fall-off in terms of numbers of accounts was really continuing to focus on that primary account. As we do that, the balances are up twice in the accounts, I think, over the last seven years or something like that, and account numbers are down from 34 million to 31 million. That was all driven by our view that we had to get to the primary account because that's where the profit could be made and the core transaction capabilities are there. We closed a lot of people ran off who were using us as a secondary or third bank just because they loved our distribution of ATMs and things like that. Basically, we have emphasized primary account sales.
I'm not sure if you've disclosed this. What is the retention of deposits when you close a branch today, and what was it two years ago?
We don't disclose it separately, Mike, it's all in there. In that 9% growth is everything we did.
Okay. Just the last question. You mentioned digital banking's up, mobile banking's up. You mentioned the 1,100 branches. That's the equivalent of it. That's good. Have you reached a tipping point where you can go from 4,500 branches down to 3,500 branches or 4,000? How far can you go?
That will always depend on the customer behavior and other factors. We are deploying new branches, hundreds of them over a multi-year period into places we didn't have branches before, located more strategically given circa 2017 and beyond banking. Again, it's not another number. We target a number. What we target is a more and more efficient system. Each day, three-quarters of a million people come into our branches, and our teammates serve them well, and our scores at those branches are all-time high in terms of satisfaction. 80% of sales go on in that space. I wouldn't want to cut them back at one branch more than the customer wants us to do it as evidenced by their behavior.
All right. Thank you.
Thank you. We'll go next to the line of Steven Chubak from Nomura Instinet. Please go ahead.
Thanks. Good morning. I had a follow-up question regarding the discussion earlier about GWIM deposit competition and just some of the efforts that you cited to compete with other cash alternatives. I was hoping you can quantify the actual magnitude of deposit price increase that we saw in the quarter and maybe just give a little bit more context as to what prompted the action. Paul, I know you gave some color here. I'm just trying to get a better understanding as to whether this was really driven by increased competitive pressures, or is it more a function of the DOL, which actually requires that some clients receive reasonable compensation on some of their assets, including cash?
It's not a function of a DOL. It's a function of our desire to give our customers an alternative to leave their money in a deposit account at Bank of America as opposed to seeking other alternatives within our AUM and brokerage platforms. That's what's driving this. It's a meaningful increase, but it's nothing, when you think about 100 basis points that we've seen here, it's not a significant amount.
Just philosophically, we said to our team, you have to maintain the operating leverage given the relative pricing against the rate curve because the rate curve, we have the zero floors for so long. They have to grow faster in the market, 4% or 5% at least. You got to grow deposits, and you got to maintain the pricing discipline. What happened to GWIM, frankly, is they got a little behind the curve, and they had to move in a single quarter, and they did. What you see in the period-end deposits, even though the average, I think, is down, period-end actually is up. They were able to shut down some of the runoff, as Paul just described.
It's really localized in the GWIM business, and it's really driven by a subset of those deposits, which are in asset management accounts and in brokerage accounts that are a part of an investment strategy that is different than transactional checking accounts and things that are driving both in our commercial business and our consumer business. That's why you see, if you go look at page 10 and kind of sort through it, you'll see there's differences, and it's really narrowly in the area that has to do with really investment cash rather than transitional and transactional cash.
Thanks for that color, Brian. My understanding then is that if we do see rate hikes from here because much of this increase was a function of your effort to catch up with the competition, should we see the trajectory increase, or how should we think about the outlook from here if we get additional rate hikes?
First let me say that our outlook on NII, absent any change of rates, is going to be dependent on loan and deposit growth offset by deposit rate paid, which is mostly going to be driven here by competitive factors. If we get a 25 basis point rate hike in December, again, most of that we'll see in the first quarter, the benefit. It's going to depend on what our customers need and want and what the competitive dynamic is. I don't know how else to answer that question. We don't know yet what we're going to do. We have to see how the market develops.
Secondly, in the $3.2 billion for 100 basis points is modeled in a rate of change relative to that interest rate change for deposit pricing. We have bettered that because of the power of the franchise and the other things, we'd expect to continue to maintain that discipline.
Got it. Just one more from me on the credit side. The trends there continue to be quite positive. You appear to be doing a lot better than many of your peers in that regard. I know the guidance that you'd given previously, at least in the near term, was that provision should approximate net charge-offs. We did begin to see, though, some healthier building consumer. I'm just wondering how we should think about the near-term provision trajectory from here.
