Good day, everyone, and welcome to today's Bank of America Earnings Announcement. At this time, all participants are in a listen only mode. Please note this 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 McIntyre.
Good morning. Thanks to everybody on the phone. Thanks for those that are joining us on the webcast as well. Welcome to the Q4 earnings results presentation. Hopefully, everyone's had a chance to review the earnings that we released.
It's available on the Bank of America Investor Relations website. And so before I turn the call over to Brian and Paul, let me remind you, we may make some forward looking statements. For further information on those, please refer to either our earnings release documents on our website or our SEC filings. So with that, I'll turn it over to our CEO, Brian Moynihan.
Thank you, Lee, and good morning. Thanks all of you for joining us this morning to discuss our Q4 results. Before Paul Dhanofre takes you through the details of the quarter, I just wanted to provide some overall context in our progress in 2015 and the opportunities and challenges ahead. As you know, for the Q4, we reported $3,300,000,000 in earnings or $0.28 per diluted share. For 20 15, we had net income of $15,900,000,000 That's the highest net income we've had in a long time.
Full year return metrics were 74 basis points for ROA and 9% for return on tangible common equity. During 2015, we continue to drive our eight lines of business forward. We focused on driving responsible growth across all our businesses. And as you look at the annual earnings of the company and see how they fell, you can see how they came through. Our consumer and wealth management businesses serving mass market customers all the way to the wealthiest Americans delivered $9,300,000,000 in net income this year.
Our Global Banking business which provides services to small, medium and large companies around the world produced $5,300,000,000 in net income this year. When our institutional investor clients, our markets business with its market leading research capabilities and a top tier platform across the globe delivered and a top tier platform across the globe delivered $3,000,000,000 in earnings after adjusting for DBA in a very challenging market. What's clear in these earnings despite the gyrations in the markets, especially at the end of the year last year is the annuity nature that we get from our franchise by driving customer and client flows. That's the power of the company, it's balance and scope and a solid strong customer base. And we aim to continue to improve it every day for our clients and customers and our shareholders.
These results reflect the work we've done over the past several years to develop a more straightforward, simplified operating model and focus on responsible growth. As you can see on Slide 2, across a variety of measures, loan growth, business activity, capital liquidity, credit losses and cost management, made meaningful progress and believe we're positioned for a variety of economic cycles. At the foundation of this is a strong capital liquidity base. We added to our record liquidity levels in 2015, when we believe we're well positioned against the 2017 LCR requirements with total global excess liquidity sources now over $500,000,000,000 This amount represents nearly a quarter of our balance sheet and we have enough apparent liquidity to last more than 3 years before we need to tap
the market for funding.
Our liquidity levels were driven by strong growth in deposits this year and we were able to put that funding to work to grow loans on an absolute basis for the first time in several years. Loan growth was all driven by organic activity and consistent with our risk posture. Our change of common equity of $162,000,000,000 is at record levels as well. We returned $4,500,000,000 in shareholders a year in common dividends and share repurchases. Our tangible book value per share improved 8% in the past 12 months to a new high of $15.62 Our responsible lending focus also shows in our underwriting results.
Our net charge offs were down to $4,300,000,000 this year, consistent with last 2014, but much lower than previous years. Commercial charge offs increased off a very low base, mostly from oil related charge offs, while consumer losses at their core continue to improve. This reflects both our response from underwriting continued improvement in our legacy portfolios. And finally, we get to the cost management side. At the heart of our work has been an improvement in expenses, which you can see are down sequentially from last year, mostly on lower litigation costs, but also on improved LAS and other operating costs.
And these have improved steadily across the last several years. We began new BAC in 2011 and completed in 2014. Since then, we've been using our simplify and improve initiatives to find savings that more than offset increased compliance, merit and other inflationary costs. But most importantly, those savings fund investments in our business, whether it's in technology, our sales force growth or other infrastructure costs. As we move to Slide 3, we include a few examples of trended business activity in our consumer side of the house and wealth management side of the house.
As you can see, we grew average deposits in consumer banking wealth management business $52,000,000,000 or 7% comparing year over year Q4 periods. These deposits were up over $105,000,000,000 in core deposits the end of 2012. This is strong organic growth. It's a result of hard work and improving the customer satisfaction in our franchise by making it easier for customers to do business with our bank and strong product management simplifying the product set. All this has been done, we've optimized our delivery network, reducing our financial centers, divesting certain markets and also expanding our award winning mobile capabilities and the customer base that uses that.
As you can see, this work also extends to our Wealth Management business. We've had long term net flows every quarter for 6.5 years in Wealth Management. We have record loan levels and significantly higher deposit levels. Good products and advice are growing sales force and 2 of the leading brands in business positions well here. When you move to our Global Banking Markets area, you can see an institutional side of house laid set up 4th on Slide 4, we saw solid activity in 2015.
Loans to commercial and corporate clients around the globe have grown nicely. Client demand has been good and our bankers have met our challenge to capture market share responsibly. This focus allowed us to demonstrate a strong 12% growth in loans in Global Banking in the past 12 months. And you can see the deposit growth has been strong year over the last year as well. If you look at the markets business, Tom Montag and the team have done a good job of reducing assets and lower their risk and still generating relatively stable revenue.
Despite the recent market challenge, we remain quite profitable in this business and well positioned around the globe with both a strong FIC and equity platform. As we step back, remain focused on our core customer strategy. We continue to invest in the future and even as we continue to address the legacy issues of the past. We've been able to grow even as operating in economic environment remains in a low growth mode. Our model is solid, but there's still plenty of work to do, but also there's plenty of opportunity ahead for us.
Overall, I'm pleased with the progress we made in 2015 and we have more to do in 2016. But in 2016, she expects us to continue to focus on our responsible growth. We'll continue to drive the investments made in the franchise to deliver the value to you as shareholders. We'll continue our sharp focus on risk management and we'll continue our cost discipline as we look to continue to improve return on capital metrics of our company. With that, let me hand it over to Paul.
Thanks, Brian, and good morning, everyone. Starting on Slide 5, we present a summary of the income statement returns for this quarter as well as the Q4 of last year, which had similar seasonal aspects. We earned $3,300,000,000 in the quarter compared to earnings of $3,100,000,000 in 4Q 'fourteen. Earnings per diluted share this quarter were up or $0.28 up 12% versus a year ago. Results include 2 significant charges that were previously announced and impacted EPS by $0.06 First, we recorded a pre tax charge of $612,000,000 associated with trust preferred securities, which phased out of Tier 2 capital at the end of 2015.
2nd, we had a tax charge of $290,000,000 associated with the UK tax changes that were enacted during the quarter. Lastly, we had a few other items that benefited EPS this quarter by a penny on a net basis. These included a negative net DBA impact in sales and trading that was more than offset by positive impacts of market related adjustments in net interest income and some more off tax benefits. Revenue on an $19,800,000,000 this quarter, up 4% from Q4, 2014. Expenses were $13,900,000,000 approximately $300,000,000 or 2 percent lower than a year ago, driven by good expense discipline across the company.
