Bank of America Corporation (NYSE:BAC.PK) Bernstein 38th Annual Strategic Decisions Conference June 1, 2022 4:30 PM ET
CorporateParticipants
Brian Moynihan – Chief Executive Officer
ConferenceCall Participants
John McDonald – Bernstein
John McDonald
Okay. All right. Thanks everybody. Appreciate everyone coming today and very happy to have Brian Moynihan, CEO of Bank of America joining us again, Brian, thanks so much for coming back. It’s great to have you in person this year.
Maybe we could talk about just an update on the spending and health of the consumer, you’ve got visibility into the bank accounts of over 67 million American consumers and small business, can you give us a sense of what you’re seeing in terms of spending trends and deposit growth.
Brian Moynihan
Well, John, it’s great to be here again. Thanks, [indiscernible] between here and cocktails for all these people. Just think about I actually pulled — had them rush to get me the numbers for the May month which was yesterday, obviously. And so on debit and credit card spending, just debit and credit card spending, and that’s about 20 odd percent – 25% away consumer spends money for the month of May, the dollar volume is up 10%, 9% to 10%, the transaction up 7%, 8%.
Now, you have to remember, last May people paid — this May — last May people paid taxes, this May, they didn’t. So you’re going to see some people use credit cards to pay that. So that’s very strong. Memorial Day weekend was a record. It’s 30%, over Memorial Day in 19 to give you a sense, and so, up year-over-year, double digits, et cetera. So they’re spending on debit credit and credit card strong through the end of month.
If you go back to broader checks written, cash taken out of the ATM, ACH payments through May 23 that number is also up double digits and transactions are about 8%. And so the transaction important because people debate about whether inflation is causing spending, if you actually adjust for the rate of inflation in the asset class, if you were spending money on the only thing that the real spending [indiscernible] gasoline, everything is up, it’s up way through the inflationary price. But it shifted a little bit from goods and services. So travel booked in May, for taking the rest of summer but also travel take in away indicated there’s a car rentals and other things actually happened in the month up double digits. So you spend in airport lately, the TSA numbers are through 19 and beyond. So travel is good. Restaurants are good. Goods down a little bit. And that’s very good so the spending strong and customers have more money in their accounts than they did pre-pandemic by multiple so we can talk about it. But if they got plenty of money to spend.
John McDonald
It’s impressive numbers. And we thought after stimulus checks faded, that we’d see this resilience start to fade a little bit. Can the consumer keep this off, we’ve got energy prices up, food prices up, rates are going up.
Brian Moynihan
Yes. It seems they have kept it up. And that’s so — the thesis that we got asked a lot about was and people were writing about was the stimulus, January and March or whatever it was last year, and 21. After that people would start to spend on accounts from the month of June or July last year, every month they grown and including March, April this year and the May data having a bit here. But then we’ll publish the institute that data coming up.
But the interesting thing is, if you take like person had the household had a core account structure, one to 2000 pre-pandemic, they are now they had an average balance of 7,000 now. And if you go the next bracket 2000 to 5000, 3500 –13,000. And so they’ll spend it down, but it’s going to be a good while. And so the ability to spend is really, am I employed and are my wages growing that you can check that off unemployment rate and wage growth strong.
The second question is, do I have money in my account? You can check that off? The third then is, do I have an ability to borrow any even on a credit card balance, even though they started rising and they’re still way below that where they were pre-pandemic and our book of credit cards isn’t massively different size. It’s just that people are not using the lines. And so in our home equity lines, we went from 30 odd billion in loans to 20 and that started to flatten and come up. So all it means to have borrowing capacity left.
Then the question is willingness and what I’m telling you this, as of yesterday, the willingness was very strong, they were coming through so they’re spending and that’s good news, because the end of the day, U.S. consumer economy is as big as China’s economy and all this kind of stuff and that’s going to have a good impact on the world. And by the way, in Europe and through our corporate cards and stuff. We can see travel in Europe and stuff for business still very strong even though the wars. That’s more question mark on that.
John McDonald
And how about the broader macro picture? How do you handicap the degree of difficulty that the Fed has in front of it, since we put you on hurricane watch in terms of the economy here? We’re in North Carolina, you got hurricanes that come every year so we’re always prepared for it. We don’t have a choice.
Brian Moynihan
Look, the Fed has a tough job because the sheer amount of stimulus so far out overwhelmed the actual economic impact and those of — Larry Summers has written on this multiple times other people have to but he’s the talent and he has the brain and talks about it, it’s just multiple. So, and that’s going to cause inflation and it was clear last fall, it was coming, the debate was temporary, that’s gone now. So it’s here, now they’re moving and they got to move. But their job is to slow it down. So our economists have gone from sort of, last year 5%, this year, they would have started almost at 4%, they bought it down to sub-3, [2.75] [ph]. And they brought next year 23, year down from 2.5 down to high once. And so what you’re seeing is the impact of slowdown.
