Q4 2020 Bank of America Corp Earnings Call

Good day, everyone and welcome to today's of Bank of America of fourth quarter earnings announcements conference call.

At this time all participants are in a listen only mode. Later, you'll have the opportunity to ask questions. During the question and answer session.

And registered to ask a question anytime of pressing star and one on your Touchtone phone.

Please note today's call's being recorded here and it's now my pleasure control of the conference So where do we Mcintyre. Please go ahead.

Good morning, welcome and thank you for joining our call to review our fourth quarter results.

By now you've all had a chance to review the earnings release documents as usual, we're available including the earnings presentation that we'll be referring to during the call only Investor Relations section of Bank of America Dot Coms website.

And our first current and turn the call over to our CEO, Brian Moynihan and for some opening comments and then ask Paul Donofrio, our CFO Jim.

Cover the details of the quarter.

Before I turn the call over to Brian and Paul just let me remind you that we may make forward looking statements and refer to non-GAAP financial measures during the call.

Guards various elements of our financial results.

Forward looking statements are based on our management's current expectations and assumptions that are subject to risks and uncertainties.

And particularly as we continue to operate during this pandemic period.

Factors that may cause actual results to materially differ from expectations are detailed in our earnings materials and SEC filings that are available on the website.

Information about our non-GAAP financial measures, including reconciliations to U S. GAAP can also be found and those materials with that and I am happy to turn the call over to Brian takeaway Brian.

Thank you Lee and good morning for all of you and thank you for joining us today.

Before I pass the call to Paul to review the fourth quarter.

And I wanted to hit a few points first I wanted to provide some brief commentary on 2020.

For the full year and talk about what we see and economy as we enter 2021.

And then highlight some areas where I believe we made strong strategic progress that will drive momentum into 2021 and beyond.

So starting on slide two.

2020 was the type of operating environment as you all know and that period, we generated net income of nearly $18 billion of $1 87, and EPS and.

And a return above our cost of capital.

Our EPS was down 32 per cent compared to 2019, driven by the impacts of coronavirus pandemic on the company and the economy.

As you know the fed drop rates to nearly zero longer rates also fell.

At historic lows loan demand surged and then Wayne.

The panic subsided.

That reduced net interest income and as we told you last quarter that we believe that I'd likely bottomed and the third quarter of 2019 and fact, we saw a modest improvement this quarter, which Paul will cover later, despite the challenges from low alone.

Non interest revenue declined slightly but included some interesting dynamics hydrology and diversity of bank of America is model consumer fees declined driven by the activity levels of clients, but also by higher account balances and customer accounts. That's a good thing for the economy going forward.

Our business mix allowed us to benefit from more market related activities and sales and trading and investment banking and investment brokerage and wealth management businesses.

Our full year revenue of $15 billion from sales and trading rose, 17% and we generated more than $7 billion of investment banking revenues this year and increase of 27% over last year.

Investing in brokerage revenue grew 5% to nearly 15 billion.

Our expenses were higher as a result of the many costs associated with Covid and of support for our teams our clients and our communities we serve.

For a comparison of 19 and 22019 2000 22020 included the third quarter addition of merchant service costs. Following the solution of joint venture and the third quarter of 2019.

These costs were always incurred as of net revenue deduction of the joint venture of county, but now come through our expense line.

Setting aside the elevated net of elevated COVID-19 related expense and a change and kind of from merchant services. Our teams continue to do a good job managing costs and you'll see that later and Paul will talk about it and.

And maintain a focus on user and productivity gains to fund all the investments, we're making across the franchise and including increasing client flows expenses, then remain relatively flat year over year, we expect them to be flat for 'twenty one versus 'twenty.

Provision was higher as a result of reserves built given the macro economic deterioration experienced and the first part of the year.

This also reflects the new C sort of accounting rules, which were adopted as of January one of 2020.

But as of macroeconomic outlook of proved we released some reserves and the fourth quarter.

As we look at share count declined 7% driven by the amount of the shares bought as we moving in the second half of 19, and then and the first quarter of 'twenty private time of suspending share repurchases.

With $36 billion of excess capital above our common.

E T one minimum requirements and excess capital above that and that's how are reverting back to its normal calculation and completion of the CCAR exam will once again and began repurchasing share starting today.

As you know our first fire of for use of all of our capital is to grow our business organically and we are funding of growth in many areas and we have funded expanded minimum wages to $20 an hour for all of our teammates.

Spun it of decreased Covid benefits and we take care of all of that now we're looking to return as much capital to shareholders. As we are allowed and as our board deems a prudent so.

So you saw this morning, and the beginning of that and a separate press release that our board has approved a share repurchase and the first quarter of up to $3 $2 billion, including shares issued to employees.

This is in addition to maintaining our quarterly dividend of <unk> 18 per quarter and.

And that accounts for net return of another $1 $6 billion of capital.

This is of maximum allowed on the fast guidelines established for first the first quarter 2020.

Tony one before.

And the first quarter.

We when we find out what the rules are and will continue to change our authorizations to reflect those rules.

In summary, it was a good year given the circumstance of the health crisis, and the impact on the economy and it and the markets around the world I want to thank my teammates for their hard work they did and serve our clients to serve our communities and to help each other.

And as we begin the new year.

Let's turn to the economy debt.

And what we see is of continuing recovery occurring consumer spending by our clients and asset quality continue to improve our companies are highly liquid and generally and pretty good shape, except of course for those industries that are focused on debt or most hard hit by Covid.

As the economy continues to push ahead. These companies that are off.

Operating well and the need of operating capital.

And we saw early signs of loan demand stabilizing as we went through the fourth quarter.

As we all know Theres, one priority and that's to get everyone. Vaccinate, So vaccinated sort of health care crisis is behind us and therefore, the economy can regain of straight.

Our research team is just this past week is upgrade of 2021 forecast and it.