We also provide returns with a few other metrics on this page. I would remind you that client activity and revenue in our Global Markets segment tend to be lower or lowest in the Q4 affecting returns in other statistics. Lastly, as many of you are aware, there was a recent accounting change that requires certain unrealized debit evaluation adjustments to be recorded directly to OCI rather than through the P and L. We've early adopted this change effective as of the beginning of 2015. The slides and the supplemental earnings materials that present 20 15 results have been adjusted.
Turning to Slide 6 and focusing on the balance sheet, we moved deposits by $35,000,000,000 from Q3 and we used these increased deposits to fund responsible loan growth. In total, assets climbed $9,000,000,000 as increases in loans and security balances of 30,000,000,000 dollars were more than offset by reductions in trading related assets and cash. Liquidity rose to just over 500,000,000,000 dollars a record level and time to require funding remains over 3 years. Tangible common equity of $162,000,000,000 improved modestly from Q3 as earnings were offset by both the return of $1,300,000,000 in capital to common shareholders and negative OCI driven by security values. Tangible book value per share increased to $15.62 another new record high.
Turning to regulatory metrics, we began reporting regulatory capital under the advanced approaches for the first time this quarter. On a CET1 transition ratio under Basel III ended the quarter at 10.2 and really has no comparable metric as transition ratios in prior periods were reported under the standardized approach with lower RWA levels. On a fully phased in basis, CET1 capital improved modestly to $154,100,000,000 under the advanced approaches compared to Q3 2015 pro form a estimate, the CET1 ratio increased slightly to 9.8%. RWA was essentially flat as growth from commercial exposures was modest mostly offset by lower activity and balance sheet levels in our global market segment. We also provide our capital metrics under the standardized approach.
Here our CET loan ratio was flat at 10.8% with modest improvements in capital offset by modest increase in RWAs. In terms of the supplementary leverage ratios, we estimate that as of twelvethirty one, we continue to exceed U. S. Rules applicable beginning in 2018 at both parent and bank. Turning to Slide 7.
We had strong loan and deposit growth this quarter. Reported loans on an end of period basis increased $15,000,000,000 from Q3. This is the 3rd consecutive quarter of reported increases in total loan balances. We continue to see solid loan demand in our primary lending businesses, partially offset by runoff in LAS and all other. Excluding declines in LAS and all other, ending loans in our primary lending segments increased $22,000,000,000 from Q3.
Dollars 8,000,000,000 of this increase was in consumer loans as GUM increased mortgages and security based lending. Consumer banking also saw good loan growth in mortgages as well as vehicle loans. We also had some seasonal growth in credit card, partially offset by selling 1,700,000,000 of card receivables at the end of the quarter. Commercial loans grew 15,000,000,000 spread across multiple industry groups. Turning to deposits, on many basis, they reached nearly $1,200,000,000,000 this quarter, growing $78,000,000,000 or 7% from Q4 2014.
Growth was solid across the franchise. Consumer led the way growing 9% year over year, while both Global Banking and GUM each grew at a 6% pace. Turning to asset quality on Slide 8, while still strong, we did see net charge offs increase modestly from recent levels. Total net charge offs increased $212,000,000 versus Q3, dollars 144,000,000 was from consumer items previously reserved for and lower recoveries on the sale of NPLs in the 4th quarter versus Q3. We also saw a $73,000,000 increase in net charge offs from our energy portfolio.
Outside of these two areas, net charge offs were stable compared to Q3. Provision of $110,000,000 in Q4 was relatively flat with Q3. Reserve releases in consumer real estate and credit card were partially offset by reserve bills in commercial, which were driven by increases in criticized exposures as well as loan growth. Reserve releases, excluding the previously reserved items I mentioned earlier, were roughly $200,000,000 On Slide 9, we provide credit quality data on our consumer portfolio. Net charge offs increased $137,000,000 The two items of note that make up this increase were reserved for in prior periods and did not impact provision expense in the quarter.
$119,000,000 was a result of collateral valuation adjustments. In addition, we had some small charge offs associated with our 2014 DOJ settlement. We expect to complete our commitments under this settlement in the first half of twenty sixteen. Adjusting for these two items, consumer net charge offs were relatively flat versus Q3. Delinquency levels and NPLs continue to decline and reserve coverage remains strong.
Moving to the commercial side, on Slide 10, net charge offs increased $75,000,000 primarily from losses in our energy portfolio. Outside of the energy portfolio, commercial losses remain very low. Given the focus on the impacts of low oil prices on companies in the energy sector, we want to spend a minute to describe our energy portfolio and provide some perspective. The pie chart breaks down our $21,000,000,000 of utilized exposure to the energy sector. This represents a little more than 2% of our total loan balances.
Within that $21,000,000,000 $8,300,000,000 or less than 1% of total loans is loans to borrowers in 2 sub sectors, exploration and production, as well as oilfield services. We consider these 2 sub sectors to have significantly higher risk than the rest of the energy portfolio. Of our $8,300,000,000 utilized exposure to these 2 higher risk subsectors, dollars 2,900,000,000 has already been downgraded to criticize. So 35% of the higher risk subsectors has already been downgraded to reservable criticized exposure, thereby driving a portion of the reserves. And allowances for loan losses for the entire energy portfolio is approximately $500,000,000 or 6% of the funded exposure of these 2 subsectors.
Companies in the vertically integrated subsector represent 5 point $8,000,000,000 of the energy portfolio. We believe this subsector has a better ability to withstand lower oil prices. Nearly 100% of the companies have a market cap of $10,000,000,000 or more or they're sovereign owned and the average company has a market cap greater than $60,000,000,000 We believe the remaining exposure in refining and marketing as well as other is also less dependent on oil prices. As part of our standard risk management process, we stress test our credit portfolios, including our energy portfolio. Our stress analysis of the energy portfolio includes various sustained low oil prices over extended periods.
As an example, if we held oil prices at $30 per barrel for 9 quarters, we estimate our potential losses on the energy portfolio would be roughly $700,000,000 In energy and across our commercial sector, we continue to support clients while managing lending limits and actively engaging with stressed borrowers. Before moving from asset quality, I want to refocus on total provision expense and how one should think about it over the next couple of quarters. As we continue to assess and react to future changes in the energy sector, we could see lumpiness that could potentially drive provision expense over $900,000,000 Turning to net interest income on Slide 11. On an FTE basis NII was $10,000,000,000 increasing roughly 300,000,000 dollars from Q3. NII included a negative $612,000,000 charge associated with 3 trust preferred securities.
These securities were scheduled to be completely phased out of Tier 2 Capital as of Jan 1 and with 7% to 8% coupons became expensive debt. NII also included $116,000,000 of positive market related adjustments to the amortization of bond premiums under FAS91. NII excluding marketable adjustments and the charge on the trust preferred improved $188,000,000 from Q3 to $10,500,000,000 This improvement was driven by increased deposit balances, which we used to fund growth in loans and securities. As we move into the Q1, please note the following. 1st, we will have one less day of interest.