So they have — their pick would be one and three that they’ve written on. And, but that’s always about one and six, or one and five, so it’s not, it’s doubled. But on the other hand, it’s not. So I think, here’s a basic case, the Fed has a tough job to do, it’s made tougher by the low unemployment and the wage growth and the fact that people are spending money. But on the other hand, it’s made easier by that, because that’s — they can work against that. And so they’ve been very clear that 50 basis points, three meetings, they keep confirming that that’s as fast as they’ve ever gone, except for one or two times. And I think they ought to stick to that, will they slow down the economy, that’s our job right now is to get it back in equilibrium.
Nobody we see out there and that blue chip and I think has an actual recession predicted in next two years, other than one person out of 40 odd people. So we’ll see it play out. It’s a tough job. But it’s been tough by what makes it easy. And that’s why I think people have to sort of square up their unemployment estimates versus their economic estimates. Because if everybody’s employing and getting paid more, and the unemployment is around 3.5% here in 23, a lot of these people in our models, you can’t have an economy that’s that slow, it’s just sort of hard.
So tough job, they’ve committed to do it. They’re making it clear, they made it clear the markets, the balance sheet started today, going down. But the reality is, it’s the best thing about the tough job is the part that makes it tough. That’s actually good thing, a low unemployment and good wage growth and good consumer spending. Those are good things.
John McDonald
Thanks, investors are certainly confused. It seems like we’ve been waiting a long time for higher rates. And now the party seems over before it started. Do you sense any kind of disconnect between the big picture of bank profitability and how the industry stands versus what’s in evaluations sentiment?
Brian Moynihan
You can understand why people will look and say, look, there’s going to be recession, these companies are going to UFC interruptions in market based revenue streams, and we could talk about that. We are going to see higher credit costs, remember, 14 basis points, they get real numbers like Florida, nine a charge offs a quarter, we are 900 million in 19, 800, 900 million a quarter, so that’s not even normal, that was very low. So you went from 40 basis points, which is really low to 14 or something like that, think about that. So we’re the industry’s capital, liquidity, everything is built differently. And we stress tests all the time as if the 10% unemployment happened, tomorrow’s if the market dropped by, generally, a third as if housing prices went down by half, or whatever the numbers are 20%, 30% and whatever’s in the stress test and we all come out, we’re okay. And so that provides a good anchor. When you saw that in early 2020. So I think people should realize the volatility about our outcomes is probably less.
At the end of the day, our NII grew strong from fourth quarter to the first quarter, it actually starting second or third quarter last year it started growing strong, keeps growing every quarter, and we estimated what we think it’d be next quarter. We look at that year-over-year, it’s $2 billion in NII per quarter, before the rate structure is actually coming through the system that’s just loan growth and restored back to the levels and deposit growth and ultimately the rate [indiscernible].
I can understand why people are concerned about the economy’s effect on banks, that’s what we do we translate the economy. On the other hand, I think you have this, these companies are in great shape, and we just got to stick to our knitting and drive through.
John McDonald
Yes. You’ve articulated a responsible growth strategy for the last 10 years of the company. Can you just remind folks with the kind of core tenants of that is and how you think it positions you well, for tougher times?
Brian Moynihan
You got to grow, no excuses, got to do it on customer focus, got to do it with the right risk and have to do it on the basis of sustainable, which means we have to be the best place for teammates to work. So we have great team. We have to share our success with our communities. That’s the work we do around supporting communities and everything. And the last is we have to drive operational excellence to pay for it all. And that means we’ve been able to bring the cost structure company round numbers from 70 billion plus to as low as 53 billion on a core operating basis. It’s backed up now just because of inflation and market levels and compensation, but we think it will be flat this year to last year meaning 22 to 21.
And that OpEx pays for all, so we got to have all the things balanced, you got to grow, got to do it with the right risk, got to grow, got to be customer focused, no acquisitions got to grow on a sustainable basis. We keep investing the 3.5 billion a year in technology and sustain it. We’ll keep an expense in check because we have commodity — pricing pressures in our business like every other business does.
John McDonald
So you mentioned the NII growth and the pickup that’s happened already, before we even get the rate hike benefits. Maybe just talk a little bit about the drivers of the robust NII growth that you’re looking at this year, how about loan growth. What are you seeing right now? And what kind of outlook do you have for loan growth this year?
Brian Moynihan
So we sort of think you had all that borrowing go on in 20, then it came out of the system. And the loans would basically went from a trillion to 900 billion, make it simple. And then that all went out. And then what you’ve done is now starting to recapture most of that finally. And so what’s happened lately, in the fourth quarter, we had $50 billion in loan growth, 15, it was in the markets business, which is going to ebb and flow. So we sort of said, don’t look at this 35 driven. Last quarter, we had less but we had a solid growth quarter, this quarter they are growing nicely, frankly.
And so we figure out growing the industry a little bit, you can see it across the board. The nice thing is car balances start to pick back up, commercial loans were sort of leading the pack, car balance picked up and frankly, mortgage balances have tipped over and grown now largely because the pay-off rate has come down and the new originations are down, but the portfolio is, we’re up to 35% pay-off rate at one point. So you went through the portfolio, theoretically it was going out the door on a given year.
Home equity stabilized, so autos are strong if people get product, we can finance it. So loan growth has been solid, and we expect to have a quarter this quarter. It’s similar to last quarter now numbers and yes, we’ll see how it plays out. But it’s setting up that way.