Their views of U S GDP growth will be around 5% and global forecast for gross growth of five four per cent.

Let me give you a snapshot of what we've seen our customer data that supports some of our views for growth on.

On slide five.

Excuse me slide three you can see that consumer payments.

With 66 million consumer and small business clients, making payments across all of our channels.

We have a rich data set that provides of a deep view of the U S consumer payment trends and small business trends.

You can see this on slide three.

This chart, so style of lines, reflecting cumulative changed for the year and spending the dotted line shows the year over year change for each month during the year and total spending.

Consumer payment activity began and ended the year very strong and.

And the first two months of the year payments were up high single digits year over year.

By April given the early spread of the pandemic and the fall across the board economic Lockdowns, which is different and the status. We are now payments trust and were down 26%.

Finally summer payments snapped back.

And you can see that here with the reopening of the economies in many areas the impact of government stimulus and increased unemployment.

And some of those funds were depleted of ran off and the volumes in fact grew back to normal levels, we saw a slowdown and the and the rate after the recovery but.

But still spending mast.

And to grow at a level consistent with pre pandemic prior year periods and as we entered the holiday period.

Langton, which was licensed by the different and activity of retail purchasing.

The trends continue to strengthen.

Total payments and the month of December hit of high of 304 billion up 8% year over year, driven by a record volume of holiday spending.

Full year of payments reached a new high of $3, one trillion up 2% year over year.

So one of the things we have done here and provide a pie chart and lower left hand side of this page for important reasons and we think about consumer spending we think about all the ways consumers take money and consume and.

And spend it to do things.

This is outside of just debit and credit spending habits, which tend to get all of the discussion because they're usually attract quite frankly the day.

They represent 75 per cent of transaction volume, but only about 20% of the dollar volume of transactions.

And you can see that they make up for that smaller amount on the lower left hand side.

And especially as travel of shift travel and entertainment spending has shifted away you've actually even seeing debit spending outgrow credit spreads.

So 80% of dollar volume of payments made a buyer of consumers happens through personal person payments person of the business payments a C. H wires and many other means including cash and take it out of the and <unk>.

And spat and checks written.

So in terms of transaction you can see at the bottom right of this.

Chart.

And how the physical payments of cash and checks have moved to more digital forums, which creates operational efficiencies for us and has been a strategic initiative for many years and one that was moved forward by the crisis.

Full year, 2020, cash and check transaction, but volume fell to the lowest on record down 21 per cent.

As COVID-19 accelerated the migration to digital card based payments.

2021 has begun as a strong year for payments and the new stimulus checks started hitting customers accounts and the first weeks of January more than 11 million of those payments of hit our accounts about $11 billion and they flowed into the accounts, mostly from digital transfers the IRS.

So how it payments performed and the first half of January the first half of January across all of these payment types is up six 7% from 2020.

And good news debit and credit is up five 6%.

Growth rates and total exceed pre COVID-19 levels of growth rates and they are larger dollar amounts so bigger dollars and faster growth rates and that is with about 30% of the 600 dollar payments being spent by our primary checking customers so 70% more to be spent.

As you move to slide four we can see the activity on the commercial side and.

And the closing weeks of 2020, we continue to see some stabilization, mainly driven by our middle market auto finance clients as inventories have gotten low and they rebuilt rebuilt them.

The chart on the top of slide five reflects debt total global banking loans across all segments.

And this bank and global commercial bank and global corporate investment banking.

As you recall and the first quarter of the year, we experienced a heightened level of client draws on commitments as the panic borrowing set and with a crisis and that was about three years of normalized commercial loan growth and a single month.

And as you know driven by capital markets for the high debt G CIB clients and soft loan demand as people gathered there.

And what's about them and that and the crisis moved at different stage, we saw significant paydowns and loan balances during.

During the last two months of the year, we've seen more stable results.

Debt, we hope can continue to turn and decreased demand and growth as we look for it.

And the chart on the bottom of the page you can see that middle market and business banking debt core.

Part of the American economy, and it started tip up for larger corporate loans continue to be affected by the market and the clients of the period.

A decade of operating out of our sponsor growth principles prepared us well for this crisis and allowed us to remain focused on our customer and are well understood risk framework and support them and the communities delivered and in fact, we of basically reopened all of the credit underwriting standards, we had before the crisis.

We are well positioned against this improving economic backdrop because.

Because of the progress you've made in respect of our strategic initiatives over the many years.

Let's go to the next slide slide five and we'll talk about the strategic process.

We can start with of consumer bank and the upper left.

As you know, we retain and number one deposit share position for retail deposits.

That's 800 billion, plus and coupled with our wealth management deposits for American consumers, we have a trillion dollars of deposits and now we grew average checking consumer deposits.

Would you move average consumer deposits of 166 billion or 23%.

$108 billion of that 166 was low cost checking accounts customers.

Customer satisfaction and ended the year at a new all time high and.

And 25 of it at the top 30 markets across America, representing over half of U S. Population. We now hold the number one two of its leadership position, including and 14 of those markets. The number one position, which is twice as many markets as our closest peer and.

Another important consumer objectives has been to focus on digital bank.

Digital engagement expanded throughout all of our businesses through the year.

So 69% of our consumer and wealth manager of households are now digitally active not just enrolled but active that's up a couple of hundred basis points and this deep penetration of customer base.

These clients signed in 9 billion times this year, representing double digit growth and they are just signing and for transactions or looking at their balances.

And also buying things, 42% of the sales. This year were digital sales it expanded and areas of checking accounts sales auto sales and mortgage loan sales.

Erica our digital assistant.

Users grew 67% to $17 million. They spent $1 4 million hours those clients did talking to Erika interacting with it.

And zelle and the payment the PDP payment form of <unk> payment for him to also is up 80% year over year.

And remember those early of payments charged on the early pages. There is a lot of growth of head here and it helps us move from higher cost of lower cost means.