2nd, recent changes by Congress will lower the amount of dividends we receive from the FRB by approximately $50,000,000 a quarter. Having said that, if the forward curve is realized and if we have some modest deposit and loan growth, we still expect to show growth in NII in Q1 2016 relative to our adjusted NII of 10,500,000,000 dollars With regard to asset sensitivity, at the end of the 4th quarter, our overall asset sensitivity decreased slightly as a result of increases in loan rates as well as security balances. As of twelvethirty one, an instantaneous 100 basis point parallel increase in rates is estimated to increase NII by approximately 4,300,000,000 dollars over the subsequent year. A little more than half of that improvement comes from the increases in short end rates and a little less than 1 quarter of the benefit comes from market related adjustments. Turning to expenses on Slide 12, non interest expense was 13 point $9,000,000,000 in Q4, dollars 300,000,000 lower than Q4 'fourteen.
This was driven by good expense discipline across the company. Litigation expense was a little higher this quarter at $428,000,000 exhibited some lumpiness as we work to resolve legacy issues. Keep in mind that annual litigation expense decreased from $16,400,000,000 in 2014 to $1,200,000,000 in 2015. Legacy asset servicing costs excluding litigation finished Q4 a little better than our target of 800,000,000 dollars As we have said, our net goal is $500,000,000 per quarter. Expenses excluding litigation and LAS were $12,600,000,000 and represents the 5th quarter out of the past 6 below 12.8.
We continue to look for ways to streamline and simplify how we do business. This is important because it allows us to invest in growth while maintaining relatively flat core expenses in a sluggish revenue environment. And importantly, this relevant flatness continued even as we invested in additional sales professionals and improved technology. Looking towards expenses in 2016, let me remind you, in the Q1, we will record as normal approximately $1,000,000,000 in cost for retirement eligible incentives. In addition, the Q1 typically includes seasonally higher payroll taxes of roughly $300,000,000 And if we experience additional rebound in Q1 sales and trading revenue, this would also increase incentives and other associated costs.
Turning to the business segments and starting with consumer banking on Slide 13. Consumer earned $1,800,000,000 9 percent greater than Q4 last year. These results reflect good operating leverage on increased customer activity. The segment generated a strong 25% return on allocated capital. Revenue of $7,800,000,000 was up modestly from Q4, 2014.
Net interest income benefited from higher deposit and loan levels. Non interest income was down slightly from lower mortgage banking. The decline in mortgage revenue reflects selling fewer non performing loans as we hold more on our balance sheet. In addition, there was the absence of $30,000,000 in quarterly revenue from the Q3 sale of a small non core appraisal business. Expenses declined 2% from Q4 2014 as the savings from reductions in financial centers and personnel more than offset higher product costs and investment in increased sales specialists.
The cost of operating deposit franchise remained low at 177 basis points. Operating leverage drove improvements in the efficiency ratio to 56% as we continue to experience shifts in customer activity away from branches towards self serve options. Mobile banking users increased to 18,700,000 which is up 13% from Q4, 2014 and deposit transactions from these devices now represent 15% of deposit transactions. Slide 14 presents consumers' progress across a number of customer activities. I would like to highlight activities in 3 areas loans, deposits and brokerage assets where we continue to grow responsibly.
These three products are at the core of our rewards programs where we share benefits with customers who deepen relationships with us. Average loans grew $12,000,000,000 from Q4, 2014 in mortgages and vehicle lending. Ending deposit growth was strong at $48,000,000,000 or 9% from Q4, while the rate paid declined to 4 basis points. Regarding brokerage assets, Merrill Edge assets levels of $123,000,000,000 are up 8% from last year even with declines in equity markets this year. Total mortgage production was up 13% from Q4 last year and stable with Q3.
Looking at card activity, which includes GUM, card issuance was strong at $1,300,000 Average U. S. Card balances of $89,000,000,000 were down modestly from last year, but up seasonally from Q3 2015. U. S.
Card credit quality was strong as net charge offs remained at decade low levels of 2.5% a risk adjusted margin of 9.4%. Credit spending volumes finished on a high note as Q4 spending was 5% higher than last year, outpacing what we believe to be total market spend levels. Debit spending was strong as well. For example, on Christmas Eve Day, we saw record debit card spending of more than $1,000,000,000 In our consumer segment, we expect technology adoption by customers to continue to be a cornerstone of not only improved customer satisfaction, but also efficiency gains and operating leverage. The latest examples of this are around digital selling and appointment setting.
Digital sales in the Q4 were up more than 31% from last year. Digital deployments reached more than 16,000 in the recent week. We expect these adoption trends to play an increasing role in future performance and customer satisfaction as we continue to advance online and mobile capabilities. Turning to Slide 15, Global Wealth and Investment Management produced earnings of $614,000,000 Results were down from Q4 last year, driven by lower transactional revenue and the impact of the market decline on asset management fees. Transactional revenue continues to be impacted by the shifting of activity from brokerage to managed relationships as well as market uncertainty.
NII benefited from solid loan growth and solid deposit growth, but was offset by the company's AOM activities leaving NII relatively flat with Q4 'fourteen. Non interest expense was modestly higher than the year ago period. Investment in client facing professionals continues, while lower revenue caused decline in incentive compensation that was more than offset by amortization of stock awards issued in prior periods. Pre tax margin was 21%, down from Q4 2014. Beginning into the Q1 of 2016, we will benefit from lower expense resulting from the completion of amortizations related to advisor retention awards given at the time of the Merrill Lynch merger.
Moving to Slide 16, despite the volatility in market levels, we continue to see solid client activity and we continue to invest in the business growing wealth advisors 5% from Q4 last year. Long term AUM flows were $7,000,000,000 and remained positive for the 26th consecutive quarter. Deposit flows were strong, growing end of period balances of $15,000,000,000 from Q3. By the way, this may have been driven in part by clients' concerns with market volatility. Loans continue to grow, improving 10% from last year.
This is the 23rd consecutive quarter of average loan growth in this segment. Turning to Slide 17, Global Banking earned $1,400,000,000 down 9% from Q4 'fourteen, but still generating a 16% return on allocated capital. The earnings decline from Q4 was driven by higher provision expense. Provision expense was up $264,000,000 from Q4 last year, driven by higher energy related charge offs and reserve builds for loan growth and energy related risks. Revenue increased modestly from Q4, 2014, while expense declined modestly.
Driven by higher loan balances, NII improved despite spread compression and the allocation of the company's down on activities including higher liquidity costs. Non interest income benefited from higher treasury services revenue, higher leasing revenue and a small gain from sale of a 4th growth property, partially offset by lower IVPEs. Looking at trends on Slide 18, and comparing to Q4 'fourteen, IV fees of $1,300,000,000 were down 17% as leverage finance and equity issuance was partially offset by advisory fees that were at the 2nd highest level since the Merrill merger. From a market share perspective, we maintained our number 3 global fee ranking. Looking at the balance sheet, loans on average were 320 $1,000,000,000 up 12% year over year.