We still think provision is expected to roughly match net charge-offs. You could see some modest increase as we bounce around the bottom with respect to net charge-offs in commercial and as we build allowance in support of loan growth. However, these factors may be offset by the release of non-core consumer real estate and energy as we've sort of been experiencing here over the last few quarters. No change there.
Okay. I mean, is $900 million as like a charge-off run rate, at least in the near term, a reasonable expectation?
Over the last five quarters, the average has been $900 million.
All right. Thanks so much for your help.
Yeah.
Thank you. We'll go next to the line of Matt O'Connor from Deutsche Bank. Please go ahead.
Morning, Matt.
Good morning. I was wondering if you could just elaborate a bit in terms of what you're seeing on the loan demand side, both on the commercial corporate as well as the consumer. Obviously, the industry has slowed down overall. You made some comments about seeing more activity in pockets of consumer. Along with that, just your outlook for loan growth in the near term here.
Look, we've been experiencing solid loan growth in consumer and GWIM and on the wholesale side in global banking. You saw that again this quarter. We talk about loan growth for the whole company being driven by deposit growth. If you think about our deposit growth and the size of our deposits relative to our loans, every quarter we grow deposits, and we put as much of that to work as we can in loan growth, and whatever doesn't go to loans and client growth goes into the investment portfolio or cash. If you're growing deposits sort of mid-single digits, that means you're going to grow total loans low single digits. We don't think that's going to change given the current economic environment.
As you've seen, because we have a significant runoff portfolio in all other, that has translated into mid-single digit loan growth in our business segments. That's what we're comfortable with.
All right. As we think about the deposit growth driving the balance sheet growth, you've got this flatter yield curve. My personal view is if we get additional increase in the short end, we might have further flattening. Just wondering the thought process to keep building the securities book and the mortgage book. You're seeing some banks shrinking the securities book and building cash instead. Obviously, there's a cost to doing that, but just the thought process to keep building securities here as the curve has flattened pretty meaningfully.
Yeah. Look, we are always thinking about the trade-off between earnings, liquidity, and capital, where we have a risk framework that we operate in with respect to the securities portfolio. Remember, when you're growing deposits in consumer 8%, those are we believe high-quality deposits. They have a meaningful duration, and you've got to find investments on the asset side to match what you believe the duration of those deposits are. We're very thoughtful about it. We think about it all the time. We haven't made a lot of changes into how we're operating. We're operating within our risk framework, and we feel good about kind of what we're doing there.
I think one of the things to remember is that as you think about deposits, in our trillion-plus of deposits, we have significantly more consumer personal deposits than anybody else does, which then if you think through the resolution planning and how those are treated and all that stuff, those deposits are extremely valuable. You think of consumer, it was four basis points last year and four basis points this year. You're going to continue to grow those because unless the curve flattens in a way that would be below four basis points plus the FDIC, you'd start to think of which no one thinks it is going to do. It's still a very valuable idea to generate more customers and generate more deposits.
We continue to really push that with it's almost $900 billion in deposits in our GWIM consumer business, which are tremendously valuable in terms of what drives this franchise's profit. There's no way we're turning down more customers with good core deposits.
I guess the point I was getting at is you're paying up a little bit on the deposit side in the wealth management business. You're paying up a little bit on the global banking side. On the one hand, you can afford to pay up to help out the customers and keep them in some of the other products. At the same time, with the flatter yield curve, it just makes it less economical to do so, I would think.
Think about the all-in cost, and it's still very advantaged. It costs us $600 million a quarter for the 1.2 trillion in deposits in total.
December.
Just think about that a second, and you'll think that there's a lot of advantage in any yield curve.
The question is obviously focused on the right thing. It's focused on the economics. Remember, these are our customers, and we want to make sure that they have the right alternatives for them to make good decisions about whether they want to keep a deposit or whether they want some other alternative.
Okay. Thank you very much.
Thank you. We'll go next to the line of Brian Kleinhanzl from KBW. Please go ahead.
Yeah, good morning.
Morning.
Morning. First question was on the first mortgage production that you mentioned. You said that you were putting most of that on the balance sheet. Could you just give kind of a description of the type of paper that it is? Is it just 30-year conforming? What's that do to the duration of the loan book for the consumer?
These are our customers who are originating a mortgage either through purchase or refinancing. We like the risk profile. We know them. We're all focused on primes and super prime. It's mostly non-conforming, but there is some conforming in there, and we still are selling some to the agencies. Obviously, that adds duration to the asset side to the extent that it starts getting a lot, but we'll manage that. Remember, we're adding deposits.
