Q3 2019 Earnings Call

Hello, and thank you for joining the bank of America third quarter earnings announcement at this time all participants are in listen only mode. Later, you'll have an opportunity to ask questions. During the question and answer session. Please note. This call may be recorded I will be standing by should you need any assistance. It is now my pleasure to turn todays conference over to lean Mcintyre. Please.

Go ahead.

Good morning, Thanks for joining the call to review our third quarter results I Trust everybody has had a chance to review the earnings release documents, they're available on the Investor Relations section of Bank of America Dot Coms website.

Before I turn the call over to our CEO , Brian Moynihan, Let me remind you that we may make forward looking statements during the call.

After Brian's comments, our CFO , Paul do not for you will review more details to the third quarter results well then open up for questions. Please try to limit your questions. So that we can get to all the colors.

And for more information on the forward looking comments, we may make please refer to either our earnings release documents, our website, where the FCC filings with that take it away Brian . Thank you Lisa Good morning, everyone and thank you for joining us to review our third quarter 2019 results.

These results reflect our success in the U.S. economy continues to grow at about a 2% GDP level.

That kind of economy, our job is simple drive solid customer activity manage risk well manage expenses well all while investing heavily in our competitive advantage. That's what we've been telling you is then what we call responsible growth.

The investments, we're making the franchise for many years and our disciplined responsible growth approach or other across every line of business results in respect to customer basis, you'll see the materials.

Today, we reported $5.8 billion, an after tax net income and 56 cents per share for the third quarter.

Those results include a previously announced 2.1 billion dollar pretax impairment charge discharge relates to the investment in our merchant Bank of America merchant services joint venture from 2009 that negatively impacted our TPS by 19 cents.

That charge, how we're positioned us to meaningfully invest in art integrate our payments platforms in our commercial side businesses over the next several years.

Excluding that charge third quarter net income was a record $7.5 billion after tax EPS of 75 cents per share.

On this adjusted basis net income increased 4% from the third quarter of 18, well earnings per share increased 14%. This reflects an 8% reduction in average diluted shares from third quarter of 18.

Returns after adjusting for the impairment charge were strong return on assets about EUR 23 basis points.

And on tangible common equity at 15.6%.

So before Paul dives into the quarter's results for the lines of business I wanted to cover a little bit about climate.

Activity cost and operating leverage at an enterprise level.

The items that we focus on for you that allow us to drive our competitive advantage, but first some kind of general context around the operating environment.

Despite the repeated discussions are they continue discussions around a potential recession in the United States I want to offer some data from our customer base, which represents the activity as a.

Substantial portion of American consumers.

Are you know customers outgoing payments concern a consumer side of our company or nearly three trillion dollars are about when compared to U.S. economy about 15% consumer payments year to date are up 6% compared to the same period in 2018 through nine months <unk> third quarter that pace was a solid or slightly increase.

Earlier in the year.

This means the U.S. consumer continues to benefit by strong employment prospects.

Interesting on the commercial side clients at roughly a $325 billion in average U.S. commercial loans outstanding we do see a lot of client flows as a market leader in United States. Our total commercial loans grew 6% compared to the third third quarter of 18 with good middle market utilization rates.

And importantly, our small business segment also grew 6%.

As such we are the largest us commercial lender in the largest small business lender in the United States. According the FDIC data.

The solid activity means a commercial customers continue to farewell.

These are tangible examples if U.S. economy is still in solid shape. Despite the worries and concerns about trade wars capital investments slowdowns or other global macro conditions.

Now, let's let's turn to slide three.

Across nearly every line of business, we're seeing strong customer activity you can see that on slide I won't take you through all the statistics here, but let me highlight a few.

When a consumer business on the left hand side the slide our deposit growth has consistently been above the average for many industry average many periods.

It's actually majdic that we're gaining market share.

And not just imbalances that year to date, we've seen something.

That's interesting to us we've had a 2% growth in a number of net checking households.

700000 increase this is the fourth year of good growing net checking households, after decade of consolidation of accounts relationships and other changed our business to began a decade ago to reposition.

It's also record levels of primary accounts and record levels, a total bounces an average balances in those checking accounts, 92% of our customers. We have the two primary checking account in the household and the average balances reaches $7000.

Now through a new <unk> renewed focus on growth in our wealth management franchise, and you're seeing K docs are leading the charge and we've seen that new Merrill Lynch and private banking relationships up over 30% plus in each case.

And we're expanding the the franchise by being a retail franchise, our consumer banking franchise to markets, where he had long established wealth management or commercial client coverage.

Well I was going to cover the continued growth in digital uses across our client base, which provides an important dual benefit of strong customer service and lower cost structures.

No and the commercial corporate side as you can see on the right hand side of the slide as well as the institutional investor coverage. We have we also growing to client basis, we have been investing in the client facing teammates in our commercial banking for a few years and we've increased our investment banking covers especially in the middle market and we bad news traders and sales staff in Europe as we opened up here.

As a broker Jarvis as you can see these efforts and deepening relationship with 3% growth and solutions for household.

Consists of customer relationship in commercial.

This investment has led to improving our client coverage in investment banking market share.

Are there this quarter merchant team made Tom on tag highlights some of the gains were making middle market investment banking coverage at a conference. We expect to see that can we have seen that continue to access and we expect for it to continue in the future as it continues to bring our capabilities to our great commercial banking franchise in United States.

Let's turn to slide four.

This increase in client activity can be seen in the growth in deposits loans on slide four we look at the deposits average deposits grew $59 billion or 4% to 5% year over year.

For four years now we have grown deposits compared to the prior year for every one of those quarters by more than $40 billion when compared to your before all what we've improved the mix of deposits.

Deposits with our consumers grew $38 billion and told or 4%, reflecting the value clients place on a relationship benefits offered by the convenes our network.

The value of our leading digital capabilities and our unique preferred rewards program.

Total wealth manager was responsible for 16 billion of that $38 billion and consumer deposit growth, reflecting client expansion in preference to hold cash in lieu of investments as well as inflows of about $8 billion from the conversion of some money market funds the pause at year end 2018.

Our consumer banking deposits grew by $22 billion or 3% year over year more importantly, you could see into right hand side upper right hand side. The slide that these came from checking balance growth.

One additional point, we'd focus on here as long term trend of deposit growth eating <unk>, even in a moving rate environment.

When the fed started raising beds at the end of 2015, many of you had questions.

I was whether I deposit could continue to grow in what rates, we'd have to pass through the customers. Since the end of 2015, our average consumer banking deposits are up $145 billion imbalances.

Three quarters that coming from checking accounts.

These balance or either no interest or very low interest I don't know core relationship and the households of American.

A rate paid remains low twos that superior mix of deposits.

Now when you look at global banking, a low right hand side. This slide $23 billion in deposit growth reflects a rising rate environment and additional bankers. We have deployed over the last few years to continue to sell our superior global transaction services capabilities.

As we move to slide five we see the loan side. The equation overall average loans were up nearly 4% year over year, despite selling about $9 billion of noncore consumer real estate loans out of the all other category.

Over the last year average loans on line of business grew $52 billion or 6% year over year as both consumer and commercial loans both grew at a 6% pays.

Middle market borrowing as I said earlier continued to complement large corporate financing.

As you can see in the bottom right hand chart, we continue to demonstrate a fairly consistent range of responsible loan growth you know commercial businesses.

All our business segments.

Within consumer you'll note the strong residential mortgage growth, but also the more stable credit card balances, which reflect our decision last year to continue to manage less profitable promotional balances down well driving core balances and our relationship, especially in <unk> rewards capabilities.