John McDonald
Just on the NII…
Brian Moynihan
This is all core stuff. I mean, this is not changing your credit underwriting and stuff, it just grinding out. One more good commercial client, a little bit more of these client, and so led by commercial consumer catching up now.
John McDonald
Yes. And just to kind of level set on the net interest income expectations you had talked about, for the second quarter had been up at least 650 million — from first quarter to second. Any change in that outlook?
Brian Moynihan
We still feel good about that. So up 650 first quarter to second quarter per quarter, and that’ll produce almost 2 billion in lift from second quarter last year to the second quarter this year. So it’s starting to capture. And again, the rate effect is just coming through. And you think about it because think about when rates cut. And we’re not — you only talked about the 30 years, I’m like that’s not where we invest. It’s all relatively short.
John McDonald
So the sequencing should be beneficial throughout the year. And as you annualized out of this year. It’s set you up pretty good for next year in terms of NII growth as well.
Brian Moynihan
You capture 2 billion a quarter. That’s a good place to get up in the morning.
John McDonald
Yes. How about on deposit betas, we’ve had almost 100 basis point of hikes already. And the industry has yet to see much pressure on repricing and outflows. How do you see, I guess, near term is there a kind of seasonality issues to keep in mind on deposit growth?
Brian Moynihan
Yes. So I almost want to say we just could get the April, May from 2019 and 2017, or whatever it was, we could rerun it, which is on the deposit beta, but very near term, just to be clear, taxes paid by customers in a special wealth management business are up like 50%. And so there’ll be — that seasonal impact from first quarter to second quarter, even though it’s April, May forget that it’s still second quarter, you’ll see that come down. Year-over-year, they’ll be up and you’ll see it come down like quarter I think and commercial deposit is fine. In general consumer deposit balances, again, you’re fine because we’re not spending it down. But if that number is not small, when you have 300 odd billion dollars deposits in the wealth management business, and people pay it out and accumulates back during the year and so, but overall, we feel very good.
About betas, at the end of the day, our deposit balance, which we strive to value on the people side, both loss management and consumer are transactional accounts. And so, we got it, I don’t know 30 billion CDs or something like that. So it’s transactional checking accounts, which are 700 billion or sort of the 2 billion or something like that. And then you got the money markets and then move really by stratification a customer. But the zero interest checking and low interest checking last time when rates got to 250, consumer went up to 13 basis points in total — 11 basis points in total deposit base.
I don’t see thing a lot different unless rate structure goes up higher and then you’ll do it. But wealth management is different, I think you got the 40 odd basis points in the last cycle up to that level. And that’s because more than money is investment equivalent on it. But the good news is from that to then the deposit penetration and our wealth management business with Katy, Andy and Tom working on it well is — that lot of growth is core transactional accounts for wealthy people. They tidy them up a little differently, but still, they carry an average balance side. We are up to about 15,000, I think Holly said this morning an average balance per account and consumer which is up from seven, eight and so some of that will — if they spend down out draft down but still zero price.
John McDonald
So just back to expenses. If you’re able to hold expenses, flattish this year versus ’21, that’s quite an impressive achievement given the inflationary environment. And, of course, while we’re all patting you on the back for that, I’ll ask you, are you also spending enough. So maybe just talk about the mechanics of how you’re holding expenses flat, while also making these investments, how you doing both of those?
Brian Moynihan
It really comes down to what we’ve been doing over the last five years to continue to drive the digitization of franchise. So it compounds on itself. So checks written from 19 to 21 and now 22, are down 25%, the dollar volume is actually flat. So what happened, all those little payments went to Zelle which has grown dramatically went to other things, the cost differential is huge, because checks written have two elements. One is the cost of processing check one way, but also people come and deposit them. So, it gets you two ways, right? It because written on us, a lot of times as a customer anyway, but if it’s so getting those our system, so what happens is, it’s just a whole bunch of singles, doubles, on those elements, continuing to synthesize the base of the various technology systems and continue improving and continue to get the leverage other ones we’ve been building courts, in our markets business with big data environment, the ability to use that risk and financing things and pushing that and still a lot of work to do on that. We spent a billion dollars developing that over a bunch of years, it’s not like it was an easy system to develop to think about holding all that data and being readily accessible. And we’re different purposes.
So that’s that, and then you invest a ton in cybersecurity, basically 10 multiple from when I became CEO to now in terms of cost on a given day. But you pay for it by just engineering out the routine activities of the company. And big moves, like in wealth management, we probably went sub 50%, maybe or less digital usage of the platforms prior to COVID to like an 80s now. And so that kind of change, in a very paper intensive business is just a lot less work and a lot less questions, a lot less errors or waste, as we call it in terms of something like the wrong mailbox got tied together digitally, just cleaner, more predictable. So yes, everybody says, what’s the magic thing, it’s the half billion dollars we spend on discreetly in our spending every year to drive efficiencies in the business, it’s actually $900 million that we spend every year, that is that the business has come up with the projects that they want to fund and drive it. Because that then pays you really not often next year, but next year and the next year, and picks up steam, and it takes out if you really get fundamental customer change behavior, it takes out forever.
So a cash on the ATM to pay the piano teacher versus Zelle is multiples different in terms of cost when you take all the different attributes that go on in that transaction. And so you just, you have to think about that.