Also don't think that we don't manage that. We manage that rate risk through a whole bunch of things, including derivatives and stuff too. It's not like we just sit there and throw the long assets on and leave them there.
Okay, thanks. Then you did call out the hiring of the sales staff up about 2,000 year-over-year. How do we measure the success of those hires? How much of that is already in the run rate? Was it an opportunity to take market share, or were you understaffed in certain areas? How should we think about that increase in sales staff?
Well, how you should think about it is that you can't grow in a business which is largely driven by face-to-face interaction for the wealth management business and the commercial business in total and a large part of the consumer business. If you don't grow in your sales force, you can't grow your production. If you don't grow your production, you can't grow your balances. All those balances are growing, loan balances and deposit balances are all driven by having more sales capabilities. Unless you assume your team isn't working hard, which is absolutely not the truth at Bank of America, the team works very hard. You got to add more capacity to serve the customers. We have tremendous opportunities. Whatever metric, and you can stun yourself with the opportunity.
The number of customers who have their banking accounts that are in our wealth management business at other banks, hundreds of billions of dollars of bank deposit balances and loan balances. The amount of middle market investment banking that goes to competitors from our middle market clients is 70%-80% of their activity, which we should be capturing a lot more of. We added middle market investment bankers. So that capacity is a requirement. We look at all the markets, 19 markets in the U.S. We look at the relative market shares. We look at what we should be able to do. We look at how a team works together, and we deploy those people in unison between the five or six core business we operate in markets to make sure we're building markets so they can play off each other.
They work to get business together and refer business back and forth. Without that sales force build, you won't have growth in the future.
Great. Thanks.
Thank you. We'll go next to the line of Kenneth Usdin from Jefferies. Please go ahead.
Thanks. Good morning.
Morning.
Paul, I wanted to follow up on consumer credit. There's been, last day or so, a lot of concern about card. Your card losses have been up a little bit, but very manageable. I did notice you did, and you mentioned you built the card reserve to now 3.5%. I'm just wondering what kind of normalization are you expecting on the card losses to follow? To start, sorry.
Yeah. We've been growing our card book. We have a back book that is well-seasoned. We have a front book that we're growing, and that is seasoning like any other normal card, and you're seeing, I think, that across the industry. We feel really very good about our card portfolio. We're focused on, again, prime and super prime. We're focused on our customers. We did see a modest pickup in NCOs year-over-year, but that was fully expected and planned for. Nothing here from our perspective unusual.
Okay. Just expected gradual seasoning, and you're not expecting any kind of vintage major shift in the recent growth?
If you think about the whole card business as we reshaped it over the last 10 years, quite frankly, has been a move to more and more relationship customers whose credit statistics are relatively consistent over time. While we had a year-over-year increase in card charge-offs, late quarter, it fell back down. You should expect this thing to bounce around in these rates. It's because of the nature of the way we originate the cards as core relationship customers. Our focus is on not necessarily getting a lot more cards out there. It's really get people to use their card as a primary card out of their wallet, a Bank of America customer, the Bank of America card and using it, and that's where we're driving the business. I don't think you'd expect the strategy is responsible growth.
The balances grew $1 billion-$2 billion here over the last year. It's going to be steady as you go and drive it, you shouldn't see major changes in terms of nominal dollars of charge-offs.
Understood. As a follow-up to that, in terms of the new Preferred Rewards Card, how will that work through? Will there be any type of amortization of rewards costs, et cetera, that we should think about in terms of the card fees line? Is that just also kind of already been as part of the spending you've been doing?
Let me just take a step back with a lot of people on the call and just review what we did. We did launch it last month. It's a card that we launched because we were listening to our customers, and we wanted to design a card that rewarded those customers who wanted to deepen their relationship with us even further. Importantly, we also wanted to give them the flexibility to use their rewards the way they wanted to use them. Similar to all our other cards, we're very careful to balance the customer value with the shareholder value. Rewards that are very clear and transparent. We put an upfront fee on this card that we're not waiving. We've been very mindful of the profitability of the product, and we don't expect any significant impact at this point anyways.
We'll see how it goes. At this point, any significant impact to card income from existing upfront.
Okay, thanks a lot, Paul.
Thank you. We'll go next to the line of James Mitchell with Buckingham Research.
Hey, good morning.
Jim.
Maybe a quick question on rate sensitivity. It looks like it didn't change despite absorbing another rate hike this past quarter. Is that sort of indication that you've gotten slightly more asset sensitive as the quarter went on? How do we think about the flat rate sensitivity?