The commercial I want to highlight a couple of various activity important I understand you think about commercial clients in the state of the U.S. economy first as I said earlier small business lending over the last year, we grow in small business loans, 6% regaining our market position as number one lender to small businesses in United States spying capital small business is very important as they had a key driver employment and U.S.

As we continue to innovate around capabilities and offerings important client base another portfolio, but our commercial loans and leases book is our global equipment financing portfolio growth. In this portfolio is a sign of commercial clients, having that are investing capital in U.S. economy that faster pace and the overall economic growth.

This portfolio is $65 billion in a grew $6.5 billion plus or 11% in the past 12 months. This reflects investments by clients and equipment to drive their business invest in renewable energy products.

These are just a couple examples when our staples lending portfolio is growing and supporting clients in a real calling me and growing the size of smaller competitors entire lending portfolios.

As we look to the expense side equation on slide six.

We've been driving a responsible growth.

Part of that is to have sustainable growth, which means we self fund our investments in five to find ways to handle the inflationary cost to keep expenses relatively flat. We continue invest heavily $3 billion in technology, new branches, new teammates slide six shows a two year expense trend here I'll talk about the expenses fivesix, excluding the impairment charge we took it.

Our investment Bank American merchant services, we've been operating and type range of $13 billion to $13.3 billion with only one exception for last few years, they've been able to operate as 50 is really a billion dollar annualized expense base. Despite increased investments in technology infrastructure buildings and people inflammatory and other costs.

At $13.1 billion. This quarter, we were basically flat compared to quarter. Three 2018, despite elevated litigation costs about 350 million compared to a six quarter run rate about $100 million per quarter.

Regarding headcount you over your head count went up it went up in a sales professional category by 17 under people, we offset that cost reduction another <unk> other teammates.

As you look to the next slide slide seven you see the familiar operating leverage trend, which has been a highlight for the firm's culture funding investments swap ratio earnings.

Despite the immediate revenue impact of a lower interest rate environment and other revenue challenges with slowing economy.

We have a good track record of generating operational savings, we're able to keep that operating leverage relatively flat essentially expenses revenue grew about $500 million.

Less than $500 million, each automotive core operating basis, taking account the elevated litigation you could see operating leverage even in this difficult and I invite environment.

As I've said before generating up or like operating leverage does get tougher. We told you that over the last several quarters after for successful years of keeping expenses.

Declining and holding relatively flat.

This will continue especially as it works appears of interest rate cuts, but we remain focused on our mission to continue to grow revenue faster and expenses. The question. We ask ourselves is how much flexibility. The question you ask us is how much flexibility we want to leverage from initiative spending on technology or infrastructure or hiring or we just keep it or do we keep investing to build our market share.

A minute as we talked to the investors who own substantial portions of our stock. They continue to tell us to invest in our Klein customer successes to take advantage of our.

Our strong position.

And continue to invest in times, but even with that you can see in this chart that we maintain our discipline around operating leverage.

Dunga turnover to Paul for few details in the quarter.

Thanks, Brian .

I'm starting on slide eight with the balance sheet.

Overall compared to the end of Q2, the balance sheet grew 30 billion driven by loan growth, which ended the quarter more than 9 billion higher.

We also grew the balance sheet in global markets to support additional client activity.

Liquidity remained strong as average liquidity sources were unchanged linked quarter.

Shareholders equity declined 3 billion driven by a 2 billion dollar decline in common equity.

As positive OCI from lower rates and net income totaling 7 billion.

Well more than offset.

By 9 billion of capital returned to shareholders through common dividends and share repurchases.

There are meaning 1 billion dollar decline in equity resulted from the redemption preferred stock in Q3 after issuing lower yielding preferred shares in Q2.

With respect to regulatory metrics, we remain comfortably above our minimum requirements.

Regarding C.T. one ratios.

Given the reduction in capital I, just reviewed RCT one ratio standardized.

Decreased to 11.4%, which is nearly 200 basis points above our minimum requirement and as mentioned in our SCC filing the impairment charge recorded this quarter reduced regulatory capital, but had no impact on our capital plans announced in July .

Our risk weighted assets increased modestly as a result of increased.

Client activity and higher loan balances across the businesses lastly, our t. like ratios also remained comfortably above our requirements turning to slide nine and net interest income.

On a GAAP non STB ft basis, and I was 12.2 billion 12.3 billion on an S.T. basis.

Compared to Q3, 18 gap and I was up 126 million or 1%.

The year over year improvement reflects solid loan and deposit growth as well as modestly higher average short term rates year over year.

As you know.

Lower rates are a headwind.

The fed cut short term rates in July and September and average long and rates are down over 100 basis points year over year.

However versus the linked quarter gap and I was flat.

There were two primary negative impacts to eni in the quarter first.

Lower short term rates reduce yields on the floating rate assets.

And second because of lower long term rates, we experienced faster prepayments on mortgage backed securities increasing the level of bond premium write offs.

Offsetting these negative impacts were one additional day of interest loan and deposit growth reduction in the cost of our long term debt.

And a small decline in the interest rate paid on deposits.

In addition.

Global markets Eni benefit from lower funding costs and a shift in mix of client activity.

Well I know I improved go markets results are better assessed by studying.

Together, both and I and trading to calm profits as client activity from one quarter to next can.

A shift in mix between these two revenue lines in fact sales and trading revenue in the quarter, which includes both and <unk> and trading income profits was down slightly versus Q2.

With regard to deposit pricing we were disciplined.

First note that customers, who are ball from us on a variable rate basis benefited from an approximate 30 basis point decline in LIBOR or on a linked quarter basis.

At the same time, we lowered the rates on interest bearing deposits by five basis points to 76 basis points.

Roughly half of our one point.

1.37 trillion.

Deposit book, and our consumer banking businesses.

Where our customer pricing remained relatively unchanged, while the deposit rate, we pay in global banking and wealth management declined 12 basis points versus Q2.

As you know.

And our banking book.

We have more variable rate assets, then variable rate liabilities, given the quality of our deposits, particularly in consumer banking.

This makes us asset sensitive and our banking book or perhaps it would be more descriptive to call us liability insensitive.

In any case.

This asset sensitivity increased compared to Q2, driven by the forward curve at the end of September which was lower than the curve at the end of Q2.

Looking forward.

On our Q2 earnings call, we reviewed our expectation that net interest income could grow roughly 1% for the full year of 2019 over 2018.

That expectation has not changed despite the lower long and rates and the expectation for another short end rate cut in Q4.

Nor have we changed our expectation that Q4 and out.

The Q3.

In Q4, we expect the decline in short term rates will more fully effect yields on our variable rate assets.

In addition.

Given the decline in long and rates over the past couple of quarters.

Reinvestment rates on securities and mortgages is expected to dilute current portfolio yields however.

LIBOR rates have reduced the cost of our long term debt and the funding of our go to markets business. This plus loan and deposit growth are expected to partially offset the headwinds.

Turning to asset quality on slide 10.

We saw no meaningful change in asset quality, which continues to be strong.

We have maintained our responsible underwriting standards for years now.

And we remain disciplined again this quarter in a relatively solid U.S. economy.

The Q2, we sold some non core consumer real estate loans, where the sales price was above our carrying value value due to prior charge offs.

This resulted in recoveries that reduced net charge offs and provision expense in both Q3 in Q2 this year.

Recoveries in Q3 in Q2 were 198 million and a 118 million respectively.