John McDonald
Wrapped into all those investments, you’ve also made investments in teammates for many years, including this year, you’ve recently raised compensation and minimum wage again, talk a little bit about that. And then also just kind of the overall [indiscernible] talent and how real the inflationary pressure is?
Brian Moynihan
We started with a basic view that that we wanted the career mindset for the team in 2010. And when things did find a career mindset as a job which a person can support their family and have a career. So we’ve always said our minimum wage across the country will be at least what the MIT family four sort of poverty level is, even for a kid as 18. It’s a single individual. And that’s then dictated this rise on the starting wage.
What we looked at and did two weeks ago, now we’re about a week before last was, as we looked at attrition. So attrition gone from probably in the early 2010, 12, 13, maybe almost 20% in the high-volume jobs, even higher. We brought the overall attrition in 20 to 15 to 12, before the pandemic all time, low. customer delight all time, high teammate delight all time high, attrition all time low, et cetera. Here in pandemic because nobody lost their job, $100 a day for childcare and your home. All these things we didn’t — it dropped to like 4%, 5% then it moved back up because the job mark and the competition. So we are fine. And then, we start to see some areas we had to tighten up. And then what we did is, you really have to — the difference between what we’ve done in the past which is starting wages, which had a push up effect in the middle obviously, because we want — we basically said our teammates that would duration when you have 0 to 2 years, 2 to 5 years and 5 years and above. We’re going to reward you for the career mindset in the company here 3, 5 and 7%. And we’ll just absorb it and you’ll always be engineering the headcount to we had 212,000 at the beginning of 21, we had 208,000 at the end of 21, we have 207,000 or something now you know we watch that every two weeks deep assessment of where the heads are, and it’s yet reengineering takes them out, we put them back where we want new branches, new commercial teammates, new financial advisors and new training program. And so you can pay for itself.
But that investment really is for the shareholder and for the teammate, both because we want a career mindset. And so you got to put that wages just next to the benefits, we just increased our childcare to $275 per child per month, if the mental wellness impact, multiple unlimited sessions and things like that, to help people in the pandemic setting. You keep doing that to keep people really want to work in a company and that’s when the market gets really hot, that gets a little more challenging and so we move.
But each point for us is 2000 people. So, hire, train and churn. It’s not when you go with seniority and with your things. The turnover rate drops like a rock, it’s the higher volume jobs, and that’s where you need to. We found out is career mindset, benefits, education, everything, lowers turnover, increases customer delight, and just that virtuous circle, I mean, it’s pretty impressive. It is the reason why we get net new checking counselor million a year now versus basically flat, 10 years ago, selling less checking accounts. And it’s led to do both in terms of invest in people and keep expenses flat.
But if that reengineering, that OpEx part of the responsible growth is critical, then people always say everything you’d like to do in a company, invest in technology, people, new branches, rehab branches, everything else. Everything is fun, comes from OpEx. So work on that. And the rest of it will be easy, more marketing, whatever you want to do, we have to fund it through OpEx, it still of an operating principle we have.
John McDonald
And thinking about some of your businesses, many people think first about consumer and wealth management when they think about Bank of America, but talk a little bit about capital markets, investment banking, and markets overall, the importance of the franchise and the investments you’ve made on that side of the business?
Brian Moynihan
Well, I think — so we run three discrete commercial segments, business banking, up to 50 in revenue, we have small business, which is part of consumer franchise, business bank, up to 50 to 2 billion middle market. And so [indiscernible] Wendy Stewart and GCIB, Matthew Koder has done a fantastic job for us. And then you have the markets business, and we show you the P&L of both those because the GCIB business relationship business and has an obviously investment banking, lending and transaction services and a lot of other things.
And then the markets business, services and investors and, look, the markets are down in investment banking fee pools 50% are not going to look a lot different, will be a billion, billion a quarter this quarter, I don’t know exactly, but it’s just the nature of the markets kind of seized up and clean up. And then, there’s a big backlog. It’s not like people stop doing things. So just waiting for all the debate about rates and movement and spreads, they are like let’s settle in a place, and then we can clear out.
And then on the trading side, just near-term, it looks like we’re up mid – 10% to 15%, we’ll see where it comes up probably in the middle of that and year-over-year so far, and nothing goes crazy in the month of June, we expect it to finish that way. And that’s good performance by them, Jim DeMare and the team. Now, why they’re important is — knitting together middle market investment banking, that’s an impressive 30%, 40% of the revenue investment banking comes from middle market clients and stuff. And then thinking about the international capability, you can’t have a good middle market business, I believe in the U.S., especially in the upper end of the middle market, unless you have a great international platform, both in transaction services, investment banking, these companies are global, despite public beta by globalization, they have factories all over the world, they produce stuff, they’re in the supply chain, in other countries for other types of companies, and then for large companies or global companies. So that’s what I have.
And then markets again, large investors, you guys an investment house, don’t invest in U.S. based stocks and say, well, we’re done for the day, you go across the world, you need the insight from a research team and at the execution of the market. So they all make money and have good returns and once my guess so bumpy if some marks on leveraged financing 100 million, 150 million bucks this quarter across $10 billion plus of quarterly revenue. You got to remember these are all the same customers on the investor side and the issuer side and the sponsors and everything. It’s all fine.