What's interesting about this out of customers is the depth of the relationship. They have Lewis on average they have three accounts of bank of America, and average checking balance of more than $9000 and and added average investment balances of 400000, when they have investment balances.

Switching more broadly consumer investment balances net these are investment balances of mass affluent and our consumer business surpassed a major milestone and moved over $300 billion with 3 million accounts we.

We added 537, new funded accounts and 2020 and net mass affluent segment, that's up 27% year over year.

In September we rolled out light play and our financial planning that helps people prioritize our financial goals and we've had 2 million plus plans created already one of the fastest Ross of product we've ever had.

As we move to the wealth management group, we saw record client balances of $3 three trillion to.

Through both market appreciation depreciation and flows.

Product integration and continue to improve as Merrill clients utilize our check and services and they are checking balances of bank of America were up 28% year over year.

And digital adoption by Merrill clients increased at 43% of the checks deposits by Merrill clients were done digitally and of private bank clients continue the strong adoption was <unk> 70 per cent of the checks they deposits where deposits digitally.

Despite the virtual environment and the inability of have face to face meetings and inherently the wealth manager of business of face to face business household growth accelerate through the second half of the year with Merrell, adding 22000, net new households, and of private bank, adding 800, and indeed, we had a record year for $10 million plus with new relationships across the two businesses.

When we turn to our commercial businesses and global Bank and we focused on virtual services for our clients through the Covid crisis increased our calling efforts and 60%. This year in terms of numbers of engagements with clients.

We saw a significant gain and our investment banking market share.

Overall and all.

All areas, but particularly in our middle market clients. We've achieved a strong position. This year. This has been a multiyear effort of higher ore and dedicating more of.

Bankers investment bankers to part with a commercial banking relationship managers across the country.

Given the nature of clients and staff working from home and digital capabilities, we had allowed our client development to continue.

We saw record sign on through our cash pro App. This is the way of commercial customer accesses that app.

And of the commercial cash management businesses.

In December alone 14 of 'twenty two business days, there were over $1 billion moved on that at this.

And this shows our clients growing comfort level with the assistant.

We reported record investment banking fees with three of our strongest quarters and the company's history of this year, we improved our overall fee ranking of number three is market share grew 70 basis points is up for two consecutive years and wrote these market share improvements include our highest ever shares and equity capital markets and M&A advice and.

And fixed income trading and markets business the trading side of the house, we continue to enhance our you're trading capabilities increase our assistance being the ability of process customer trades and faster and the equity is trading side of the house, we had our best year since 2009, when the merger of Merrill and Bank of America took place and we gained market share even more of the market was growing and cash equities we estimate.

We picked up 200 basis points and cash equities and the fourth quarter of 'twenty compared to the fourth quarter last year.

For the last point I want to mention is all of the work we continue with our clients around our activities and environmental social and governance, including our award winning proprietary research from the number one research platform and the world as well for sustainable financing initiatives, including green bonds sustainable bonds and Covid related bonds. Our team also committed.

$1 billion to further economic opportunities and address ratio of justice and the middle of the of the Covid pandemic, we've made significant progress and made announcements over the last six months on the strong work done there and with that let me turn it over to Paul for the quarter.

Thanks, Brian and Hello, everyone.

I'm, starting on slide six and seven together.

I did last quarter I will most of the compare our results relative to Q3 as.

As most investors, we speak with our more interest and our progress as we transfer of <unk>.

Pandemic, rather than comparison to pre pandemic periods.

And Q4.

Earned $5 5 billion or <unk> 59 per share, which compares to $4 9 billion or 51 cents a share and Q3.

Compared to Q3 of the earnings improvement was driven by lower provision expense as we released $828 million and reserves nearly offsetting net charge off which also declined.

Also benefiting earnings expenses declined $474 million from Q3 on lower litigation costs.

And and I'm from.

And from Q3 from the Q3 trough.

Non interest.

Income declined.

From Q3, but results across individual line items were mixed.

First.

The decline and other income was driven by seasonal client activity with respect to ESG investments.

Each of created higher partnership losses.

<unk> benefited our annual tax rate as I have described in previous discussions.

Our tax rate for the year was 6% if we adjust for the tax benefit.

Of our portfolio of ESG investments, our tax rate would have been roughly 21%.

And I point this out to emphasize that the full year tax benefits of the socially responsible investments more than offset the portion of losses recorded in other income throughout the year.

Relative to Q3 noninterest income was also impacted by lower sales and trading which typically flows from Q3 to Q4, but while sales and trading revenue was down linked quarter year over year. It was up 7%.

On the positive side non interest income benefited from higher asset management fees.

As the market improved and we grew net new households, again this year and.

And finally.

We had another good quarter of investment banking revenue, which increased from both the strong Q3 levels.

And of year over year also when comparing our net income for Q3 remember the Q3 tax expense benefitted by $700 million from the revaluation of our U K deferred tax asset finally with respect of returned and note that our R. O T. R O T C E.

<unk> was 11, 7% and our ROA and <unk>.

<unk> 80 basis points.

Moving to slide eight the balance sheet expanded 81 billion versus Q3, 228 trillion and assets total assets and.

Main point is that deposits are driving and funding substantially all of this growth deposits grew 93 billion and the quarter and are up 361 billion from Q4 19.

And the other hand loans declined from Q3.

And with deposits up loans down excellent for liquidity is piling up and our cash and securities portfolios.

Global liquidity sources are up 367 billion year over year.

And 84 billion just from Q3 and in fact global liquidity is up so much and now exceeds total loans.

With respect of regulatory ratios. The standardized approach remains binding at 11, 9% consistent with Q3 shareholders' equity increased $4 billion as earnings were more than three times the amount of common dividends paid plus.

Plus we issued preferred stock totaling one for $1 billion.

This was offset by higher or to the way as we invested more cash and securities.

At 11, 9%, our CET, one ratio and its 240 basis points above our minimum requirement, which equates to a 36 billion dollar of capital cushion.