Including these recoveries total net charge offs in Q3 were 811 million compared to 887 million in Q2.

Adjusting for the charge offs.

Adjusting for the recoveries excuse me net charge offs were just over a billion in both periods and the net charge off ratio would be 42 basis points in Q3, and 43 basis points in Q2.

On that adjusted basis, and comparing to Q3 18, net charge offs were $77 million higher reflecting modestly higher commercial losses and season of card losses.

Provision expense was 707 million and included a modest 32 million dollar net reserve release. The prior year period included a 216 million dollar reserve release, driven in part by energy releases.

On slide 11, we break out credit quality metrics for both our consumer and commercial portfolios and as you can see asset quality remains strong.

Consumer nonperforming loans declined as a result, a blown sales and in commercial ratios tracking nonperforming loans and Reservable criticized exposure remained near historic lows.

Turning to the business segments is starting off with consumer banking on slide 12.

Tumor banking produced another solid quarter of revenue and earnings growth.

Earnings grew 5% year over year to 3.3 billion revenues grew 3%.

We believe our efficiency ratio of 45%, which is one of the lowest among our peers is driven by our digital delivery platform and simplified product offerings, which enables not only ease of use but also efficiency.

Our investments in this business continued at a steady pace and client activity remains strong with respect to loan and deposit growth as well as consumer spending.

Again this quarter.

We added salespeople expanded into an existing markets renovated financial centers and improved capabilities for consumers as well as small businesses.

And even as we continue to invest the cost of deposits year over year declined 250 basis points nearly offsetting the increase in rate paid which is now 11 basis points.

Deposit growth was up 22 billion or 3% and centered in low rate checking loan growth was up 7% year over year. The low long term rate environment continued to generate momentum in consumer real estate as new originations nearly doubled from last year to more than 20 billion.

Asset quality the segment remained strong as the net charge off ratio was 118 basis points down modestly from both last year and the previous quarter.

In addition.

We saw origination spreads improve both mortgage and consumer vehicle lending during the quarter.

Consumer investment assets grew 19 billion to 223 billion a strong client flows were partially offset by market declines.

Turning to slide 13.

Note that our 3% year over year improvement in revenue.

Was driven by both <unk> and <unk> as well as fees.

Hi benefited from deposit and loan growth card income was up 4% year over year as we experienced solid spending levels, partially offset by rewards, which continued to be a headwind.

Each quarter, we show you the improvement in the consumer digital statistics, which are highlighted on slide 14.

Customers continued to transact and interact with us.

In person as well as through digital channels.

So we continue to invest in both by adding financial centers and resumes existing ones as well as enhancing and adding capabilities to our number one ranked digital banking platform in fact over the past year, we have opened.

98 financial centers renovated 562, and installed nearly 1000 ATM and remain on track to hit our build out targets.

This includes opening financial centers in three new major U.S. markets in the past year, where we had previously no retail presence.

And remember.

While many are new markets additions from a retail perspective.

Other lines of businesses like commercial banking Merrell and our private bank had been serving customers for decades in these markets.

Turning to digital in the third quarter, we saw nearly two and a half billion consumer interactions across all channels.

With digital accounting for more than two bill.

And digital sales now represent 26% of total sales and by the way our digital and physical world are increasingly connected and synergistic digital appointments are a great example of that 13% of our financial center platform traffic is now driven by appointment set in advance this allow.

I was just to better prepare and staff for the specific needs of our customers and improve their experience.

Turning to global wealth and investment management on slide 15.

Strong results were aided by growth across a land loans and deposits and generally good marketing conditions in the quarter.

Client balances are approaching three trillion.

The result of flows and market valuations referrals across the company remained strong.

Net income was 1.1 billion and grew 8% from Q3 18 pre tax margin was a record 30%.

This is created nearly 300 basis points of operating leverage year over year as revenue increased 2% well expenses declined 1%.

Within revenue positive impact from growth in deposits and loans drove higher.

Asset management fees grew year over year as fees from a U.M. flows and market valuations more than offset general pricing pressures.

Transactional revenue declined modestly versus Q3 18.

With respect to expenses.

Investment in sales professionals technology, and our brand or more than offset by lower intangible amortization and deposit insurance costs.

Mobile channel usage, among wealth management households grew 45%.

Moving to slide 16, do you want results reflect continued solid client engagement in both Merrell and the private bank.

Strong household growth contributed to higher client balances, which exceeded 2.9 trillion Aon flows were nearly 6 billion in Q3 or 21 billion in the past 12 months boosting aon balances to a record 1.2 trillion.

On the banking side average deposits of 254 billion were up 16 billion or 7% year over year, driven by client growth and a 2018 year and conversion of balances from money market funds.

Average loans were 5% higher year over year, reflecting strong growth in mortgage and custom lending.

As you turn to slide 17.

Before I review, the slide and that's I've done in the past I want to provide summary information on global banking and global markets on a combined basis to allow comparison against competitors that may not break out these business separately.

So on a combined basis. These two segments grew revenue to 9.1 billion and earned nearly 3 billion in Q3 generative return of more than 15% on their combined allocated capital.

Looking at them separately.

And beginning with global banking.

The business earned 2.1 billion and generated return of more than 20% on allocated capital earnings were strong up 3% from Q3 18, driven by an increase in investment banking income and leasing related gains.

The every our growth in earnings was mitigated by the absence of prior year reserve releases primary from energy exposures.

Growth in investment banking fees was the largest contributor to the 8% improvement in revenue year over year.

Strong deposit and loan growth reflects the benefits of adding hundreds of bankers over the past few years as well as continued advancements and how we deliver our loan product and Treasury services.

<unk> expenses were up 4% as we continue to invest in technology and client facing associates.

Looking at trends on slide 18, and comparing to Q3 last year as you heard Brian mentioned earlier and Tom discussed at an Investor Conference last month.

We have made steady progress in investment banking over the past year, our standard progress with clients is reflected in both our improved fees as well as market share rankings and lead tables.

I'd be fees in Q3, well more than 1.5 billion for the overall firmed up 27% year over year.

Pfizer was particularly strong at approximately 450 million as we advised on five of the top 10 transaction completed in the quarter.

Turning to our strength and leadership in credit underwriting activity into capital markets was strong with some record weeks of debt issuance.

In Q3, we continued to add regional investment bankers with a focus on expanding our geographic coverage in the U.S. to match, our coverage model and market leadership and commercial banking across the U.S.

One of the reasons for growth and deposits in global banking has been our consistent investment over multiple years digital capabilities within our transaction services platform.

Referring to slide 19 note the growth in mobile and digital usage at the top of the page and our focus on solutions for clients on the bottom of the page treasures are looking for the same type of convenience as consumers and our consumer and commercial teams worked closely together to leverage technology advancements and.

Drive usage and adoption of mobile and digital solutions.

We now have over 500000, Kasper users and mobile Castro users doubled year over year.

Mobile payment approvals by these users were one point where were 144.

Billion over the past 12 months nearly doubling year over year.

Switching to go over markets on slide 20, as I, usually do I will talk about the results excluding DVA.

Global markets produced 858 million in earnings.

When comparing results year over year in quarter over quarter note that both prior periods included similar size equity investment gains that were noted in previous earnings calls.

And in both cases these gains were not included in sales and trading results.

Year over year revenue was down 2%.

As the segment share of improved investment banking fees and a modest improvement in sales and trading did not offset the prior years gain on an equity investment.

Sales and trading improved 4% year over year.