John McDonald
You mentioned like, yes, could have some leveraged finance, but just overall volatility seems to have been helpful to the markets businesses in the first quarter and just from what you described, is it any demarcation between thick and equities that you can elaborate on there?
Brian Moynihan
I think in the last several quarters to equities has really been — just this quarter fixed. It’s a little different just because of nature, what’s going on? But [indiscernible] markets business, would you rather have the markets operating at this throughput because that’s what your customers need is access their capital. And having spent the week before last — the last week, I guess in Davos in, every time you come away from that you realize the power of the capital markets, the U.S. is such a differentiating factor. So, yes, they’re all doing fine.
John McDonald
How about in terms of capital ratios for the industry, overall, capital cushions have gotten thinner. There’s a lot of demands on capital now in terms of the loan growth, you mentioned.
Brian Moynihan
For years you said, when you’re going to get the capital levels buyback and stocking did it now you’re saying?
John McDonald
So yes, no, I mean, you’ve returned a lot of capital over the years. And you kind of running at the level, you said a couple of years ago, you’d like to run at. So yes, how should we think about that in terms of how you maintain the dividend growth, and also, you’ve got businesses that need capital right now.
Brian Moynihan
Yes. So for a long time, we really had one use of capital, which is to pay a modest dividend, and we got the right to start buying back stock as a company as an industry. And that started happening, and then we added interrupted — by the pandemic, and then we got back in. So we brought the capital ratio 10.40-ish. And if you think about, the GCIB score growth, because the markets business, we’ve invested 200 billion in balance sheet technology to give them a better competitive position they’ve grown that market share.
We think 10.5 would be where you are, 10, yes, 10.75, if you assume we go from nine after 10, then you put another 75 to 100. As you get bigger, you can actually bring it closer, because frankly, the earnings power and stuff has different things. So we think we got to get from 10. For 1075, we got six or seven quarters, we’ll just chop it away. Now, what was interesting in first quarter is because the rate move is so dramatic, you saw this pop and if you looked at our sort of waterfall we put in there, you saw that our impact was less, because we’d hedged out a lot of that risk on purpose. And so as rates stopped to start to creep that back in, so we’ll get through that accreting back in.
In terms of use of capital we used to have one use then we had two uses. Now we need it to support some organic growth, we acquisitions aren’t the game. So basically, it’s not a bad thing, if we need to retain the capital grow loans and deposits in the core business, because the returns are very strong. And so you’ll see us the stock buyback has to come down a little bit to let us build that cushion back up with we still bought back stock this quarter and last quarter, and we’ll continue to do it, it’s just to be a little more balanced.
John McDonald
Okay, fair enough. Other banks have used bolt-on acquisitions and M&A a little bit more than you have. And if you found it just better to build organically what you need and be able to do that?
Brian Moynihan
Well, like in transaction services, we bought a medical payments company, which was nice little pickup for us. In the end of the day, if you look at what we’re doing a straightforward business model consumer, the greatest wealth management business, we got the commercial banking business. So it’s going to be around payments, and we do a lot of partnerships and affiliations, even, you know, Apple Pay and things like that we early in and pushed it with Pay Pal, we’ve done a lot of work of them getting our cards in their wallets and stuff. And so we work a lot of these companies in partnership, bigger ones and smaller ones, you’ll see us as partner on the smaller technology side, yes.
Some of the data analytics and robotics companies and things like that we use. And then, sometimes we make an investment, some of these things along with some of our peers and stuff, but we don’t see something we need to own to make it work for us. And that’s because these companies are difficult to merge in. And by the way, they have a nice business prospect. That’s why we’re using and so let them run and we’ll see what happens in the end. But we haven’t found anything that compelling. We’re not the asset management business, from what you do. We are we’ve got $4 trillion of assets from our clients that we’re managing do portfolios and Ken and team and [indiscernible] and team running. But you’ve run that in the financial advisors and the PCAs. But there’s not really compelling. You buy something because it’s disruptive. It slows you down in, we looked at an online bank overseas and came back and said, it’s $60 billion, $70 billion deposits. If you work at it, this was seven years ago. It kind of looked at that point, year-over-year consumer on a given quarter, we’re about 30 billion or 40 billion, and it costs you nothing. And you’re saying why don’t we actually get our market share in the U.S. to where we think it might get to it just boom, boom, boom. So that’s 8 cities, open branches, that’s getting the top 10 and those things after few years, it’s $100 million, a branch in those cities because you’re concentrating your efforts.
If something comes down the road, change it from my successor something, they may have a different view. But right now, we just have so much opportunity in U.S. in non-acquisition opportunity.
John McDonald
Yes. I mean, you’ve certainly carved out a leadership position on digital and mobile, especially in the consumer bank. Well, what’s the next phase for digital and mobile, I noticed that you did move the marketing function under David Tyrie Head of digital. What’s the rationale there? And what should we take away from that your prospects there.