T. Lac ratio also increased and remains comfortably above our requirements.

Before leaving the balance sheet as usual, we provide the charts on slide nine and 10 to show the historical trends with respect to average loans and deposits for reference. We included the same charts on and end of period basis, and the appendix overall year over year total loans are down, 4% and and the lines of business they are down.

2%.

And year over year was driven by lower revolver and utilization and other paydowns and commercial.

And by pullback and credit card activity.

On slide 10, we provide the same trends by line of business for deposits, Brian and already made a number of points on deposits and you can see the tremendous year over year growth and every line of business that led to 23% growth and deposits for the company.

At $1 seven trillion of deposits.

[noise] far surpasses any previous record for deposits.

We believe our strong deposit growth reflects our customers' overall experience with us as we continue to innovate around digital capabilities as well as enhance our nationwide physical footprint of financial centers and ATM.

Which have continued to prove important to customers and clients.

I will just add that given historically low interest rates our rate paid on deposits declined modestly linked quarter and we are now lower than the rate paid to customers in 2015 before the fed began raising rates.

And I will point out that our interest cost on one seven trillion of deposits. This quarter was only $159 million.

Turning to slide 11, and net interest income on a GAAP non FTE basis NII in Q4 was $10 5 billion $10 37 billion on an FTE basis, while net interest income declined.

And from Q3.

And the improvement from Q3 was driven by the increased deployment of excess deposits.

And two securities.

Lower loan balances lower reinvestment rates and modestly higher mortgage backed securities premium write off mitigated the improvement and NII.

Net interest yield was relatively stable declining only one basis point from the Q3 level.

Note that given all of the deposit growth plus the low starting point with respect to interest rates, our asset sensitivity to rising rates remains quite large and is a good reminder of the value of these deposit relationships.

Now with respect to NII.

As we move into 'twenty and 'twenty one.

We offer the following perspective.

Our perspective on NII and assume that net interest rates of follow the forward curve.

And do not move.

Lower than current levels.

And that the economy does not take a meaningful step backwards as a result of recent negative COVID-19 developments.

With that said.

First I would remind everyone that Q1 will be impacted by two less days of interest, which is a headwind of nearly $200 million.

Also seasonally we would expect to see payments related to holiday spending.

Result, and lower card balances.

We also have the continuing impact of higher yielding assets maturing or paying off and being replaced with lower yielding ones.

Offsetting these headwinds.

We currently intend to again invest a portion of our excess deposits, which continued to grow in Q4 into securities.

Have a list of those specific Q1 impacts.

And then I improvement more generally will depend on all the factors. We are all focused on such as loan growth PPP loan forgiveness and PPP new originations.

And mortgage refinancings, as well as mortgage backed security payment speeds, which impact the write off of bond premiums.

Should those trends develop and a positive way, our NII and earnings will benefit.

One final note on NII, we added a slide in the appendix that shows the difference between 2015, when short term rates or lastest slow and today.

The important difference between then and now is the growth and our balance sheet, which improved NII and decline and expenses since then.

Speaking of expenses and turning to slide 12.

Q4 expenses were $13 $9.474 billion lower than Q3.

The decline was driven by a reduction and litigation expense. We also saw a reduction and COVID-19 related expenses, primarily those associated with processing claims for unemployment insurance.

Planned marketing costs across the firm and revenue related processing and incentives mitigated the reductions.

As we move into 'twenty and 'twenty. One remember Q1 will include seasonally higher payroll tax expense, which we estimate of roughly $350 million.

Given the resurgence of Covid cases across the U S and in Europe, we estimate that $3 million to $400 million of net COVID-19 related expense remained in our Q4 expenses.

We continue to work hard to lower these types of expense, but not at the expense of the safety of our employees and customers and.

And outside of these COVID-19 costs, we continued to manage expenses tightly using gains and productivity and digital activity to mitigate other increases.

Turning to asset quality on slide 13, our total net charge offs. This quarter were $881 million or 38 basis points of average loans net charge offs continued to benefit from years of responsible growth as well as government stimulus and loan deferral programs.

And 91 million dollar decline and net charge offs was driven by lower credit card losses, the loss rate on our credit card declined to a 20 year low of 206 basis points of average loans provision expense was $53 million, which not only reflected and improvement and macroeconomic projections.

But also incorporated uncertainties that remain and the economy due to the health crisis.

These considerations resulted in an $838 million reserve release, this quarter, reducing consumer loan reserves by.

$621 million and commercial by $207 million.

Our allowance as a percentage of loans and leases ended the year at 2.0 of 4%, which is well above the one point to 7%, where we began the year. Following our day one adoption of the <unk> accounting standards.

With respect to key variables used and setting our reserve as done in previous quarters. We continued to include a number of downside scenarios.

Based on our Q4 'twenty weighting of those scenarios GDP is forecasted to return to its Q4 19 level and the early part of 2022.

This improved by a couple of quarters relative to Q3.

The weighted scenario also resulted in an unemployment rate at the end of 'twenty and 'twenty one.

Consistent where it is today just north of six 5%.

On slide 14 breakout of credit quality metrics for both our consumer and commercial portfolios on the consumer front COVID-19 effects on net charge offs continued to remain benign overall consumer net charge offs declined 800, excuse me declined $82 million driven by card losses and remained at <unk>.

And our historic lows, we experienced modest increases and delinquency and NPL levels, but they remained low and were expected given the deferral of activity of our customers.

While expired deferral of drove consumer 30 day delinquency and modestly higher compared to Q3.

And importantly, they remained 22% below the year ago level.

And.

Consumer deferral balances continued to decline in Q4.

And in the year at $8 billion.

Moreover, balances are now mostly consumer real estate related with strong underlying collateral values.

We added a slide in our appendix, which further highlights of delinquency trends for credit card.

It shows and.