FICC was flat with Q3, 18, well equities improved 13%.

Fixed revenue showed improved results in mortgage trading and municipal trading but was weaker in FX and credit products. The improvement in equities to 1.15 billion was driven by growth in client facing activities as well as continued.

As always we continued to invest in our equity financing products.

In 2019 in equities, we added new clients and increased our market share with existing ones.

Benefits derived from increased scale of improve the efficiency of our balance sheet as well as return metrics.

Expenses were up 2% year over year as we continue to invest in technology, plus Brexit preparedness continued to add expense.

On slide 21, you can see the that our mix of sales and trading revenue remains weighted to domestic activity, where global fee pools are centered within FIC.

Revenue mix remained weighted towards credit products.

Finally on slide 22.

We show all other which reported a loss of 1.6 billion results here included the joint venture impairment charge. Excluding this charge. The segment would have reported a profit of roughly $100 million.

A few other items impacted results here first provision benefit from the recoveries totaling 200 million related to the sale of primary noncore consumer real estate loans.

Totaling 1.1 point 8 billion second the elevator litigation expense, Brian mentioned is booked here and third the effective tax rate. This quarter was 16% and included discrete benefits booked here related to the resolution of several tax matters.

We continue to expect the effective tax rate in Q4 of around 19% excluding unusual items.

Okay with that let's just opened up to <unk>.

At this time, if he would like to ask a question. Please press star and one on your Touchtone phone you can or move yourself from the key by pressing the pound he.

Again that star in one and we'll take our first question from Jim Mitchell with Buckingham Research. Please go ahead.

Hey, good morning, guys, I guess I'll I'll ask the question and you can decide not to answer but just if there's any help you can give us on sort of the and I out and I out way beyond for Q I know, there's a lot of moving parts, but given the forward curve and maybe you could also help us think about the premium amortization year to date what that.

Drag as Ben and how that would play out in a enough in a stable rate environment from here. Thanks.

Sure. So let me start with the premium amortization, if I'm not gonna, giving a precise number but if you think about the extra day, we had from Q2 to Q3, the increase in premium amortization of the quarter more than offset that.

In terms of but but going forward, you know unless long and rates fall.

Meaningfully from here, we wouldn't expect that level of increase in Premiumization in Q4, even next year.

Without.

A significant increase significant decrease among that rates.

In terms of the outlook for 2020.

You know, obviously, that's gonna be highly dependent on future fed activity on deposit pricing across the industry. We don't think it's really prudent right now to provide specific guidance at this point.

You have our thoughts on you know walk so we're going be talking about Q4, and you have our thoughts on that from our prepared remarks.

You've also going to have our asset sensitivity disclosers.

So the only thing I'd remind you is when you think about Q1, we will have one less day of interest you know which impacts and I.

By about.

80 million, but we'll get that day back in the third quarter.

So maybe just a follow up on that just on the balance sheet growth. It seems like both loans and deposits of accelerated a little bit I'm, you indicated some pretty strong trends and sort of new account growth in both consumer.

And wealth.

Do you and coupled with sort of a lower rate environment do you see deposit growth picking up across a you've had good and commercial across the consumer franchise broadly whether its welfare or traditional banking.

I think we have if you go back up.

Many.

Quarters ago, we discuss our thought processes to tell our teammates to price to achieve sustainable deposit growth of 3% or more faster and the economy, which majored in hair axiomatic.

Point, there as you're gaining share at all times, if the economy is growing less so they've been doing that we are staying very careful and disciplined there was some adjustments made under wealth management business. If you. If you look back last year, we had some growth there that we slowed down because it was a little too.

<unk> tied to the bidding too much rate they change that process. They flattened out the other growing again on the commercial side that the changes of interest bearing an interest bearing and the.

Fees for services, and all that stuff calculations change, but I'd say you should expect us to continue grow draper going now or faster because frankly. This is we've been very disciplined about how we've been driving it gets core checking accounts and consumer side core checking.

Checking and savings accounts in the wealth management business and you, obviously GTS business and so I'd expect it to continue to grow up maybe faster, 3% for four or 5%.

But the thing about that is that has incredible amounts of new customers at very advantaged pricing that we can put to work.

[laughter].

That's great. Thanks.

Yeah, I think one thing Jim just as.

As I said in my prepared remarks, do you know there's a lot of discussion.

The fed started raising rates what would happen then and what I said back there was no consumer increase their deposit balances by $145 billion. Since the first fed rate increase in other than to decreases right. So think about that that machine just churning out growth and growth in growth 75 said that was checking balances that's the real encouraging part of the other store in consumer.

All tied customer satisfaction Hot hi in those businesses, all time employee satisfaction high all time customer growth rates high for 15 years or so and you just take that played out it's it's pretty important.

It seems like it could be a good leading indicator. Thanks.

Oh My next question will come from Mike Mayo with Wells Fargo.

Uh huh.

Hi, I'm, a little stuck on slide seven with E being efficiency.

And you mentioned all the investing that you're doing so.

Are you willing to go to negative operating leverage.

Rich for with the investments like you had the new salespeople in the branches and you have more deposit growth you have new regional banking coverage you have more investment banking so against the investments are paying all so what's your confidence in growing remedies faster than expenses over the next year.

You're not giving specific guidance, but more generally what's the whole technology inside the firm.

Enabling this operating leverage for example, I mean data centers do you have in heavy or.

Oh what percent of your applications, you expect migrates to cloud just a little bit more color, what's happening behind the scenes and enables your operating leverage and your expectations for continuing that.

And Mike those are good questions. I think you know what we're going to invest the long term value This company and our clients and so if if this quarter, we're sort of flattish on operating leverage if we happen to go negative I'd argue and that was right things to do a based on everything we're assessing a time you do it if these quick changes.

And rates, obviously have an impact that you then outgrow with a volumes coming in and producing the value. So but that takes some compounding sort of quarter, so our attitude and talking to our investors is.

If we're gaining share and doing right things keep going.

But the real key is back to your sort of your second question, which is the we are we are getting the benefits of.

Contain a sustained long term investment and the changes the way. This company operates that continue to push through and so three years ago too, but a half years ago. We said we'd operate this year on 53 billion and change in expenses and we hit that number in a lot of you had said and 57 billion or something like that next year. We told you we be it a low 53 is a good and.

We still are sticking to that and and so that's three four years out you're saying how can you playing out with all the investments we're making that is because we know we're making investments at the same time, they're taking out it taking out cost the cloud a journey for bank of America is an interesting one we started about a really the new B C framework for those of you remember that this there.

Came out of that into early days as a simplified improve we had 200000 plus servers those sort of accounts now down to 70000. The first decision. We made was actually create an internal club those servers are operating about 30% 60. Some data centers very much dedicated by line of business by operational unit by risk or whatever we took all that away and bill common architecture.

So the lion share applications run around 8000 servers, we still have 70000 servers, but those are more dedicated for very specific things and we'll continue to work to take them down we're down to 23 Datacenters those you've been around the company for I know, we took a $350 million charger for years and the second quarter 17 to pay for part of this change over but in that.

Timeframe, we've reduced expenses by basically.

Around 40% EUR $2 billion a year on our backbone.

And so at the same time, if you looked on pages 14, and 19, you can see just over the last couple of years of volume of transactions. So were up 86% and mobile log ins were up.

39% in wire transactions and things like that so what you've had is this scale effect that we've been able internalize in our provision. These services from what we can get an external clouds are still 20, 530% cheaper, which we expect the change obviously and so we're working with potential providers to take the next step which was.