Brian Moynihan
The rationale with David was he’s top talent and retired, we had to sort of reset some of the pieces of the company and David was top talent, great at what he did. And so that was one rationale. But the second, frankly, more important rational is, in the end of the day, the way we market now is inherently, a lot of digital. So you’ll see the ads about never start banking all that stuff. But the reality is, is the day-to-day combat, and the digital interface is not only our own platform, which has a billion plus interactions every quarter, and how you use that to marketing bench offer branches, which have — you have 3000, 4000 visits every day, and how you use a digital follow up on that and proceed that, et cetera. So, we are driving that. And so David has that both, what does digital go, it’s really just taking a deeper and deeper advantage of the products and services and adding capabilities to them. So, life plan started from scratch, two or three years ago, two years ago, three years ago, whenever, blew up to 6 million people. And now it’s kind of getting them to use it more and more, and then getting 25 million more people 30 million, so let’s get that done there.
Mobile check deposit, when you see the deposits, you see, oh, my god, look at how much is coming to mobile check deposit, it’s now — if you think about the three pieces, ATMs, mobile and branches, mobile check deposit is basically, ATMs have been flat and actually going down, mobile has taken over and branches are down, they’re like 13% of deposits. That’s good except for why are people go in the ATM deposit check when they deal with their phone. And that differences 10 times terms of cost structure.
So there’s a lot of and so what’s the feature functionality and the interface, what makes them, once we get them over the hump, we do it. And so, there’s a lot of that — Erica has a lot of room to go, Ty and Erica, the reward system deeper and deeper types. And people can see a better Bank of America awards, these programs that you’ve seen for years, we’ve had for years that you can discount slowed in your car with an interface. So it’s all that digital feature functionality, capabilities, ease of use, better and better interaction scale. And using as a core way customers handle themselves. It’s all the wealth management, now, if you have guided investments in Merrill Edge, which can go across the platform, they’re up and sizeable and growing fast, self-directed business, for lack of a better term is, growing well.
And so there’s a different strategy data that becomes — it’s a core backbone across all the consumer side business, including the wealth management business for the financial advisor to have a customer who frankly, 90% of the wealthy customers have a self-directed account somewhere, so why not with us, that difference is like doubling the size of the business or tripling the size of the business without much, we’re the only working on our people.
So to trigger that is all around digital, how you get them to see the feature functionality capabilities and make it resonant. And you can do it. Digital Sales are half the platform but there’s the other half.
John McDonald
You still have a multi-pronged approach when you’re building branches in some of the expansion markets, right? So there’s still a role for the physical store.
Brian Moynihan
110% is high tech, so when we think about it, it’s difficult question, and so the service element is no longer service elements really relationship element of the branches, it’s always difficult. It’s always much more difficult. It’s not changed my address that that went away years ago. My mother died, how do I? What do I do? I’ve got a mother who’s sick and a father is sick, what do I do? I’ve got a kid that’s sick, and I want to take care of what do I do? Those are the questions that come in, that takes go back to that. Why are we raising wages and driving that career mindset? Those questions are intricate, to answer, take a certain skill set. And so we want raising of the teammates, because they get better at it, and but that’s what’s going on. So it’s just absolutely integrated capability now.
John McDonald
Just on the wealth management, it’s been a good organic growth story at BofA the growth there. And I think you’re targeting 3% to 4% growth and advisors over the next few years. How do you go about that? Is that an ambitious goal or something that you feel like you’ve got pretty good line of sight on?
Brian Moynihan
Yes, it’s all really developing people at a faster pace. So we took the program. So Merrill had a program, the private bank had a program and Aaron Levine and team and the conservatives, we combined them together. But what that allows you to do is have many career choices for people coming in the business. It gives a chance to see him for five or six years before they get into the — a little bit more self-determined operations and they can also do a great job servicing clients. So it’s, but getting that capability really leveraged is — it’s 4000 or 5000 people in there at a given moment. So it’s not an easy task, and they’ve done a good job. We will grow the advisor. So it’s deeper penetration of all products at growing advisors.
And then frankly, working combined expansion whereas frankly, in some markets where we have great banking share, we don’t have as great wealth management sector. So we compare, we do a series of analysis across all markets, it says we expect every market it looks like another market that to be the 75th percentage of where the markets are. So in the case of Los Angeles, our wealth management shares here and our consumer shares is here, in the case of Washington, and you like that you’re sort of saving. So why was that? So that means probably 500,000 advisors around Greater Los Angeles to get up there. Well, that’s, that’s a lot of work. And so that keeps us busy. And so you just keep working at that. But that’s how you need the advisors. So you got to start manually getting them through the training system, and we change, paying, three multiple or something for somebody, it’s hard to make that scale, honestly.
John McDonald
You’ve been a big proponent that banks have to serve all stakeholders, and they’ll be successful to shareholders when they serve all stakeholders. How’s the industry doing on that front? I know, you spent some time in Davos and talking about climate, you’ve had a leadership position on that. Just give us a little bit of report card about the industry. And what are the challenges there?
Brian Moynihan
Yes. So I think the idea of a bank serving its customers, its teammates, its shareholders and society is not foreign. It’s actually the way banks were formed to provide capital and ability to grow and markets. By the way, it’s the ability to have the capital markets formed down by the trio of Wall Street and apocryphal stories. But it’s that’s not a new idea. The question is, how do you make sure that you’re even in — people often thought, you have the communities was given away money. And that was the — that’s the mindset that went on for years, what we’ve done is change and how you have the communities how you actually run the business. So our vendor management practices, drive 20% to 25% of women and minority owned suppliers. And across our scale, that’s a big number that creates a lot of businesses.