The growth was broad based across C and I, real estate and leasing. We continue to experience some spread compression, although it has moderated relative to a year ago. Asset quality of new loans was consistent with the overall portfolio. On deposits, we saw good performance with average deposits increasing by $16,000,000,000 or 5% over Q4, 2014. The mix of these deposits remains very good with less than 5% classified as 100 percent runoff balances.
Switching to global markets, on Slide 19 and comparing to Q4 last year, we are pleased with the results here given challenging market conditions as the teams increased revenue while using lower asset levels and less bar. Gold Markets earned approximately $200,000,000 but we think one should consider results excluding EBA. On that basis, adjusted earnings were $308,000,000 which was relatively flat to Q4 'fourteen on a similarly adjusted basis. Note that our net DVA loss this quarter was $198,000,000 and compared to a loss of 626,000,000 dollars in Q4 2014, which included an initial FBA adjustment. Total revenue excluding DVA improved $313,000,000 or 10% from the Q4 last year on improved fixed sales and trading.
Outside of sales and trading, global market share of lower investment banking fees was offset by a gain on the sale of an equity investment. Non interest expense increased 9% in line with revenue improvement. Moving to DVA was up 11 point 5% from Q4 2014. Compared to Q4 last year, fixed sales and trading of $1,800,000,000 improved 20%, reflecting improvements across most products, notably in rates and credit related products. Equity trading of $822,000,000 declined 3%, reflecting lower client activity.
Average trading related asset levels were down 9% in Q4 'fourteen, while borrower was down 14%. Turning to legacy assets and servicing on Slide 21, this segment lost roughly $350,000,000 in line with the prior year. Focused areas here are mortgage banking income, the number of delinquent loans and expenses, all compared to Q4 'fourteen. 1st, mortgage banking income, which improved slightly, was driven by 3 factors. Revenue warranty provisioning improved $237,000,000 to a provision of $9,000,000 this quarter.
That favorability was offset by a decline in servicing fees of $108,000,000 as units service declined, as well as a decline in net MSR hedge performance of $152,000,000 dollars Next, the number of first mortgage loans that we service that are 60 day delinquent continue to decline and are now at 100 and 3,000 units. And last, the team did an excellent job lowering expenses. Excluding litigation, we achieved our goal of $800,000,000 moving costs down $309,000,000 or 28%. On Slide 22, we show all other, which reported a loss of 289,000,000 dollars This was an improvement of $86,000,000 from Q4 'fourteen. This loss was driven by the $612,000,000 pre tax charge associated with our trust preferred as well as the impact on the UK tax law changes.
This was partially offset by gains on debt security sales as well as reserve releases on consumer real estate loans booked in all other. A comment or 2 on taxes before wrapping up. The company's effective tax rate for the quarter excluding the UK tax charge was 25%, reflecting reoccurring tax benefits plus a few small one off benefits. We would expect the tax rate to be in the low 30s for 2016 excluding unusual items. Before closing, I want to cover our early adoption of DBA accounting in more detail.
In January of this year, the Financial Accounting Standards Board issued an update to allow early adoption of a new rule regarding recognition of DVA on financial liabilities from changes in our own credit spreads. The update means that these types of debit valuation adjustments will now flow through OCI instead of the income statement. We believe this change makes our earnings comparisons more meaningful and easier to understand. Therefore, we adopted early. We restated all prior years excuse me, restated all periods this year per the FASB rules and those numbers are contained in the supplemental package.
This has no impact on capital as it moved dollars between retained earnings and OCI, but it did impact revenue, earnings, taxes and EPS in the first 3 quarters of 2015. The changes reduced previously reported EPS by approximately $0.02 each in Q1, Q2 and Q3. This accounting standard adoption did not impact DBA on derivatives, which continued to flow through trading account profits. Okay, let me conclude by offering a few takeaways. Although the U.
S. Economy is improving slowly, revenue growth remains challenging. This quarter, we continued our progress on those things we can control and drive. These include delivering for clients and customers within our risk framework and driving client and customer activities that will result in sustainable profits and returns. Our results reflect this focus.
We maintained a strong foundation of capital and liquidity. We grew loans, deposits and investment flows. We continue to invest in our franchise by adding sales professionals and improved technology. Our strength, global capabilities and experience allowed us to deliver for clients in a challenging market environment. And we did all this while closely managing expenses.
With that,
we'll open it up to Q and A.
We'll take our first question from Matt O'Connor of Deutsche Bank. Your line is open.
Good morning.
Good morning, Matt.
Can you talk about the outlook for the core costs beyond some of the lumpy items in 1Q? And then specifically maybe comment on how you feel like your markets business is sized. We've obviously seen some cost saving announcements at your U. S. And non U.
S. Peers and want to get a sense of how you feel you're positioned for the markets?
This quarter the Q4 I think represents as I said in the comments, the 5th quarter about a 6% that we've been below 12.8%. As you know, I think we've been talking about maintaining core expenses below 13,000,000,000. So we would feel really good about our progress. I have to remind everybody that we're maintaining those core expenses at those levels while we're investing in front office professionals, while we're investing in technology, while we're absorbing the natural increase in pay for our employees and fraud costs and CCAR costs and other things. So I think we feel good about the work we're doing there.
In terms of global markets, what was the question?
Just in terms of the staffing and the positioning there, how you feel for, I don't know about the current environment, but just not bouncing back in a big, big way. And obviously, we're seeing reductions being announced at some of your U. S. And non U. S.
Peers. So how are you feeling about the sizing of your business for the environment you expect?
Matt, in the Q4, we did reduce headcount in the business, the markets businesses and the related capital markets business. We didn't make a big announcement, but that led to the $130,000,000 in severance in the 4th quarter numbers that you see. So and we'll continue to adjust that headcount. Tom and his team will continue to adjust it, but they made an adjustment in headcount in the 4th quarter, just didn't make quite the press other people's
only thing I'd add Matt is, my focus was on core expenses. We're still we're going to see full expenses I think continue to come down as we work on LES and continue to hopefully see some moderation in legal
expenses.
And just on the timing of the LES getting to that below $500,000,000 you did disclose a big drop in the headcount if we look year over year. And obviously there's a delay in terms of the cost and sales coming down, but what's the timing of getting to that $500,000,000 or below?
Look, I think we've made great progress in terms of getting expenses down. I think we started at what $3,100,000,000 quarters ago. So we made great progress getting down to $800,000,000 Our next milestone is $500,000,000 per quarter. That's going to be a little bit harder. It's just as you get lower and lower, it's a little bit more unpredictable.
And so we're not really giving a target at this time, but we're going to get there as soon as we can.
You should expect to make good progress toward this, Matt, toward this year. And so as you look towards the end of the year, we should be getting there.
Okay. Thank you.
We'll move next to Betsy Grafik of Morgan Stanley.
Hi, good morning.
Good morning, Betsy.
I just wanted to dig in on a couple of things. One was on energy since its flavor of the day. You gave a lot of color there and you indicated that if $30 holds for 9 quarters, that's a loss of $700,000,000 I just wanted to understand, is that already reserved for or that's over and above case if we go below 30, what you've got baked in because I don't think it's linear, I just wanted to understand how you're thinking about it?