Modest board of the expected deferral of related delinquencies moving their way through time and into the 90 plus bucket at year end.

As the bulge of deferrals related delinquencies pass through time periods delinquencies receded.

As an example, and Q4 five day delinquencies were down more than 30% year over year, which shows that after deferral of pass through this time period delinquencies fell and stayed lower.

So.

Assuming net losses, followed the historical relationship to delinquencies and the 90 plus day bucket.

And no other changes and card payment trends, we would expect card losses to be higher in Q1, but then decline and Q2.

Moving to commercial net charge offs for relatively flat to Q3, even as we sold some loans and affected industries crystallizing losses, but reducing risk.

Overall, given the environment.

The asset quality of our commercial loan book remained solid and.

89% of exposures, where either investment grade or collateralized.

Our reserve over criticized exposure metrics continued to be the most heavily impacted by Covid and increased this quarter by 3 billion from Q3 led by downgrades downgrade and exposures and commercial real estate, primarily hotels and <unk>.

Accordingly, commercial npls, while up modestly remained low at only 45 basis points of loans.

Turning to the business segments, and starting with consumer banking on slide 15 <unk>.

Consumer banking throughout 2020 has been the segment most impacted.

Most heavily impacted by Covid.

And for the brunt of revenue disruption from interest rates customer activity and fee waivers Ross.

Zero of building impacted provision expense and expenses increased for PPP programs and protection of associates and customers.

And Q4 compared to Q3.

Revenue expenses and provision all improved.

We earned $62 6 billion and consumer banking and Q4 versus $2 1 billion and Q3.

But.

With earnings still below prior year of pre pandemic levels. We know we still have plenty of room for improvement.

Client momentum and this business continued to show strength around deposits and investment flows.

While near term.

Loan growth was has been impacted by the decline and mortgage balances from heightened refinance activity.

Looking at the components of the P&L linked quarter revenue growth included both higher NII and fees.

Consumer fees reflected an increased level of holiday spending as well as higher investment account activity.

Even as revenue moved higher expenses moved modestly lower as we had a reduction and pandemic costs and continued to realize the benefits I think more digitally engaged customer base.

And as Brian noted and as you can see on slide 17, we saw an improvement and digital enrollment most importantly customer use of our digital capabilities increased with not only more sign ons and higher digital sales, but also more for service fulfillment through digital channels as reflected by volume growth and both are.

Erika and zelle.

Note also that both of our rate paid and cost of deposits declined cost of deposits is now of 135 basis points and.

And the past share we added over 500000 net new checking accounts grew deposits of 23% and dropped.

Cost of deposits 17 basis points, even with the increase and costs associated with the pandemic.

Let's skip the wealth management on slide 18, and 19 and I will refer to both slides as I speak.

Yeah.

Yeah.

Okay here again, the impact of lower rates on our large deposit book pressured NII.

Impacting and otherwise solid quarter with positive AUM flows and market appreciation and solid deposit and loan growth.

Net income of $836 million improved 12% from Q3 as revenue growth and improvement and provision exceeded a modest increase and expense.

With respect to revenue and NII grew driven by solid growth of both loans and deposits and asset management fees grew to a new record on higher market valuations and solid flows.

Expenses increased driven by revenue related expenses and investments in our sales force.

Merrill Lynch and the private bank, both continue to grow households, as we remain a provider of choice for affluent clients climb.

Client balances rose to a record of more than $3 three trillion up 302 billion year over year, driven by higher market levels as well as positive client flow.

Let's move to our global banking results on slide 20.

Yeah.

Covid has also heavily impacted global banking to lower interest rates softer loan demand and higher credit costs, but here again, we saw improvement.

The business arent, nearly $1 7 billion and Q4, improving $751 million from Q3, driven by lower provision expense and improve revenue.

On a year over year basis earnings were $341 million lower driven by NII.

Looking at revenue and comparing to Q3 revenue improvement was driven by higher investment banking fees as well as more of leasing activity associated with our clients' ESG investments.

Investment banking fees for the company of nearly $1 9 billion grew 5% from Q3 and were up 26 per cent year over year as Brian noted this performance led to improved market share overall and in a number of key products proving.

Provision expense reflected and reserve release of $266 million, and Q4 compared to a build and reserves of $555 million and Q3 and.

Noninterest expense was higher compared to the linked quarter and year over year, primarily reflecting investments in the platform as well as support for the PPP program and also reflecting.

The recording of merchant services expense.

Given the change in accounting versus the year ago quarter.

As Brian noted earlier.

<unk> continued to appreciate the E safety and convenience of our digital banking capabilities.

And usage continues to grow.

Helping.

The fray other costs.

We present and digital highlights on slide 22.

Noted earlier loans declined but as all of <unk>.

Stabilization late in the quarter and.

And continuing the trend since Q2, the spread of the loan portfolio continued to tick higher at spreads on newer rate originations on average exceeded the average spread of the portfolio average.

Average deposits increased 26% relative to Q3 as businesses remained highly liquid.

Okay switching to global markets on slide 23.

Results reflect solid year over year improvement and revenue from sales and trading but a decline from the robust levels of Q3 as I, usually do I will talk about our segments and results. Excluding DVA. This quarter net DVA was a small loss of $56 million.

On that basis.

Global markets produced $834 million of earnings and Q4 of decline from the more robust trading and Q3, but up markedly from Q4 and 19.

Focusing on year over year revenue was up 13% on higher sales and trading.

The year over year expense increase was driven by higher activity based cost for both trading and unemployment claims processing sales and trading contributed $3 1 billion of revenue, increasing 7% year over year, driven by a 30% improvement and equities and a 5% decline and fifth the.

Strength in equities was driven by market volatility and investment of repositioning which drove client activity higher.

The other kind of debt reflected strong.

Trading performance, which was more than offset by declines across most macro products and mortgage trading.