Discrete data centers and resources to internal cloud save a ton of money then use that power to actually negotiate with third parties to how they might help you in support you and that's going on with Kathy beside and her team right now it how both feel runs this for us, but so far we're still cheaper and so far we have to make sure that the external providers are.

Safe sound lead the day to just for us to use a lot of customers don't mix of other people's data et cetera, and that discussion negotiation goes on as we speak that we will we're not we don't need on the hardware, we just need to find out who can provide the right way.

Well, thanks to providing data that others not provided yet so just one follow up then again.

The spirit behind this is you're getting the operating efficiency, while making investments you're doing stuff behind the scenes like this.

He's gone from 60 data centers to 23 data centers how much further he had to go on 200000 service to 70000 service how much where do you have to go Oh and what percent of your applications do you expect to migrate to the cloud over time.

Last question I'd leave the people more expertise that Mike in the spirit of constant improvement I never give people a number that I'm satisfied with it because and you shouldn't either in other words that you know if we if we think where it can you know we're at X you know for Howard and the team in this case or any of our businesses you can improve it every day and so that that is the cultural change.

Andrew made in this company and frankly, the stability of having not had any acquisition activity and yeah.

Since 2009, and any yeah anything other inorganic movement. You can you you can play in these things out and execute him and some of these things take three to four years to get done. So you have to patient yeah could be consistent you have to keep allocating investment to them to cause a change to happen and then be disciplined about the cost coming out there side, but I'll never tell people were done because then it.

Stopped working it.

Right. Thank you.

Our next question will come from Glenn Schorr with Evercore.

Please go ahead.

Thanks very much.

I'm curious now that you you've taken a charge on the merchant servicing JV.

I'm curious about the go forward like can you talk a little bit about what is built what do you want to build it is there going to be an impact on expenses that will see and how soon we'll see progress and what we see just curious to learn darn sure.

Sure well, let me start with a high level comment and then I'll, let Paul because remember many of you don't know don't probably remember the Paul ran GTS for a while it had as part of his portfolio. So the but he can hit some of the details, but philosophically, where we wanted to control our destiny to be able to provide this type of service to our clients and a much cleaner away and we had a great partner and FDR and.

At some point that was good for what was going on in the World Dennis change. So yeah, we're making it changed a lot of the discussions on in terms of where we take this the team is working with FBR closely to to.

On line the venture that further contracts et cetera, but it's it's been a good relationship expect.

They continue in various ways, but on the other hand, we had to get control our destiny the sales force that implementation.

Well once you had some of the.

Pieces in terms of the numbers and.

He was asking sort of what impact on expenses and things like that revenue yeah, I mean, I guess in terms of expenses.

You know I would remind you that the accounting for bands.

Doesn't change until the JV actually ends in June that's the first point.

And so when you get out to two Q3 20.

Well begin reporting our share of the revenue and our share of the expenses versus today, where we record that share as net earnings in the other income line under the equity accounting method.

Right as we sit here today, given all we have to do between now and then.

We're not disclosing specifics.

You know, there's a lot of work to do and the bottom line impact is really not that you know impactful.

As we get closer to I think the actual dissolution will give us we'll give you some more guidance.

Do you do you have a lot to build in terms of [noise].

Being able to service clients and deliver everything that you want to deliver the then everything that you're doing now.

I'm, assuming your current partners doing so I'm just curious how much of that you can do behind the scenes as you lead up to June 2020.

We're working on our plans and we have what we have a fair amount to do but as you think about technology spend an incremental build costs.

I would <unk>, that's going to be prioritize within our normal 3 billion or plus a year that we're investing.

Okay.

Brian maybe one just high level one on on loan growth I think growing loans core loan, 6% and a 2% world like you've described.

Would be considered great, but most metrics I'm just curious if you think that's sustainable if were.

Going to sustain this 2% world.

Yeah, I think it'll ebb and flow and you've seen it otherwise if you looked out one page on the low ran quarter. It shows you across.

6% to 3% to 6% for commercial so what do we have been doing that's helping drive that you're one of the major things we did as I I think if you.

<unk> calculated we have yeah.

Ah four segments, which go against commercial lending to small business segment now consumer business. The business banking. So segment the commercial global commercial banking segment, which must be called middle market than in our GC I'd be for large companies. If you look across those segments, especially in small business.

But in importantly in business banking and global commercial banking eighth away.

Williams, who runs a business banking in house Borthwick, those guys have been investing in headcount and people and Lacey manager in <unk>.

At the precise number for each of them, but think 25% more bankers today than there were three years ago, which gave us an opportunity to divide the portfolios of clients up.

Further so people had less clients, who get more depth relationship and that's why you see statistics about a key products for relationship and then secondly, with the capacity we added to get new relationships all consistent with our credit.

Yeah. So we often get asked are growing commercial loans were not yeah. Yeah, we always ask ourselves our okay. We're sticking to our credit standards and we've been able to do that so I think a sustainable and mid single digits, maybe six a little higher maybe you have five maybe for maybe six if economies are too but this this taking market share.

Because of the deployment of the capabilities into the into the middle market and business banking franchises, along with some of the work that's going on with investment banking. Others is is there is a good is a good place to be and we and it's a three or four your investment takes about three years to get a commercial banker coming into our franchise up to speed honestly.

And then on top of that you know weve.

There's a filing and Robert slice. It runs a group that are under <unk> does the underwrite process that whole enterprise behind all these businesses and we've invested tremendously in the technology to support that group for their underwriting capabilities turnaround time, all the things and that is allowing us to frankly have we're told the faster turnaround time banks large large smaller.

Ah yes.

Bigger or smaller and so we feel we feel that were afraid that kinda competitive advantage that this franchise has embedded.

Awesome. Thank you Brian .

Our next question will come from John Mcdonald with Autonomous Research. Please go ahead.

I wanted to follow up on Jim's questions, Ron and I. Paul on you mentioned that the full year outlook for the 1% hasn't changed to the prior outlook for the fourth quarter was to be around 12 billion. You came in a little bit higher this quarter or just as we think about jumping off point into next year, you're still thinking about a fourth quarter and I around that 12 billion is.

That affair reading of you know your disclosures and things like that.

Yeah, that's a fair reading.

Okay, and then just could you remind us how to read those disclosures and think about the impact of another fed cut from here. There's some differences to the 10-Q disclosure you imagine prior like it's only the banking book is relative to the forward curve, how should we not all that and think about what one rate cut is if we're gonna model that going forward.

Sure so you'll have our sensitivity disclosures.

And our normal filings, but when you look at them you're going to see.

You know that.

Over the next and up and if the fed where to cut rates.

By.

25 basis points and remember that disclosure is beyond the forward curve, which has three rate cuts in it right.

But if you look at that disclosure you'll see that.

400 basis points would equate to around 3.3 billion on the short end you just divide by 16.

And you're going to get the impact on a quarterly basis of about 200 million.

But it's going to be a little bit less that because again that forward curve includes three rate cuts and then you're talking about 100 basis points on top of that so you'd literally be that forward curve literally I mean that that sensitivity is closer to literally means you'd be at zero interest rates and obviously the next.

Great well I'm going to be Xone interest rates, what's not going to be the full 200, when you do the math on that disclosure.

In addition, as you point out or alluded to.

That's just our banking book.

And if you include global markets, which is modestly liability sensitive.

That decline would be even further mitigated.

Okay. So something I think you said, maybe before in the 125 to 175 or there's something less than 200.