Sure. Look, as we said in the comments, we've got reserves against that energy portfolio of $500,000,000 That's 6% of the high risk subsectors. And we develop reserves on an incurred basis. We develop them by looking at loss given default, probability defaults, exposure defaults. We go loan by loan.
We have a lot of in precision. Other factors that we look at for imprecision, we put judgment on all of that. One of the things we look at when we come up with our judgment on what we should be is our stress testing. And so that's how that gets factored in to our reserve, which again has to be on an incurred basis.
Right. So when you indicated that if $30 holds for 9 quarters, your model suggests a loss of $100,000,000 dollars that's already reserved for or that's on top of what you already have reserved?
In part, Betsy, because the idea is you cannot incur for what you see through today in terms of the operating structure of these companies and the asset based loan these are asset based loans, those are based loans. If you were 9 quarters from now and oil is still at that price, you'd have to have a reserve for what's left of the portfolio. The exposure has been coming down. It would come down during those 9 quarters by the losses you took at least in resolving those credits. So it's in part covered, but not fully because that's an estimate of a future that we as Paul said, it's an incurred view of the portfolio.
Yes, okay. I guess that's helpful.
We think about it is we've got a $500,000,000 reserve. As we go theoretically you go through the 9 quarters, if that $700,000,000 would have come true if our model was perfect, it would go against that $500,000,000 but you'd be building reserves as you went through that process. So if you told me what you wanted to end the 9 quarters at, if you wanted to end at 500,000,000 dollars you can do the math. If you wanted to end that at more or less, it's going to be more or less in terms of you kind of build.
And then could you talk a little bit about the reserve release that's still possible from the other portfolios? You had $200,000,000 reserve release this quarter. Just wondering what the legs are on that. We've seen other institutions essentially finish up the reserve release. I know you had a big legacy book, so maybe there's a little more legs there.
Just wanted to understand how you're thinking about the trajectory there?
I think you got it. I think we have a legacy, we have a large legacy portfolio on the consumer side. As we continue to work through that and if home prices continue to stay where they are or improve, the economy stays where they are and improve, I think you're going to continue to see reserves from us in 2016 or reserve releases, I should say, from us in 2016, but they're going to moderate from what they have been in the past. Okay. So there's still
some legs, but at a decelerating pace?
Yes. Some of that swings over to the commercial book, yes, as we saw this quarter, Betsy. So we have come down from a lot of reserve releases last year. I think it was $800,000,000 or so in the Q4 last year, dollars 700,000,000 or something down to 2 $100,000,000 if you expect that to kind of mitigate during the course of 'sixteen. Yes.
And we've built reserves in commercial.
All right. Thanks.
We'll move next to John McDonald of Bernstein. Your line is open.
Hi, good morning. Paul, I was recalling I think you had for a goal this year to generate positive operating leverage. I was wondering how you feel about the ability to achieve that. What kind of revenue environment are you planning for and how will you manage expenses to try to get some positive operating leverage this year?
I think we feel good about the operating leverage we achieved in 2015. 15. You can see that with the revenue growth relative to the EPS growth. And I think we're looking to continue that trend. We've got a little hopefully a little bit of a tailwind here on rates.
We're going to continue to manage expenses carefully. So in terms of our EPS growth in 2016, we don't give estimates, but in terms of our EPS growth in 2016, I think it will be more of the same revenue growth with some hopefully expense discipline that will get us some operating leverage.
Okay. And then Brian, could you talk a little bit about what your goals will be with your 2016 CCAR submission? Are you looking to make some progress on both the dividend and buyback potentially? And do you maybe you could share some thoughts about that?
John, we haven't seen the scenarios yet and stuff like that. So I think it's probably premature to discuss that. Our goal is long term is to return more and more capital to shareholders through dividend and stock buybacks at this price. Obviously, stock buybacks are favored, but when we see the scenario and play that out, it begins to have the process to talk about today.
Okay. And Paul, one quick follow-up on the NII. Is there a benefit from the pay down of trust preferreds that you'll get 2016? Is that why you're able to grow the core NII a little bit in 2016?
I wouldn't say that's why, but obviously there's a benefit from paying off those trust preferreds. They had I think it was $175,000,000 in per quarter. I mean I got that right. Yes. And so there's a benefit there.
The way I would think about those is we're not going to quote replace them because they don't count for regulatory capital. So why would we replace them? We're going to have a capital structure that meets our regulatory requirements, which requires us to have a certain amount of CET one, we're going to have the appropriate amount of preferred and sub debt. And of course, we have to meet the TLAC requirement. So that's how I would think about it.
Okay. And so it's really just the loan growth and pretty stable rates driving some core NII growth?
John, if you look at it, what was affecting us 2013, 2014 was we continue to run off portfolios that had yield to them. And obviously the reinvestment rates on the investment side of the house as we ran those off were flattish. That's kind of all run through the system. So now what you're seeing is $80,000,000,000 of period deposit growth in Q4 last year this year and the overall pay rate for that is in the low single digit basis points, all core, all in consumer wealth management and driven by middle market in the banking business. So that's the deposit funding side and the asset build is now good core loans that have reasonable yields.
I mean you start to see it and then pick up just to air from that and we expect driving that forward as long as the economy continues to grow a couple of percent.
Okay. Thank you.
Hey, John, just real quick, I want to correct one thing I said. The $175,000,000 is full year. Okay.
We'll move next to Paul Miller of FBR and Company. Your line is
open. Yes. Thank you very much. On your NPAs, you had really good disclosure, you're getting it down to 103,000. Did you sell any this quarter?
Or was that all workouts through your servicing?
We sold a little bit, but not as much as we had
in the past. Largely, Paul, that's been it's very incremental at this point on the sales side.
And then when do you I mean like at this point when do you think you can get that down to I guess it's not a normal level because you're just going to run this whole portfolio off. I mean, could you have any idea when that will be over with?
Well, the 103 is the total portfolio. So there's a normal piece in that and an abnormal piece in it. But we should be driving it down to 60 days, 103 bps across both portfolios. But that number should come into, I don't know, pick up 1% or 1.5 percent of the service loan units. So it's still got some room to go.
And that's the key that I think Matt pointed out earlier is the IP headcount and LAS. We had a 2,000 person headcount drop in the company overall in the 4th quarter, about half LAS, half the rest of the company. The LAS percentage rate was 8 percentage points not annualized for the quarter of 30%. It's still dropped in its headcount, but it's getting flatter. And now we've got all the old cost to drive out of the portfolio.
So in terms of thinking about real estate and old systems and stuff, and so that's what takes a little more time now, just the people cost.
Okay. Hey, guys. Thank you very much.
We'll move next to Jim Mitchell of Buckingham Research.
Hey, good morning. Maybe just a quick question on deposit behavior since the rate hike. Have you seen anything unusual or but I would assume it would be more on the institutional side where you'd see movement at this point? And maybe you can kind of give some update on how you're thinking about the deposit betas this year?