As Brian noted the year over year of performance of this business has been strong and every quarter of 'twenty and 'twenty you can see that on slide 24, and that produced strong segment returns of 15% on allocated capital for the year.

Okay.

Finally on slide 25, we show all other which reported a loss of $425 million.

Compared to Q3 the.

And the decline in net income was driven primarily by the prior quarter's tax benefit of $700 million associated with our UK deferred tax asset.

Revenue declined from Q3, driven by the accounting for wind and solar and other ESG investments. We also experienced a modest equity investment losses.

Expenses declined from Q3 on lower litigation expense, but were partially offset by higher marketing costs.

For 2021.

Absent any changes and the current tax laws or unusual items.

And we would expect the effective tax rate to be and the low double digits.

Driven by the level of ESG client activity relative to pretax earnings.

And with that.

I'll turn it back to Lee and Brian for Q&A.

And at this time, if you'd like to ask a question. Please press the star and one on your Touchtone phone at Star and one on your Touchtone phone.

Our first question today from John Mcdonald with Autonomous Research. Please go ahead.

Hi, Good morning, I wanted to ask a question on expenses, Brian mentioned expecting the cost number to be flattish in 2021 versus 2020, just kind of wondering is that all and expenses, Paul or some kind of a core metric you gave an outlook for the expenses that you expect and the Covid trend for Covid expenses this year.

Yes.

Yes, John and that's all in given the so you're.

Around 55 billion both years and so we feel good about the.

The ability to keep bringing it down Cove and it came out of low slower this quarter largely due to the fact that if you go back and think where we were in October and case counts.

The need to continue to provide strong benefits to our teammates including debt.

<unk> care and their homes. So they can be effective that's why we get those customer scores and why.

The growth and checking sales of 70% to 80% of a normal year again, we'd have to 40% of the branch to close so yes flat year over year, Paul and number and then we'll work and the dynamics underneath it but importantly, remember we are investing.

Yeah, three 9 billion and technology next year, and a new financial centers of expansion employees to help us sell more and.

We will continue to drive it through so.

Youll see sort of a change and the COVID-19 costs coming down hopefully as we move through the year, but we can.

Got some work to do but flat over year over year overall.

Okay, and then longer term, Brian you've talked about getting back to a low 54 billion is kind of a run rate ex COVID-19 is that still how youre thinking about things.

Yes, we should start to work down again as.

As we said many years ago.

And as we get out and the out years and get more and more efficient.

Yeah, the day to day.

You know liquidity and cost of rent increases and and payroll pay increases work at yet, but the idea is to have the net net.

Gross sort of that 1% of year, so 3% up from just day to day cost of managed a couple of percent out and so we will continue to work that down of future. We've got work to do on getting these COVID-19 expenses out of here.

Okay. Thanks.

Our next question comes from Mike Mayo with Wells Fargo. Please go ahead.

I also wanted to follow up on the efficiency I mean youre.

And you're making big strides with digital banking and too many ways for $39 million digital households are engaged and you go through all of those metrics and you see.

<unk> ratio for the quarter of 69%.

And if you take your $400 million of Covid costs, maybe it would be 67%.

So thats still a far cry from the 57% to 59%, where you had debt and I know low rates hurt a little bit but.

Either you're investing more than you're you're you've disclosed or are there. Some other COVID-19 costs and there or youre not getting becoming more efficient as you said in your opening comments, Brian. So help me kind of reconcile your current efficiency of my adjusted efficiency ratio with a more normal level.

So Mike I'd take you back to page 11 on the net interest yield and and and net interest income and realize it basically and the four quarters of last year realized $2 billion of revenue per quarter.

Which is the bridge from a lot of that bridge and so as we worked that back up and ultimately as rates rise at $2 billion that's per quarter. So $8 billion of revenue was really no cost.

Will go up so we continue to get more efficient and our branches of the cost of operating over the over the deposit base is now at $1 35.

And we added <unk>.

700000 of checking accounts so.

Youre right, but it's more affected by the revenue.

Packed and eyes and as by anything else in terms of expenses net were saying net COVID-19 cost of.

Three of 400 that includes offsetting against that of all of savings of travel and stuff for the gross costs are obviously much higher than that.

We've got about just.

We opened up P. P. P. Today, we've got 5000 employees ready to go to complete the next round of P P and P and and the forgiveness process and.

As that finishes off of that stuff will come out of the system. So we've got you.

And then the follow up to that is going to NII I'm not sure from Gabe.

And specific outlook or not Paul when you you went through that I mean, as you said liquidity is now greater than loans your loan to deposit ratio of close to 50% I think it's the lowest and history like ever.

Right now so there's a lot of dry powder, there, but did you give guidance for NII for this year, assuming the forward yield curve stays where it is and do you think you can somehow pull out positive operating leverage this year or is that is that too tough given the rate environment.

We didn't give specific guidance all I can give you a little more color on our perspective on on 'twenty and 'twenty one.

But I do think of as you think about how you want to estimate and model NII.

And how it may unfold and 'twenty, one I think it's really sort of helpful to kind of review the progress, we made and and 2020 of there's a lot of clues there.

And remember in Q1 of 'twenty interest rates fell to a historically low levels short rates were down 150, and long rates were down a 100 basis points plus loans declined significantly beginning in Q2.

Demand weakened and larger companies assess of capital markets to pay down debt and build liquidity.

In the past when we've had situations like this where interest rates are and our loans and declined it's it's always take one of.

Several quarters to reach a point, where renewed balance sheet growth was significant enough to compensate.

We believe we found that NII bottom in Q3, and NII, Indeed moved higher and.

Q4 <unk>.

All else equal.

Day, count et cetera, it should become easier from here to grow NII.

I think what helped us to start to grow again quickly and this crisis wasn't a tremendous influx of deposits and our relatively recent confidence to invest the excess and securities instead of holding that excess and cash.

So our continued investment of that cash in Q4 of leads us to believe that we can offset the headwinds of.