Yeah, it's gonna be it's gonna be less than 200, and I I'd. Even you know tell you it's gonna be meaningfully less than 200, John So that these things I know you guys would like us to rounded up to six digits, each time and give it to your [laughter] years, but yeah. The reality is is we gave you an estimate for this quarter.

Your last quarter, Yeah, I mean fourth quarter to quarter, and we gave it to you last quarter and in fact, there's been more rate cuts and we still hold in the same.

Guidance after 12 day in and change in and set shows you that we're managing the heck to try to avoid somebody's impacts and how it pies deposits and better growth in deposits. When you may have estimated that so there's a lot estimation, but yeah.

We're trying to give us the medically as Paul is talking about over time, but its if there is that it's not that's imprecise. There's just a lot of moving parts that frankly, we've managed better than we thought we thought we could.

No I totally get it and that's totally appreciate it Brian I'm, just with that one more Nit pick Paul just just from the third to the fourth quarter.

You know 12, three this quarter what the pressures that you have in the fourth is kind of the combination of the alive or and then also the premium am is that why you could come down a little more than 200, you know in the fourth quarter and again subject to all the caveats.

Let's look at your thinking about the second quarter <unk> third quarter remember, we had one extra day.

We had a second rate cut that came at the end to the quarter. So as we sit here today.

Don't have that extra day, you've got to rate cuts fully baked in.

That are going to affect acid <unk>, plus you've got in that forward curve. So everything we're talking about here assumes the forward curve you've got another rate cut.

He told you that I.

I thought that the premium am work would not be a significant anywhere near as significant as it was.

Second quarter, the third quarter.

We're going to have loan and deposit growth.

We're gonna have when a again as Brian just said work hard on all the other levers we have like deposit pricing.

And so you know you get to a I'm not giving you guidance I gave you kind of how to think about it based upon those sensitivity disclosures.

But that's why it's a little bit different.

Going from Threeq to Fourq, you versus Q2 to three Q.

Okay, great. Thanks very helpful. Thank you.

Our next question will come from that he can you talk with Morgan Stanley .

That's it.

Hi, good morning.

Question that we get with everybody. We speak Wes is around you know, how you're thinking about the competition and retail brokerage where some of the.

E brokers, obviously going to see our commission on a cash in options and.

Different players different you know price points here on different products, but just wanted to understand.

How you think about that I realize it's a small piece of the revenue a line you've got but just wanted to see if you think that this is it all something that a you need to address the marketplace.

The.

So let me take that because.

If you remember right I had the business when we introduce your dollar commissions in 2006, so it's not a new concept at bank of America.

And so about 87% of the current.

Yes.

Commission, you have current trades or zero dollars in the area that.

In the Merrill edge and their self directed platform. It's been through forever. So this has not changed or operating strategy, but we don't focus on try that.

Drive up your <unk> trading type of thing, we think about the relationship in the Merrill edge and things like that so if you look at the consumer investment assets on page 13, you can see either up you know $20 billion year over year, Yeah, we're driving a whole relationship into these.

Managed portfolios, that's based on financial advice to that yet we still have a very confident capable or I guess in redoubtable kaput Titian, we have a very strong platform that grows also but it did zero dollar change won't affect us much larger because we frankly and if it does to 13 years ago.

Right, that's with preferred accounts and so when people look at page 16, and they see the brokerage Red line. There. It's like 700 million. This quarter that is side you know really question on other things then stocks and options is that fair way to read and that's that's that's really not relevant here because that's in the wealth management business that were where this.

Stuff shows up is actually back in the consumer side, because Merrill edge is in that area and that's where the lion share. This is so.

It's so it's a it's it's not that 700 million as you know the financial advisory team under 80, selling you know things of that closed end funds muni bonds the stocks than a lot of other things. So it's it that.

That's something that under pressure for years, and as you well know and so that's a constant change of fighting the average yield for the total client assets in that business, but that's not affected by this decision.

Got it yes, you'll see us pushed a little bit on some of the qualification for her to open up this capability. Another set of clients that were you only have 30% less to go so.

Got it Okay, and then just separately one more question on Eni policy that mine, but in the quarter, though markets Eni helped out this quarter I believe and I, just let me now if I'm reading that right.

Yeah, Yeah, you read and write markets markets and I.

I went up.

This quarter.

You know as you and we we've said that the markets business is.

[noise] liability sensitive so it does help and <unk> if rates decline I just would point out that you know, we really manage that business.

Looking at total sales and trading revenue not and I ran although the trading book is liability sensitive.

It is really important to remember that client activity and product mix in global markets can vary quarter over quarter.

And we'll drive you know sort of income statement geography.

Which can you know produce an increase as you saw this quarter.

Hi, or or maybe reduce and I had another quarter with the offset is gonna be in trading account profits.

That's why the real key here is to focus on.

Sales and trading disclosure as opposed to the mix between and I and trading account profits.

Okay. Thank you.

<unk>.

Our next question will come from Saul Martinez with Tvs.

Hey, good morning, guys, Oh, so ask a question on.

And I.

The one you know it seems like obviously third quarter is little bit better. Then then maybe expect any retaining the D. The I'm.

The 1%.

Growth in you know kind of implies 12 billion for the fourth quarter.

I mean, you obviously have had rates come in you know long ends come and forward curves pricing. It at least two more rate cuts, but it also feels like maybe a little bit more optimistic then about the and I I trajectory than you were you know maybe earlier this quarter is that a fair reading Paul and if so.

What makes you a little bit more optimistic about your ability to sustain and <unk> is it just that loan growth is coming in better you've been able to to reprice to pause a little bit faster yeah. What what gives you a little bit what makes you a little bit more confident that.

Gary and I I trajectory could be a little bit better than what you thought maybe even a couple months ago. I think we do feel good and I think we feel that way because we've seen how our teams are performing in a different interest rate environment [noise].

How.

Teams and our clients by the way have reacted to you know appropriate <unk> adjustments on deposit pricing given the change in my bore it's going to remember all of our clients are getting a huge benefit and what they're paying on their loans.

So it's appropriate to adjust deposit pricing I think you know were worse, we're obviously growing loans and deposits well.

Yeah.

We deepened relationships, we've improved our capability to service them on both the loan deposit side. So you know I think it's just a another quarter under our belt where rates were different than we've seen how the team to reformed and we're feeling good.

Okay. No that's helpful and on the deposit cost side, you did I mean, obviously to interest bearing deposit costs were down.

Five basis points into you know it seems like that's you know I'm going to be given the limited scope in retail wealth and commercial your your you're being proactive there as you should it but you know you are coming from us so lower starting point on deposit cost. The most of your competitors to begin with so I mean, it's just can you just talked to how much.

More room, you feel like you have if there's we get further along in the rate cycle out difficult does it become.

Or does it become more difficult to be more proactive in terms of of lowering your deposit costs.

Yeah I think.

Back to the and the early discussion that sort of general guidance. We give our teams is you have to get us threepar sense in the current economic environment, we want to see 3% and code core growth in deposit and you have to then priced achieved that both.

And then also at same time, you know chief your your goals and then I have things like that so you I think we tried to be consistent we value relationships. We focus on the core yeah on the commercial side, the GTS relationships or draw you know drive the economics in the business as you well no on the wealth management side, we're driving not only that investment cash.

But all the transactional cash and you have to think of those as two separate executions and.

Putting teammates investing by putting teammates into the into the Merrill Lynch offices, who can help the Cline associates and others will always done a good job he's doing better job of getting core checking relationships and mortgages and things like that which also helping then on a consumer side. Obviously, it's the it just the power of the brand and a franchise and digital competency. So you know.