If you look at rates at the end of last quarter, and you look at rates where they are now, there really hasn't been a lot of change. It's the rate structure both existing at the end of the quarter versus existing then, plus what the forward path looked like at both those points that drives that asset sensitivity disclosure. They were kind of similar at both points.
Was there any change in the short versus long end sensitivity?
Not really. It's still around two-thirds short end.
Okay. Maybe just a broader question on consumer credit. I think that's been a big issue. I heard your comment on cards, but maybe just looking at the consumer as a whole, do you feel like there's any stress points out there that gives you some pause? I think that's really what's going on in the industry, or at least in a lot of investors' minds worrying about, is this the start of a new upward cycle in consumer credit costs? How do you think about that?
Look, again, we're focused on prime, super prime. We're focused on our customers, and we're just not seeing it in that group. I'm looking at a page here. It's got my initial on it. After you adjust for the OCC bankruptcy and the repossession, if you look at card, if you look at auto, if you look at consumer vehicle lending, and you make an appropriate adjustment, net charge-offs, they haven't really gone up linked quarter or versus Q1. We're just not seeing it yet in our net charge-offs.
Is there any reason-
That's a multi-year discipline. This is not something that happened this quarter. This is multi-years of changing the underwriting standards and sticking to it and not varying those standards as we move through time. We changed the mortgage underwriting standards in 2007 and 2008. We changed the card standards about the same time. The auto standards have always been high. We've always made that a business that we took very little credit risk in. When you think about it, we just don't see it, but a lot of it's just sticking to the knitting over the years and to the responsible growth strategy and the team finding the growth in the customers. The debate's always been, can you grow? And the answer is yes, but you got to grow in a rational, responsible basis.
That's what's playing out in this quarter relative to other people, I think.
Right. Okay, great. Thanks.
Thank you. We'll go next to the line of Gerard Cassidy with RBC.
Good morning, Gerard.
Hi, Brian. How are you?
Good.
You mentioned, Brian, on the call about going into different markets with de novo expansion of your retail branches. Can you give us some color on how long it takes to get those branches to break even? Second, how long does it take to get them to a level of profitability that's similar to your legacy branches?
It takes a while to build them up to the level of deposits, obviously. What we've seen so far, and that's going to be one of the things you test every quarter, is some of the branches we opened in Denver quickly moved into the top 10% of sales and stuff. Now, why is that different than de novo branching? A, we have a nationwide brand. B, we have wealth management and commercial businesses in all these markets. C, we have card customers and mortgage customers in these markets that we've had for years. A lot of times, you're converting a deepening proposition as opposed to I'm opening a store and seeing what comes in. The fourth is we strategically locate them near where the rest of our teammates are and drive it. They're getting up to speed faster.
I won't give you the exact date that we target and things like that because it's proprietary. You should assume that they're getting up to speed faster, and you should assume that we're smart enough that we're not going to build them if they don't work.
Very good. Second, we're all familiar with the Treasury whitepapers that have come out about where they think regulation should go for the banks. When you guys review what has come out, what are the top one, two, or three items that when you sit down with the new Vice Chairman of the Fed, Quarles, what you're going to talk to him about? As part of that answer, can you share with us your thinking on where is your operational RWA, and is that a big issue for you to talk to the regulators about changing in the future?
Sure. On the first point on the whitepapers and all the other stuff that you've been seeing. Look, as an industry, I think it goes without saying that we really have a vested interest in reasonable regulation, that also promotes safety and soundness. We are very focused on that. I would say that we are for regulatory refinement that promotes economic growth while protecting financial stability. There's been a lot of discussion out there, a lot of whitepapers. There's lots of great points that are being made in those papers.
We would be in favor sort of generally in the type of refinement that allows us more access and control over our capital and liquidity in support of responsible growth that we've been talking about all throughout this call, in support of the economy and the communities where we live and work, for lending, and for capital return. We've talked about how large our buffer is. We'd also like to see a little bit more efficient regulation driven by harmonization across the regulatory bodies. We're going to work with whatever parties we can to see some of this get refined in a responsible way. Your second question was on RWA. On operational risk capital. One of our favorite subjects. Look, we have a third of our advanced RWA is operational risk RWA. It's a floor that's been given to us by regulators.