And <unk>.

Low loan demand and the near term recent reinvestment yields and two less days of NII in Q1, leaving NII relatively flat in Q1 versus Q4 before moving up through the balance of the year.

Remember in Q2 and Q3, we pick back up those days of interest we lost in Q1.

As Brian reviewed we also saw commercial loans stabilize at the end of Q4.

Providing hope that increased loan demand will soon follow given that we expect some loan demand through the year and using the existing rate curve, which has steepened over the past 90 days, we would expect NII and Q4 'twenty. One for example to be much higher.

And Q1 'twenty one.

And when we get to the second half of 'twenty one year.

Year over year quarterly comparisons for 2020 as well as the second half of 'twenty, one compared to the first half of 'twenty should be quite favorable.

Okay. That's helpful and then when you say.

Lot higher in Q4 and Q1.

And bigger than a bread box or I mean, any sizing of that.

Right.

Once we get Paul of the simple way to think about it Mike is once you sort of get to.

Yes.

Underneath the.

Levels, you start growing the loan growth and we said we will.

Outgrowth of autonomy and loan growth and normalized time zone and.

And so but we've got we've got to work it back up from here, it's a for a five quarter of fight to kind of get this huge balance sheet turned and reposition and just.

Fight it down and then they have of grow back out so most of it.

Okay. Thank you.

Okay.

And our next question is from Glenn Schorr with Evercore. Please go ahead.

Hi, Thanks very much.

You guys are pretty.

For predictable and steady on this front, but I'm curious on your thoughts on capital I don't I'm not sure your CET one has ever been.

And your and your requirements are not going up so so as capital continues to build.

And your adjacent target.

Reasonably low relative to your big peers.

What are you thinking in terms of how aggressive would you get on the capital return and personally we don't talk much about bolt on acquisitions with you.

Sure Yes.

How do you think about that and if you might address asset management in particular, given your great distribution franchise.

Okay.

And let's go backwards for that one.

The big leverage point.

It would be more deposit acquisitions and markets, we're not in and stuff like that but we can't do it it's illegal and has been for you.

All the way back since <unk>.

<unk> or whatever it was 2030 years ago, so even before but.

And then you know asset management and remember we sold asset manage it because we believe that being the large distributor.

Is that is the priority. So don't expect us we look at stuff from time to time like everybody does but the way we're going to we built this company was organic growth.

And then delivering the capital back to shareholders and what's interesting.

We'll see what the rules change, but remember that things like the SLR in the accommodations that were given we didn't need and we have plenty of SLR. It doesn't have any constraint it doesn't because it become an issue.

Like you said, even if you look at the CBOE Calix and stuff, we got plenty over that so we will be aggressive on returning capital. We've got basically two months to return those $3 billion and change we've got a return now and then we'll see what the fed constructions are and and then we'll get after it as we move forward and we look at things from time and time of day.

There just isn't much to consider and United States right now and the best answers to develop.

Continued development of this franchise on organic basis.

And it works if you look in the markets and we've expanded our branch system to it we're averaging $100 million.

For more and deposits per branch and.

And the ones that have been open a couple of years and.

And moving share of.

Literally.

And by year by year, and so we think that's where we got to keep driving.

I appreciate all of that is there a specific.

Jim.

Buffer above the cc, one and or do you want to put it in the 36 billion excess.

Whereas our nacho resting ground not tomorrow, but just when and where you got that.

Yes, we always said sort of 50 basis points above the relevant binding.

Criterias, where you'd start to slow down, but remember we're basically one of getting back to earnings and so we got a lot of room between us and of what.

For the requirement plus 50 basis points and from time to time those move around advanced of standardized.

That's how our whatever's behind them, but think about that's for the board targets are.

Thanks, Ron Thanks for all of that Brian.

Our next question is from Matt O'connor with Deutsche Bank. Please go ahead.

Good morning.

Could you talk of a bit about the timing of the liquidity of your appointment and the fourth quarter and I think mortgage rate actually came down.

And one could argue if you look out six to 12 months out longer term rates will be higher of kind of vaccines get rolled out the economy picks up so.

Obviously, you have tons of deposits, but it's also pretty long duration assets I would think that you are buying so if you could talk about that.

Yes, you're absolutely right the tenure was up and.

For the quarter, but.

Rate of mortgage backed securities.

While certainly mortgage rates to customers declined and rates and mortgage backed securities I think declined slightly.

Having said that we're always kind of balance.

Quiddity capital and.

Returns and profits.

And.

We did deploy and as we sat and our third quarter call approximately.

$100 million of our cash and securities.

It went into both mortgage backed securities and some treasuries and in the quarter.

And.

We you know we think that was the right thing to do.

Understand.

The rate structure.

<unk>.

We did get probably and improvement on our yield on on that $100 billion of approximately 125 basis points. So.

And I would say, we've still got a lot of excess cash Matt. If you look at our balance sheet cash grew by 780 billion this quarter. So.

I mean that was for growth on top of of what we already had net of of deployment. So we sell of a lot of room to invest in the future.

And we plan to do some more investments in Q2.

Obviously, we're always looking at the rate environment.

And then I guess somewhat related is there a point where you just say we don't want some of these deposits.

And that her to kind of.

And free up even more capital or just talk a little bit more of an efficient balance sheet and not have to kind of make some of this type of decision.

Or for its hard for that appointment.

Well so well.

If a customer comes to you to open a checking account and start a lifetime relationship you would never turn that down whether it's a commercial customer or a consumer customer for core.

Deposits and so if you look at the growth.

Bidding for Cds and money markets on the consumer side, you can see that 108 billion of the 160 billion was checking account balance growth and by the way when rates Rose before we continued our checking account growth and we are.

We expect that continues ease of core customer relationships. So to go back and look as rates Rose 16, 17, and 18, we continue to grow checking.