Sure. The short answer is that we have seen no real movement. Of course, we're very focused on making sure that we pay appropriate deposit rate, but so far there's been no movement. We have been modeling deposit betters on our interest bearing deposits in the high 40s.
And you still think that makes sense or do you think that's relatively conservative?
We think that makes sense. And given the quality of our deposit base as Brian sort of kind of walked through already, the portion we have in our consumer and G WIM franchises, the number of primary checking accounts, even on the wholesale side, if you look at our deposits, less than 5% of them are 100% runoff deposits. So we feel good about our 1,200,000,000,000 in deposits. We took even this year the deposit rating came down another basis point to 4 basis points for the all deposits. So we feel good about that modeling.
And Jim, remember that modeling is not 40% of everything. It's a lot less nothing and a lot less for the first couple of bumps. So I think that's what you're thinking about. So if we continue along with 1 or 2 rate rises, there'll be a lot more captured than as it gets up to the higher.
Right, it'd be more back end weighted.
Exactly, exactly. That's what you're asking.
Okay. And just one last question, maybe on the expense side. If we look at I mean, you guys have done a good job. And if you look at your core expenses, normalized for all the puts and takes, it still seems like your efficiency ratio would be sort of in that 63%, 64% range
and a lot
of your peers are well below 60%. Is there a is this sort of you grow into the improving efficiency ratio with the revenues as you reinvest? Or is there do you think you can get there more quickly? Just trying to get a sense of how you get the trajectory into more in line with the peer group on the efficiency ratio side?
If you look at the full year 2015 and you do those puts and takes with the things that we've talked about through the year and you make any sort of a reasonable guess as to the progress we're going to make around LAS. We're sort of in the kind of 65 ish range. We're going to continue to focus on growing responsibly and working on our total expenses as we talked earlier. And so with a little help from growth and some more work on expenses, we think we're in the shooting range. As we model ourselves and
look at sort of the peers and that gives us the average efficiency by business units and model against our business mix, we're going to be a little higher because of high level wealth management in our business relative to total. But look, 3 things on expenses. Number 1, we're continuing to drive at them and funding all the growth in FTE for sales side. We had 6% growth in consumer FTE sales side, 3% wealth management, 6% or maybe 8% global banking year over year. So we're paying for all that, paying for all the incentives attached to it, paying for all the infrastructure attached to it.
So we're going to continue to drive it down. So just rest assured that is and then we are not satisfied in the mid-60s efficiency ratio of the company and we should be able to drive that down and it will come from both just hard work and then as you say with the rate lift and stuff which affect we're still affected a little bit more by the low rate structure and other people we should pick it back up. But don't think we're complacent on this.
Okay. Appreciate it. Thanks.
We'll move next to Glenn Schorr of Evercore. Your line is open.
Thanks. So I think you put the heat on a little bit on loan growth over the last couple of quarters. And if you look at lending in your primary lending segments, it's picked up and I think that's good. The question I have is with new information that we have, I mean the market is digesting and anticipating, I don't know if I'll call it a recession, but a lot of fear around recession on lower oil and China related fears. The question I have is, if you look at the core loan growth, are you still okay running it at this level?
Do you feel like your customer base that you're making these new loans are a little more insulated to the world that the market is fearful of?
Look, we are outside of energy, we are not seeing asset quality change nor are we seeing a reduction in appetite for credit. We I would remind everybody that we look we are very, very focused on our customer framework and our risk framework. But within that framework, we continue to see a lot of opportunities to help our customers grow their businesses. If you look at this quarter and you just focus on the core, we had 3% quarter over quarter growth or an annualized growth rate of a little over 12% or $22,000,000,000 I'm not going to sit here and tell you that's what it's going to be next quarter, but we're not seeing material decline in conversations with our clients about how to help them grow.
I think to give it additional color, if you think about it, if you go back a couple of years, we grew the international business because we had to round out that franchise. We sort of slowed that down 24 months ago that started to drop in terms of growth rate. And so because of the client selection criteria there is very high level, very high in clients, multinational clients, etcetera. But we slowed it down just to keep the company in balance and that's been our watch for it. If you think about the consumer, no subprime, no borrowing FICO scores.
If you look at the coming on FICO's are higher than the portfolio still, which is almost hard to believe the charge offs, delinquencies in both home equities delinquencies across the last 4 year and has continued to come get lower every year. This year was the lowest they've been all the way back a long time, in both credit card and home equities. And then if you look at the client selection in the U. S, a couple of things. One is, we're adding officers in the middle market business, but they're going after our target clients and this is not go find new industries etcetera.
So whether it's the way we land in commercial real estate which is down, which is very high end real estate developers, the way we land in middle market, etcetera, is very strong. So as you look across this client selection in the middle market business has been strong. The best that we're seeing is things in our business banking, small business portfolios. We're actually starting to see growth there against sticking to our credit risk, which is the first time in many years that we had to run off some stuff that came in through LaSalle and Merrill and everything else that we're finally seeing nominal growth. And so I think it's client selection.
We slowed down international. It's sort of always watching and in fact using your stress test to make sure you stay balanced. And if you look at us, we feel we're pretty balanced between the consumer and commercial sort of fifty-fifty. And then within the consumer, we're really staying to sticking to our knitting, which is very strong, high quality creditworthy borrowers.
Great. One follow-up on the FA growth. You noted a 5% year on year. I'm just curious, there's not a heck of a lot of core growth in that business. I'm just curious how much is coming from your training programs versus recruiting both traditional and non traditional sources?
It's coming from both. But the reality is that the number one issue they face in the Wealth Investment Brokerage Services revenue line is the decline in transactional revenue. And it has gone from 2 years ago, probably $600,000,000 a quarter, even in not robust market times down to $300,000,000 $400,000,000 a quarter and that is hard to make up on annuity streams even though they're having record net flows, it's just the pay the revenue rate on that is less. And so that's the factor. So it's got to do with really recruiting.
The production for FA continues to be solid at $1,000,000 plus. It's really that core fundamental issue that they're facing and that transition is what we're all going through. It's getting to the point where it's becoming less material and I. E. Less material to the total revenue line from the transactional side.
And the other thing I would just remind everybody that we've got significant positive loan base in that business. And so again, if rates rise, we're going to see some benefit there.
All right. Thank you very much.
We'll move next to Steven Chubak of Nomura.
So I actually had a quick follow-up to how Glenn was just addressing relating to Gwen and just some of the margin pressures that we've been seeing over the last couple of quarters.
I want to get a
better sense as to how much of that do you think is cyclical versus secular, whether it be DOL, related pressures or just intensifying competition for advisors? And along those same lines, whether a 30% margin target is still achievable once we get to a more favorable rate backdrop?
Let me start with the last one and pick up on just some comments Brian made again. The decline in margin has been because of decline in transactional revenues. In addition, over the last couple of quarters, there's been a lot of market volatility. The markets have ended down in certain months and that affects what we think on asset management. We would hope in a better market environment, we would see some improvement in some aspects of the transactional business because there's a lot of selling of mutual fund products and other products there.