That $500 billion is 33% more than our next closest competitor has in operational risk RWA. That $500 billion is more RWA than just about all the European banks have in total RWA. We'd like to make progress on that. The advanced approach is something we use to manage risk at the company, it's important to have an accurate amount of RWA as we think about how we're managing the company. Having said all that, I would point out that at least in the U.S., with the Collins Amendment, we have to have an amount of RWA that is the higher of standardized and advanced. As we continue to make progress on optimizing how we deliver for customers and clients, we are optimizing our advanced RWA, and it's getting closer and closer to standardized. At some point, standardized will likely become our binding constraint.
That doesn't mean that the operational risk capital operational risk RWA is not important. It is. Standardized at some point will become our binding constraint and make that a little bit moot.
Very good. Just finally, Paul, you mentioned, I think, on the call about the higher rep and warranty expense. Can you guys kind of frame for us what's left there? Obviously, I'm assuming we're toward the tail end, do you guys know about what's left?
Look, we don't really go through them line by line. I think you guys know all the big ones. I'd be happy to sort of list a couple of those if you want. What I would say is if you look at our disclosures, we still have $2 billion in reserves for reps and warranties, and we've got another $2 billion, at least as of the end of the second quarter in the RPL for reps and warranties. We're going to work through these things, and we're going to see over time how that all plays out.
Very good. Brian, we'll see you in Boston. Thank you.
Thank you. We'll take our final question from the line of Saul Martinez from UBS. Please go ahead.
Hi. Thanks for taking my question. I want to ask about a follow-up on efficiency and cost performance beyond 2018 and where you think your efficiency ratio can go to. You've obviously brought down your efficiency ratio to 60%. If you get to the $53 billion, whenever that is, 2018 or whenever you get there, around 2018. You drive down your efficiency ratio even further to 57%, 58%. You're pretty close to sort of your competitors, despite the fact that your business mix is one that has more wealth management and which has a higher efficiency ratio. How should we think about your ability, the opportunity set to continue to drive positive operating leverage over a multi-year period and get your efficiency ratio down even further to the mid to low 50% range?
I know it's a difficult question to answer, and it depends on a lot of things, but with Technology and AI and cognitive computing and digitization and mobile banking. Can we see efficiency ratios that maybe a few years ago we wouldn't have even thought about for a bank like Bank of America?
Well, I think a number of things. Number one, you've got the general picture right, which is we're getting it down to $53 billion. That puts us in a level. We have a higher position of wealth management, which has revenue-related compensation that obviously is a 27% pre-tax margin. You flip that around 83% efficiency ratio, and it's a meaningful amount of $, but it's a great return on capital business, and the last thing we want to do is not grow it. That creates a dynamic around the aggregation of all these numbers, and you look at the other ones, and they're 50-ish type of numbers across the board. We're going to drive that. When you think about it in future, the way we talk about it is the $53 billion is the 2018 target.
We try to hold it flattish after that, fighting to apply technology, all the things you talked about, more digitization, the earlier questioners talked about, and using that to offset the fact that medical care premiums go up, you have 6%-7%, something else goes up, rents go up and things like that, and pay for all that. Merit increases and bigger bonus pools because our teammates are doing a good job. All that, you're fighting that, if you keep it flattish, the question of what scenario you're playing into. If your rates rise a little bit, that pours the bottom line, that's what we told you guys before, that's what we'll tell you in the future. There's no additional cost to that. If it comes through wealth management fee generation, it's going to have more expense attached to it.
There's a little bit of what's your scenario we're playing into. The efficiency ratio is a result of all the hard work that goes in to keep expenses flat, down to $53 billion and flattish after that. That will produce an efficiency ratio based a little bit on the revenue scenario. Which could be on the economics and what's going on out there. You should rest assured after $20 billion expenses in the last five years taken out of the company, that there's no team that is more focused on this than the team that works for me.
Okay, great. That's very helpful. Thanks a lot.
Is that the last one? Okay.
We would like to turn the call over to Mr. Moynihan for closing remarks.
Thank you, operator. Let me just wrap up quickly. Thank you all for being on the call today, and thank you. Look forward to talking to you next quarter. As you think about Bank of America for the quarters to be of 2017, it's pretty straightforward, responsible growth. It's evidenced across the company in all different fashions, whether it's got to grow, no excuses. You saw that in balances and revenue. Got to do it with the right customer focus, got to do it with the right risk, and we got to do it and be sustainable. When we say sustainable, that means we got to do it and keep investing in the future, and you saw us do that also. When we do that right, we can take more capital and deliver it back to you through dividends and share buybacks.
As we told you earlier, we nearly doubled that year-over-year. Thank you, and we look forward to talking to you next quarter.