But we don't let people off the hook either way and that said, we want them to grow we want them to grow with the right got it with pricing that you have somebody comes and says I can grow by issuing a bunch of term cities a premium price me. So that's kind of interesting but that doesn't qualify for you. What we want so and that then if you look at it by business you're seeing.

We decide to move ins as rates moved up and following you're seeing as you stabilize and even come down little bit you're seeing them able to continue to grow when managing a rate paid carefully.

And should we expect noninterest bearing deposits to to grow disproportionately in this environment. It seems.

Yeah with lower rates, it seems like higher yielding Cds become less attractive and this is a port for bank like you got to National Bank, and and you know, there's great franchise and and National franchise. It seems it seemed like a pretty attractive environmental work environment for you guys to take share and you know suck up.

Demand deposits as maybe a faster rate than some of your peers.

But I think.

Yes, we expect to grow at a faster rate than our peers, that's going to axiomatic when you're getting into shares.

But if you look at the if you look at the slides on the deposits you can see you that growth in consumer it drives the equation on a non interest bearing and very low interest cost deposits and and the team they're doing in the team has done a good job of you know.

They've gone from six basis points to 11 that student mix. It's you know and as Paul said earlier, Yeah, we're liability insensitive to some degree because you know stuff the mixed deposits and yet, but if you got to remember and $7 billion 11 basis points of 700, and some million dollars a year of costs. There's only so much <unk> leverage in there. So we say just keep growing and growing a REIT categories.

Yet they they have cities in the Cds grew year over year.

The only thing a lot there is.

Thank you will notice but.

If interest rates are lower than deposit rate paid.

Less important relative to all the other things people reasons, why people investments or I should say deposit with us.

So.

Theoretically you might see more deposit growth in a lower interest rate environment right because trust it is more important.

Deep relationship they have with us across preferred rewards and other things we do for them.

Can you know mobile.

The online capabilities nationwide network of financial centers, our global Gcs capabilities I was just all become more.

Valuable.

Two customers if rates are lower.

Great. Thanks, so much.

Our next question will come from Ken <unk> with Jefferies.

Hey, guys just a quick one Brian you mentioned that.

Obviously, you know delivering positive operating leverage gets harder with her and rate environment, where it is but as you look ahead and you've done. This good job of keeping this 53 billion or so what are the think the incremental things that that become more productive underneath that allows you to fund the and the incremental investments like.

Do we transitioned to other parts of the business, becoming more productive or other pieces that you have it may be still haven't yet attack that could still provide that no under underlying support thanks sure I mean it.

We have a operational excellence platform, which.

Selling and Tom Scribner had now he's moved over to work on part of the operations group under Kathy, but and Walker has she had some flying approved this is an ongoing program which has.

Literally every every at every manager and the company that a couple levels down from my team constantly working on coming up with a mapping of the process improvement across the system.

Asking for investment to help improve those processes. So there are areas, where where you're very digitize and very no paper and very electronic and you can think of that and somewhat consumers. There's areas, where we're still just just now getting the benefits of major investments you may think about that and and underwriting area and commercial I talked about earlier that we're now.

Bringing the people the teammates onto the platform to drive it and so all our platforms have major improvements are available to even though we're very efficient and efficiency ratio in each business unit.

Just two leading apart from our scale impart from just the discipline the teammates so and you know we look at deployment of.

The relationship management town are we getting the calls in the customer visits in the and the.

Productivities out of that we're looking at give a continued work on a real estate configurations that were down 50 million square feet and real estate from the start of 2010, and yet we don't satisfied with ourselves and the occupancy rates and we push it up to me densify the space and the New building. We built New York will be also this new modern style of work environment.

That allow us to get you to to make economic at a higher rental costs.

Yeah, and you look at every aspect of the company and continue to look at managers were down 10000 manage over the last three or four years decade continues to drift down as you continue look at what a manager does and how we test that well you, let attrition workforce, and but not hiring and making sure but planful on higher and we can drive it out and so everyone wants to say whats the silver.

A bullet the answer is everywhere you yeah, there's opportunities and we don't know how far these goes with machine learning artificial intelligence need. These things you hear about our stone infancy of being applied and by the way, we spend a billion and a half dollars and data work over the last five six years, you're largely around all the C car stuff, but ultimately crop.

In that and some of the work you're doing but really to get the all the data rates is actually the wrote the the bought some things that can operate our operating a good data and that that that investment then allows us to take advantage of it and we're still in the early days courts that we invested <unk> markets business. So it's from one side of the company other and going to the earlier comment you know what.

Targets you have the answers I, we don't have a target except improve every.

Months day to day month weakened <unk> and and quarter and we'll continue to do that.

Thanks, a lot Brian .

Our next question will come from Brian Kleinhanzl with KBW.

Please go ahead.

Yes, I just two quick questions here on the both investment management I heard that you are bringing down the noninterest expense can you go into little bit more detail. If there's still more there can be done on expenses and there is probably and see the positive operating leverage with expenses down.

It it's all you have the.

The.

The pre tax margin if you think about it once you.

Hey, the talent teammates, we have enough financial advisory platform and and the private banking platform you're working on about.

You know half half the revenue and were getting 30% of that to the pre tax line. So the idea is you got to improve it all directions, it's not just expenses and its efficiency expenses simplification of product and especially for the for the clients with five 600000 to continue that straight for products that are digitized on both the way.

They are delivered in the way there you know statement and everything and and then making advisers able to handle more clients and that that allows us to get more efficiency real estate configuration. Yeah. We there's a lot of paper still in this business just because the history of it. So there are probably in the first inning of really it's a very digital business in some ways when you.

Think about trades and how they go through but it's a very paper intensive business in other ways the way to do a ml. Okay. Why see refreshes. So we're going to recognize the team. It took a several hundred thousand hours out of several thousand hours out of the work to do that it's just a thousand things and so but importantly also by driving the growth in loans and deposits and stuff.

That is less.

Yeah creates more a pretax profit margin frankly are off the strength of the bank's balance sheet and the size of our company and that gives us unique positioning so we're running the industry leading margins and we know we can continue pushing up it is a very slow thing and we yeah. We don't change the way we pay people, we really focusing on your working around them.

Taking all teammates ability to have a great color here make more money and sort of the clients better.

I would keep making place more efficient.

And then a separate one.

For the U.S. cars I mean, certainly saw the gross interest shields still tick up in the core despite the a rate cut and the change in prime rates. There. It was there something unique growing only allows you to kind of expand yields.

Right.

The card portfolio right.

Correct correct.

Yeah look we've been focused on profitability I.

We have been careful about you know growth as we're growing writing a million new cards, a year and again with a focus on profitability. So weve you know we've reduced.

Sort of scaled back on people, who we think are trying to game. The system are just going after promotions. So that's.

You know improving the profitability overall I think you saw that.

The Ram that you're referencing which is up year over year.

And that's mostly being driven by and I I mean, I'm, you know NIM growth and the card.

Great. Thanks.

Our next question will come from Matt O'connor from Deutsche Bank.

Please go ahead.

Good morning, if you look at your expenses ex the impairment and the legal cost is about 12.7 billion. Obviously after you annualize out of its below the 53 billion you're talking about next year and I know, there's some seasonality the first half there.

Does that drives costs higher but I guess first is there anything in the 12, seven thats kind of not.

Oh, yeah, not sustainable or unusual and you know why isn't there maybe some.