And then again, as I point out, we've got a business here with, I don't know, 100 and close to $140,000,000,000 in loans and $240,000,000,000 to $60,000,000,000 ish of deposits. And as rates move, we're going to start seeing some benefit from that, which the payout ratio is quite different than on the more traditional asset management products. So that I really do think is the revenue story that will affect margins. And again, in the Q1 of this year, we're going to see $100,000,000 reduction in expenses because of the runoff of compensation program we've put in place around the Merrill merger. So I think that's what I would say about the margin.
What was the second part of the question?
I mean just about to what extent if you could at least segregate the secular versus cyclical headwind components on the revenue side, but I think that you adequately addressed that in your response.
Yes. So I think people ought to think about, Steve, when the margins come down, we think it's flooring out here and will start to pick back up, part because some of the fundamental changes in the ATP program running off and stuff. But we've invested in the PMD program, it costs a few $100,000,000 of drag to do that. That's the right thing to build the advisor base over time and service the clients. And the team, if you look at it underneath the U.
S, the flows and stuff are strong in the U. S. Trust business is having some of its best quarters ever just because the difference in that it didn't have the secular runoff you referred to in terms of the fee based business. So it's a good business. It does a good job as clients.
We expect more out of it and that's the job for John and Keith and Andy and Terry going forward.
Thanks Brian. And maybe just switching over to the credit side, I appreciate the detailed disclosure you guys have given on the energy book. I was just hoping you could provide both exposure and reserve levels, maybe some other areas of the commodities complex, specifically metals and mining?
We feel good about our metals and mining exposure. It's about 8,000,000,000 dollars and but most of that exposure is much more short dated and much more collateral. So we feel good about that exposure.
Okay. And then just as a follow-up to the initial provision guidance you've given, just thinking about it from a modeling perspective, is the right way for us to be thinking about the provision rate for 'sixteen, taking that $800,000,000 to $900,000,000 quarterly run rate plus whatever additional energy driven reserve building we should be contemplating, which presumably is incremental?
Yes, that's not a bad way to think about it. Again, if you remember our guidance last quarter, we said $800,000,000 to $900,000,000 for the first 2 quarters of 'sixteen. And the way I would think about those 2 quarters would be, yes, I could see some lumpiness.
I think the one thing overall is that as you look at the question on this exposure that we're also paying close attention to is, is it sort of a demand or supply issue for oil prices? And if it's a supply issue that affects these companies and related companies and demand from. But if it's a demand in the broadest context, our economies continue to slow down and that's the broader concern. So we're looking at not only the impact on all the portfolios, thinking about who gets the benefits in our portfolio basis from low energy costs, which are serious benefits to consumers and companies that consume energy versus those producing it. And so there's a balance here that we got to think through right now.
It's pretty isolated to the energy companies. And even if you look at consumers who work for them in our basis by zip code and unemployment levels and stuff, we've seen relatively modest deterioration in none in the consumer side, people employed in these businesses. So I think as you think about it, the real question is going to come down to for 'sixteen in terms of all our industry is, are we in a demand driven issue, I. E. General economic issue or is the United States going to plug along?
And if it does, then I think Paul's guidance is the right one. If you're in the supply it's going to all be localized on these industries.
Yes. I mean, look, it's not demand. It's again worth emphasizing. There are a lot of people who are helped by the oil prices that helps our asset quality not only on the consumer side, but also in places like India and manufacturers all around the world.
All right, got it guys. Very helpful. Thanks for taking my question.
We'll move next to Eric Wasserstrom of Guggenheim.
Thanks very much. I was just wondering if you could help me think through a little bit your GAAP and risk weighted assets over the first half of the year, given the growth dynamics that are pretty robust in some of the runoffs and then also some of the changes that are going through on the RWA calculations?
So you're talking about over the first half of twenty sixteen?
Correct.
Well, on a standardized basis, I think you're going to see RWA trend up if we're able to grow deposits and loans. On an advanced basis, there's all sorts of puts and takes there. I don't think you'll see as much growth as you would on a standardized basis. Did I say advanced basis, yes, as you would on a standardized basis, as we continue to work on our RWA.
Okay. And so what are the kind of what are the implications of that then for your regulatory capital ratios?
Well, we need to get to regulatory from CET1 on our advanced basis. Our goal is to get to 10% plus a buffer by 2019. So we're at 9.8%. I feel like we have the time to do that. We're certainly not going to need to take all that time.
We would expect to get there soon. But it is impacted by changes in rates, changes in OCI. We're returning we're hopefully returning capital. But we don't we're not we feel like we're on track to get to 10% plus an appropriate buffer. And this is an appropriate The only other thing I would add is, we still have some opportunity to optimize RWA from an advanced perspective.
That's in 2 fundamental areas. It's always stuff you can do in markets and other areas, but in 2 fundamental areas. 1 is the extra RWA we got on the wholesale side when we exited parallel run, that's not a permanent thing. We need to work on our models, work with our regulators and hopefully over time we can make some improvements there. The other one is operational risk.
We have $500,000,000,000 of RWA for operational risk under the advanced approach. That is 25% more than the next highest bank. And that operational risk is for businesses that we are no longer in, for products we no longer sell, is for a risk profile that we no longer tolerate. So again, that will take time, but that's another opportunity for us to lower RWA from an advanced perspective.
Thanks. And if I can just sneak in one more. And when you talk about an appropriate buffer, are you thinking a method 1 or a method 2 as a baseline?
I think the buffer to the capital Yes, we're thinking I mean, we're basically thinking about we need to be above the 10 requirements at 10%, and we'd say you have 25 to 50 basis points to be where we're at.
Got it. Okay. Thanks very
much. We'll move next to the site of Ken Usdin of Jefferies.
Thanks. Good morning. Just a quick follow-up on the loan growth side. I know you talked about the credit quality underneath the commercial side after 13%, 14% loan growth year. Do you think you can maintain that type of pace of growth given some of the concerns we've seen underlying even if quality is holding up?
So just I guess your general outlook for loan growth rates and can you match or maintain what you did last year? Thanks.
Yes. Look, I'm not sure we're in the business of giving guidance on loan growth. We think we can grow. If you're looking for some perspective, some loans, I wouldn't even call it guidance. Mid single digit is what we hope we can accomplish.
Okay. Continue to be driven by commercial, would you say?
I think it's going to be continue to be driven by commercial, but you're going to see growth in consumer as well.
Yes. Just a quick second one. You've been growing the mortgage business again. What's your outlook for continuing to take share in the mortgage business? And kind of have we seen the bottoming of results on the fee side of mortgage?
Well,
we are in our mortgage business, I think we are focused on originating prime and sort of non conforming loans. I would there's been good progress there I think if you look over the last year, the number of non performing loans that we are originating has increased meaningfully. And I would remind Lori that those loans we book on our balance sheet. So that affects MBI when you're booking when you're selling less loans, it's going to affect your MBI income, but it's going
to come through a NIM on
a more annualized basis.