We looked at private equity investments in women, Hispanic, Latina and Asian American business very low. So what do we say we’ll go out and have some funds for them, by doing making investments, 100 funds later, $300 million of commitments, and those funds are out making, and those are all clients of ours. And while we clients underneath it, and that helps the capital get for growth capital and smaller bite size. So we think it’s all balanced. And but believe me, if you read the shareholder letter I write every year it’s got delivered to shareholders, and, and you got to deliver for the society, you got to live for the teammates, and you got to live for customers. And these aren’t words, and it’s a false choice to say it’s or, and we’ve shown that. And so on the environment, the question is, our clients have got to make a transition, it’s not us. And so the oil and gas companies are our clients have to make it that the new energy clients have to make it and by the way, the average manufacturing firm has to make it because the net zero commitments by in their supply chain, whether it’s a big auto company, a big technology company, or whoever are going to drive this midsize companies to have to be able to answer the question. What is net zero? Are you net zero? And things like that, because that’s what society wants. But it’s really a business question. It isn’t us telling them it’s, they’re going to get a knock on the door some day and say, you produce this for me.
XYZ says, they can do it. Net Zero, I got to be net zero. I’m going to go with them. And so we’re saying those clients get understand it. And some of those midsize clients are unbelievable. They’re already there. They’re already — they win business because of it. And so, but it’s our clients make the transition, we translate. So we have a net zero commitment. We did $250 billion of financing and environment stuff last year, this is a big business for us, in department and other related matters. Yes, we have a huge tax benefit. We disclose in our financials every quarter for renewables in that low income housing units, it’s worth 1000 basis points on the tax rate to give you a sense of business keeps going, and this is a big business for us.
And so but it’s getting capitalism aligned to solve the problems, not a choice — a false choice between capitalism and then not capitalism. And again, United States system can actually make the change happen, because otherwise it’s not charity is wonderful, just enough of governments run deficits, they don’t have the money. If you lie in capitalism, you change the course of history. And that’s where whether it’s our commitments of all our companies to diverse populations working on whether it’s our commitments to vendor management, which our commitments to where we buy energy from, that’s what changes the business system and I think we’re working on it to make sure people understand it, it is the financial services business is a translator that our customers activities, so how, let’s get our customers there, and then the change takes place.
John McDonald
And there’s a lag. I mean, we hear from investors that are ESG reminded that banks don’t score well on the traditional ESG metrics that consultants use and others so hopefully, those will evolve to a broader and we’ll do better on those metrics so that people can invest.
Brian Moynihan
We supply the metrics to all those people, but a group of — we got 150 companies committed a simple set of metrics that the Big Four developed across the four pillars of sustainable development goals, called the IBC Metrics, International Business Council. And we got 150 companies, about half of those are actually disclosed. And we’re in the second year disclosing, they’re in the annual report on pages 46 or something 52 in our annual report. But people place prosperity, principles of governance, and there’s all this other stuff that we get hung up on a lawsuit from 10 years ago, or something that you’re saying, This isn’t relevant to the company. But there’s many, many providers of metrics and analysis. And so normalizing that [indiscernible] Europe is actually good for that will be good for companies, because we’ll spend a lot less time trying to produce the metrics and more time actually trying to change them. And that’s what you want. And so we’ve got a set of metrics we believe in, we’re trying to get investors are in there, and others and operators, all industries, and they cut across, and people say, well, they don’t include my metric, or that metric. And you guys think, well, these are good enough. If you put that in, you will see, you’re keeping GCIB compliance, your scope three emissions for you can actually figure them out, you’ll see your ones and twos, you’ll see your adversity, you’ll see your management diversity, sort of EEO one stuff, you’ll see in there. Your tax, how you pay your taxes and foreign jurisdiction, which is a matter of input. You’ll see — your board and your principles of governance. That’s enough, I think, for people to make a good judgment.
Now, remember, our three searches, we depend on before is having a debate about our performance, our researchers actually have shown a different thing, we have shown which is, if you avoid the companies that score poorly, avoid 90% of all bankruptcies, that’s actually great for portfolio managers, whether they outperform the elite to your understanding the business model, but if you say if something’s going to go wrong, that’s an interesting point. And that proves true in all jurisdictions, and across many, many years. And so, what I would say to the investor side is, this is a metric you can measure that sort of meet those standards, when I say that the company side is, capital will move away from you, unless you can tell people that you’re managing the business in a way that has long-term value.
Question-and-Answer Session
Q – John McDonald
So just got a couple of minutes left to just do a little bit of lightning round some audience questions here. One clarification, someone’s asking here, if the grow no excuses is inconsistent with responsible growth, but I think it’s part of the tenants. I mean, you can just accept you…
Brian Moynihan
You have got no excuses got to do with the right risk. And that’s what we call it the genius of the hand, not the terrors of the lord. It’s not one or the other. And so believe me, the reason why we started with grow no excuses is from 2010 to 2015, our company had shrunk. And people thought that’s was the thing. We said, no, you have to grow. That means you’re getting more customers to use you and do it, but you can’t change the risk. And since then, you’ve seen the company grow organically outgrowing the industry in deposits, outgrown the industry loans, your fixed income business is growing, market share all of this at the same risk, consistently applied now across 10, 15 years.