Downward fine so if you didn't see our benefit.

Correct correct.

Yeah, I think it's just a third quarter was just a little bit autonomy.

You know, where we're increasing our investment in people and financial centers in marketing, but it's not even throughout the whole year. So you got to.

Think about the guidance, we've given for the full year as opposed to just any given quarter.

Okay. So just some ebbing and flowing there, yes, yes, just having flowing on on marketing and other areas, which you know will rebound investments, we expect some of that to rebound in the fourth quarter and Matt. That's why if you go back to that earlier page in the deck why we should you have to take about the last couple of years, there's always opinion.

Flowing, but we're showing that what kind of holding in here and as you look over the next couple of years. You know we think the holder here and then at some point you will start growing and we're trying to grow you know.

Yeah, we're trying to spend 3% more year, but only grow the expense base bumper sense kind of long term picture, we're trying to take maybe one or two and with revenue growth of three to four normal environment that is great operating leverage and if he has got that's that long term view that we keep holding too.

Yeah, when interest rates move quickly enough yeah. Those are things that deal with a bit over time, that's what you're trying to achieve and so you could take that is where the general operating principles, we push our teams towards.

Okay, and then just separately you talked about deposit growth potentially a four or 5% you know accelerating a little bit from where we're at right here and you talked about loan growth potentially being there call it 4% to 6% range.

That's the thing about the overall balance sheet should grow in line with deposits or are there some opportunities to bring down dad, and you'll see a little bit less earning asset growth.

Yeah look.

On the specific point other opportunities to bring down that there's a little bit of opportunity. There. Our t. like ratios are probably a little bit higher than we want them to be big but that was because we were you know, adding a new bank in Dublin, and adding new broker dealer in Paris, and by the way putting up our broker dealer in the U.S. resin.

We should planning so we have a little bit opportunity there I wouldn't make too much of a.

Big deal about that basically our our balance sheet is gonna grow as we grow.

Deposits.

With all that deposit growth going into loan growth, we still have the noncore portfolio running off a little bit.

And whatever doesn't go to loans is gonna go you know into the securities portfolio and it but and then you have the markets business, which also because of financing activities and equities <unk> not a lot of risk, but notional girls the balance sheet that you've seen.

Yep.

Okay. Thank you.

And he will take our last question from Gerard Cassidy with RBC.

Please go ahead.

Thank you Hi, Brian .

And our good first so just wanted to thank you and bank of America or for their continued support or the Bank Analyst Association meeting you guys do the dinner every year like you're doing this year. So thank you very much we really appreciate that.

<unk>.

The second point.

Credit is very good for you folks in the industry can you share with us.

When you look out over the next cycle, where are you guys. You know spending extra time today, just making sure that you don't take your eye off the ball because some potential problems I could be on the horizon.

George you asked the question that Paul and I, and Jeff Green, our Chief risk Officer.

Importantly, our enterprise risk Committee led by Frank Bam brand, both our board of directors, Yeah, we keep saying how do we make sure that we're sticking to.

Our knitting so to speak and you do that by you know you see all this goes industry industry.

Limits or country limits you.

Leverage underwriting limits you pick you know just limits after limits. The house guidelines exception. So I think one of things I think my peers and I would say as is.

With stress testing and other things you know you you're you're required to think of the worst of times in whole capital for it. So I think in the industry generally that has had a good a great impact in terms of basalt thinking through the.

The long term impacts, but importantly, the data in the capabilities that that we built starting you know 10 12 years ago.

Just a tremendous so when we asked the question we can actually see it very discrete areas you know, whereas our exposure this or that are the other thing and that's important because then you can manage at that level and <unk> and team under Jeff has done a great job of sort of bringing that data as a four and making sure. We're always watching oh, all the different up pieces so much.

Anchor move is in charge of credit rest of the company you know I'll call them up after the Houston Hurricanes or you have a couple of years ago, I said make what's our exposure. So whats ZIP code you want a four and which product do you want to four and you want the card versus the mortgage or people at both in all that's just as thing. This is all my gut Saturday night or something like that.

Saying he doesn't have more fun things to do but you know it's.

So I think that that allows us to keep track of a bit. So it's just all those limits and as granular limits and then the intrusion of underwriting process requires really for any reason to be Sizewell, you know a risk manager to specific you sign off along with a a banker on a commercial side and consumer side the parameters of that by box of so called are set but with risk and.

So I know, it's it's you know kind of eating into the system is not something we people argue about or think about you know so our real estate exposure is limited by limited Jimmy Tomorrow, you know presents and as a head of the real estate exposure for the whole company and you know from line side and supported by the team underwear side. So it's.

You know, it's just another 30 years I've been around this business you just see the granular where we used to say what do we have with people have to run out look now you have it and then you can manage a lot more effectively on a go forward basis.

Very good and then pivoting a bit you touched on it in your prepared remarks about the regional bankers that you guys have been hiring here in the states Tom talked about it at a conference recently you had good numbers in your investment banking area. This quarter and are taking some wallet share is it because.

You know hires that you're making across the globe or is it because some of your competitors are still struggling to really get back into the old group or what they were yeah, let's say 10 or 12 years ago, Yeah, I think that Matthew coated and the team have you noticed and still yep.

Realized we had.

The capabilities of franchise tools, we just needed to really drive the calling effort and he's done a great job of doing that Alister Borthwick a Matthew together you have been working on building out this middle market team, which is good it's not only just pure investment banking everything's M&A or maybe debt capital markets also exposure plays into.

A lot in into the markets business into your hedging fuel cost or hedging interest rate risk or currency risk because you know the average midsized U.S. companies.

Engaging all over the world and that's a competitive advantage only a few of us has to be able to deliver in India for mid sized company, United States and help them think through that or other places so I think.

Yeah. The teams done a good job there we work very closely with wealth management team in terms of referrals and coverage of the entrepreneurs segment thinking about a private bank or financial advisor Merrill Lynch and their clients working with a commercial we measure that we would goal. It we it has to come sort of naturally by you know money in motion or transactional activity, but but there were.

The capabilities in the coverage is they've done a good job and so we will always be susceptible the biggest deals that activity slows down all of us have that issue, but that underlying your middle markets. Just a lot more companies. You know 10000 5000 companies that you get out you know that Theres, just a lot higher probability of one of them doing something on a given day than.

You know thousand company.

No very good and thank you know the fruit as seen in three weeks. Thank you, okay nice drugs.

And there are no further questions at this time, so I'll turn it back you Brian .

Thank you very much up your time attention.

Thank you for a pending or earnings call you I think the themes for this call and you heard him in the queue in a in earlier presentations are the years of investments that the team has made and managers are paying off.

Yeah, we're using loans, our loan and deposit growth above industry averages and above the market on a conservatively responsible growth basis continues to help offset the eni pressured due to rate changes, which is which all of your focused on it should be.

We still continue to make sure we stay dedicated responsible growth to make sure that credit risk and market risk. We take on his is consistent with how do you expect us to manage it and we continue to manage investments.

And expenses and run that sort of a dual brain side of saying, we can we can grow our investments and we can also continue to manage our expenses carefully relatively flat and then on top of all that.

Over the last few years, you know the our ability to have sustainable predictable earnings in excess capital is coming back to you along with 100% the earnings at levels, which are unprecedented among our peers. So that's helping drive down the share count in helping produce GPS growth that we need so consistently responsible growth and we look forward to see you next time.

This does conclude today's program. Thank you for your participation you may now disconnect.

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