Absolutely. From a broader, leave aside the fees because of the geography and how accounting works and when you put 60%, 70% of loans on balance sheet. In terms of overall production, we expect to continue to make progress because you can see that in the numbers that we're going to as other people are flattening out, we continue to have lots of opportunity with our core customers, 7 out of 10 still get it that are credit worthy and our customer base are still getting a mortgage elsewhere and that's what the team is chipping away at. And it's never going to be the hugest business of Bank of America compared to things like the Merrill Edge business and consumer, the credit card business and consumer, but we expect to get broader market share from each of the segments.
Yes. I think it's interesting. I'm not going to sit here and tell you this directly 100% correlated and we've done all the work, but we've added sales professionals in our branches. They're focused on originating mortgages that are more prime oriented. We've got them working with our GEOINT specialists who that client group is generally more prime oriented.
And we see progress. We see the prime loans growing.
Thanks guys.
We'll move next to
I guess on
commercial, if you could follow-up on the X Energy comments. In your experience, what are some of the best leading indicators for the commercial credit cycle? And what kind of trends have you seen again ex energy in those leading indicators over the past couple of months that gives you confidence that things are stable?
Well, I think about that. I mean, we spend a lot of time our credit people do spend a lot of time just coming through that portfolio and looking at cash flows from the companies and making sure we understand the collateral, making sure we fully understand our structures. So I think it's just a lot of blocking and tackling and talking to clients and making sure we understand what's going on with their businesses in terms of the energy portfolio. I would emphasize again that outside of the energy portfolio, we are not seeing movement in NPLs and criticized assets. Our NPLs continue to come down.
And then if I could ask a follow-up along the same lines on the consumer side, I guess, 2 parts. 1, you made the point that even in energy heavy geographies, you're not seeing any adverse change in the consumer. In cards specifically, just since it's such a big credit line, are early delinquencies still coming in better than expected? Are they stable? Or how would you characterize the current early delinquency trends?
And then on home equity, since again, that's another big outsized portion of the reserve, is there any update you can give us on how the first wave of HELOC recasts or switches to capitalization schedules have performed versus what you had modeled?
Sure. So in terms of card, when we look at our credit losses, they are at low points, historic low points and they've been bumping around at that level. We've seen a little bit of increase in the last couple of quarters. But that again, I think it's just a reflection of things just bumping around at really low levels. In terms of the home equity end of draw, based on the volume we've seen to date, which we've seen a lot of volumes, the portfolio is performing in line with our expectations and we continue to monitor the InterDRAW portfolio and continue to work with our customers to manage the risk.
And I just would remind everybody that these borrowers have paid through the downturn and this portfolio continues to improve as home prices improve. The risk is a non port going part of our reserve process and we think we're well reserved.
Thank you very much.
Just on card and it was 30 days delinquency or 90, it came down during the course of from the end of 2014 all the way through 2015 and in both cases is running at multiple year lows in both percentage wise and nominal amounts. So we're seeing no deterioration of credit and either of those are same with the home equities. It's just in home equity just have more a little more cleanup because of the legacy ish portfolio in there.
We'll move next to Brennan Hawken of UBS. Your line is open.
Brennan?
We'll move next to Mike Mayo of CLSA. Go ahead please.
Hi. I have one question for Paul, one for Brian. Paul, lower energy prices, you said can help certain segments such as consumers. Can you give any examples of that? And also on the energy topic, if oil stays at 30, then your provisions for energy would go up by how much?
I didn't understand the answer from before.
Well, let me hit the last one first. So we've got a reserve on our energy portfolio of $500,000,000 That is 6% of those 2 sub factors that we think are high risk. And we have done modeling, stress test modeling at various oil prices. The one we've been talking about on this call has been at $30 and that's over 9 quarters. And so if oil stayed at $30 for 9 quarters, we would think that our losses over those nine quarters would be $700,000,000 Again, that will go against the $500,000,000 we already have reserved and when we're presuming we'd be building reserves during that time period to make a difference.
So Mike, when you look at consumer benefits from the oil and gas, just to give
you a simple thing, if
you look at our card base, in the Q4 of 2015, the spending on debit and credit cards rose 4% from the Q4 of 2014. And if gas prices would have been stable, it would have grown at 5 0.7%. And so what that means is consumers had effectively on that base of 1.7% that they received the benefit of and year over year. If you translate that to dollars, round numbers, that's $20,000,000 a day less spending on gasoline by our consumers and our portfolios per day. And from like $90,000,000 down to $70 ish million or something like that, that is the benefit they get.
And so for a large number of consumers, median income, the cash flow increases and that gives them more money to spend.
So do you think people are being too negative on the decline in oil prices? You're implying it has a nice stimulative effect, but people aren't thinking that these days.
I think, Mike, it comes down to question whether you think this is a the oil price is a reflection of a broader issue of growth in the economies or we're going to get slow growth 2.5% in the U. S. And IMF said, I guess 3.5% in the world. If you're going to get that 16, it's going to be isolated. The negatives could be isolated to the oil companies and later commodity producers just because of slow growth environment, if you're saying.
There's going to be a much different economic scenario most so called consensus predicts. It's a broader based problem. But right now, it's really at the oversupply of oil driving prices down and that's impacting the people in the industry and the rest of the consumers that's meaning corporate customers and consumers that use oil and energy are getting a good benefit.
And again, Mike, the only thing I would say is, I mean, Ryan is spot on, because the demand issue is kind of we're going to see it in other parts of the economy. However, we have not seen that yet. We have not seen a change in our asset quality outside
of energy.
And then if I can shift gears, Brian, I know I've asked this question in other years, but I know you're not satisfied with the mid-60s core efficiency ratio and I know you're not satisfied with a single digit ROE. So what is your specific financial target for efficiency and ROE and what is your timeframe to get there?
As we said, we ran about 9 adjusting for everything about 9.5 for the year and return on tangible common equity. We want to we believe we have a path to get that to 12%, rates get us part of it and hard work on expenses and core revenue growth and driving gets us the rest of it. And so in LIS expense drop and we're chipping away at that. If you look from 2014 to 2015, we made substantial step and we'll continue to drive away. We haven't put a specific timeframe on it.
It's just a goal to keep driving and we'll drive beyond that. On efficiency, it follows that. The efficiency follows that sort of math. Right now, we're operating 66%, 67% probably normalized for 15% and between LAS, we can drop that down to 65%. And that's just hard work and we're grinding away at every day.
You're seeing loans grow, you're seeing deposits grow. And so you should see an improvement in 2016.
Any expense initiative plan, Paul, since you've had a couple of quarters now to take a look at that? Are you looking for like an extra $1,000,000,000 or kind of like a new BAC program or what are you thinking about there?
Expenses are on our mind every day at Bank of America. We have everybody focused on expense discipline. That's translating to our culture under our simplified and improved program where the teams are always coming up with ideas to make it simpler for our customers, make it simpler for our employees and improve the expenses of the company. That's how we're going to achieve our objectives around core expenses that we talked about on this call. We're all very focused on expenses.
All right. Thank you.
And it appears that we have no further questions at this time. I'd like to return the program back to our host for any concluding remarks.
Thank you, everyone. We look forward to talk to you next