So if they aren’t going to, they’re absolutely inconsistent. And when I — we had a town hall or if you were my teammates, we’d have what we call a placemat up there, and we talked about it and but that’s what we get paid for is to manage that inconsistency, that big leveraged finance deal come in the market, how do we structure it so we can get it to market? How do we manage the risk or $2 million loan? How do we underwrite it? Well, consumer loan and so but you got to grow, there’s no excuse or underwriting criteria, like a consumer, people come and say, well, there’s — we don’t do below 60 or something, you say, okay, that’s 15%, 20% you’re telling me, you can’t get your market share out the other 60%, 70%, 80%, what’s wrong with you? It’s kind of the response there’s plenty of customers to get to meet the risk premium.
John McDonald
On a similar line of risk, this person writes the subway ride here this morning was empty. Do you worry about commercial real estate in big cities and as an asset class and then your own exposure to commercial real estate as you’re thinking about tougher times ahead?
Brian Moynihan
Commercial real estate — that it was 2000, right? There’s some bumps made around there. We’ve underwritten pretty consistently you see that now the stress affects it and stuff. Am I worried about cities? Yes, because they’re vibrant. But by the way when you walk down Sixth Avenue over there wherever it is, you get run over, I mean it’s and try to go to restaurant, try to go to play try to go nothing’s—
John McDonald
They are all walking and I’m taking the subway—
Brian Moynihan
That’s a question that public service having. Public side has to figure out but the reality is people back in cities. Are we concerned about? Yes, remember we shared 6 million square feet in New York across the last 15 years on the [island] [ph]. You just throw the dice that we all use and before we are shrinking the footprint constantly 130 million square feet over on the company down to about 60, this new work, whatever works out will have impact on it, but it won’t happen overnight because you have 10 year leases, 20 year leases, the stub periods, 10 years and so you walk away from something and guess reposition that is over and Hudson Yard or something the people left someplace in Midtown and that’ll fill up. But if we have to be careful right now, but we have 60 odd billion, underwritten that well and it’s one of the reasons why we brought it down at a time we were probably 100 billion against a $400 billion commercial portfolio. Now we’re 60 against a 500 billion if you think about across that period I’m talking about.
So we know we go hit the bid on the stuff we want, and the other stuff we stay away from a pure company. But overall, I think you’re judging by the number of teammates we’ll bring in next week into the city, record number of kids coming here to work permanently in summer — in a month in the summer teammates. I think New York will be fine.
John McDonald
And the last question, just on FinTech, so we hear a lot about FinTech threats. But it doesn’t seem like FinTechs have been able to grow deposits in any size relative to big bank. So is it something that you see as a threat? Or are they really just kind of on the margins with secondary accounts and things like that on the deposit front?
Brian Moynihan
So the trick of being a big company, is you always got to doubt yourself constructively at all times. Are you really paying attention? So when we looked at the FinTech, whether it’s on payment side, lending side, or the sort of deposit taking side and looked at all those companies, we study the heck out of them. We look at them and say, what did they bring in? Or even on the brokerage side? What did they bring the consumer? Why is the customer making that decision? isn’t something we’re missing? Is it something? Irrespective of whether the business model is going to work or not? That’s not our concern. Why would a person take them versus what we have what’s missing? So we keep retooling. And that’s where David Tyrie and others drive this [indiscernible] drive that competency to say, we have to be as good as they are. But then we have this nice size and this business, because they’re busy, around 40 billion revenue makes, made 3 billion last quarters. I’m like, that’s kind of nice to be investing on fed platform. 36 million — 60 million customers, 55, 57 million, whatever customers 35 million checking accounts, card holders, it’s nice to be that size, but you can never be sanguine.
So the perfect example and the rage of all the lending came out on a small business side five years ago, they sat down, we were 20 days underwriting haven’t come out with financial crisis, and you have rented everything down. And that’s kind of crazy. So we got the two days, we didn’t needed 20 minutes, because frankly, somebody has to borrow money on that kind of standpoint, your question what’s driving the behavior. And by the way, we were the best modeler in the business in 2000, 4, 5, 6 years ago, read the books about the people we had in the company could model credit. $50 billion of credit card charges later, I’m not sure these models off, really, really are tested in. And so we have a healthy experience.
But on the other hand, if people can digitally apply for a credit card, and we don’t have it, what the hell’s wrong with us? And so we built that. So that’s — so we studied, we look at what the business models do. Let them explain to you. But the reality is, is that we don’t ever take for granted that, they’re not better than we are at any given moment. And then we figure out, what’s attracting customer and then we say, why don’t we have in some cases, we’ve said we don’t want to have it.
John McDonald
In other cases, you’ve built it.
Brian Moynihan
Yes.
John McDonald
Brian, thanks so much. Covered a lot of ground. We appreciate you coming today.
Brian Moynihan
Thank you.
Source: seekingalpha.com