And and double digit type of numbers quarter after quarter after quarter, which means youre, just taking market share and so and the commercial side of the same thing the GTS business, we are not out of the market taking.

Short term deposits from people haven't been and that's it.

This is all real core stuff that we're getting paid to take and albeit it gets sandwiched of little bit as the zero floors are hit and the commercial side frankly that services overcome the zero floor, but.

You'd be hard pressed to turn it down so its not like we have a lot of you know.

Here's a few billion dollars can you put on your balance sheet and give us your debt just doesn't happen, we don't do that but we turned that down already.

Okay. Thank you.

Our next question is from Betsy <unk> with Morgan Stanley. Please go ahead.

Hey, Thanks, Paul but just first of all of a follow on question to the last one around the reinvestment into securities. Like you mentioned you did 92 billion of so this past quarter.

And as we're thinking about the NII guidance you just gave should we be anticipating and increase into the securities book that are.

Above and beyond that roughly 100 million run rate that you did and for Kim.

Look we continue to access.

And that's the excess deposits and we do expect to continue to deploy more cash into securities.

We're not really planning on.

Disclosing how much more but there is a meaningful amount and that guidance that we gave you.

And the size and pace of the purchases of all of them, So you're gonna be influenced by.

A number of judgments, including things like the.

Like expected loan demand and customer deposit behavior.

So yeah, I mean, I'm not going to give you a number but it's a meaningful increase that we're expecting to do and and Q2 excuse me and and this quarter.

Yeah, Okay got it and.

Then just separately and talking about credit and you indicated that the.

Delinquencies are suggesting that Youre and you guys are going to come down Q on Q and shoe care and that's a pretty stunning statement given that we started for unemployment rate where it is can you just talk a little bit about what you know why why do you expect that's happening in your book of business do you just have a population that is.

Really not being impacted by the unemployment rate and if you could give us some color there.

Sure now I want to correct I think I heard you say something that you may not have set up and I want to make sure everybody heard it we expect.

Marc and sales for card to be up and.

And finally went down in Q1 and the reason for Paul I thought we lost you there for a second just Paul said like we're saying, Okay, alright, well I wanted to make sure everybody her and because.

I thought I heard you say something different we expect net charge offs for card.

Which you know obviously the primary driver of consumer loans, and we expect those to be up and Q1.

And then decline in Q2.

Brian.

You know the uptick and outside law and.

And so sorry about that okay and.

And that.

Expectation is being driven by what we see and the 90 plus bucket in terms of delinquencies.

And those delinquencies are that have sort of a if you look at the other buckets youll see and the 90 plus bucket, they're higher than the other bucket and thats. The deferrals of work their way from the five day to 30 day 30 to 60 day, there now and the 90 day bucket.

And we can look back historically and say X percent of.

Of our delinquencies and the 90 bucket show up.

And as losses and the next quarter, because you get to 180 days and so that's all we're seeing but importantly, when you look behind the 90 day bucket you don't see the same elevated levels. In fact, if you look at the the the 30 day bucket you're down meaningfully year over year in terms of levels. So that's why I don't think Q2.

We'll have to come down.

And maybe have too is too strong of a word.

All else equal with what you would think it would come down.

And you.

The question is really.

If you think about it.

The people who have been affected by this health crisis, who are unemployed who have helped.

Helped by stimulus.

Will this new stimulus.

Carry them to the point, where they get vaccinated and they've got jobs back and will we ever see those losses or will they just be pushed out into future periods.

So thats just just to give you.

Some extra information. We included if you look at page 27 of the deck and the appendix and the for charged for the bottom of a put and specifically because of this question. We knew would arise. So if you look across the buckets and you look from the day.

The mid 19 to the end of 'twenty.

You can see the different delinquency buckets.

Are all down.

Even the 90 plus day is down and gross dollar amount year over year.

But you can see that the.

And what people thought was sort of the.

The nano and <unk>.

<unk> of of pigs for Snake is probably more of a mouse through the snake and it went up and it's still a lower dollar amount and then it would come back down because you move from the left of the right side of the page and if you go back to page.

2014, you could actually see and of top chart. The total charge offs and consumer of this quarter of 482.

Look and the red bars, which of the credit card you can see that they're down dramatically year over year.

In terms of gross dollar amounts and then this will bode well and our future. So when we talk about going back up theyre going up for them.

To a level that was much below where they have ever been historically in terms of dollar amounts and so the last point you made it just so you have to have it as debt.

The unemployment rate and our customer base is below the unemployment rate and American Society, and that's just due to the.

Especially on the borrowing customer base due to the client selection and being in the prime business.

Hey, Betsy maybe just to complete the conversation with respect to commercial.

We have seen increases and reserve over criticized.

They haven't we haven't seen mpls increased significantly.

They're at 45 basis points of loans right now.

So we think commercial losses in future quarters are going to be driven by really company specific events that play out over the coming quarters.

And we'll obviously likely be concentrated and industries more heavily impacted by Covid I would point out that and this quarter.

We took some losses as we chose to reduce exposures and industries that were affected by Covid and that crystallize, some losses and and shown up on our NCL of this this quarter.

And I didn't take those losses.

Hadn't sold of loss of credits, we would have had even lower and sales and commercial.

Yes.

Yeah, No I got it.

We're forecasting nci's, peaking sometime and you know the end of 'twenty, one, but given your comments maybe the question is have they already peaked or will they have peaked for you and like <unk> yeah.

Yes.

And the care of their as to think the consumer is really.

At this point sort of run.

But of course and the commercial.

The reserves of build and the activity may occur and the out quarters, but the consumer runs of course budget of straight throughput.

And to 30 30 to $60 60 of the R&D. So we're showing you that charged to really tell you what's going to have to happen and the first half and and.

And because it's a pretty mathematical calculation.

Yes, no I got it.

And process. Thank you.

Next question from Vivek, you and Asia with Jpmorgan. Please go ahead.

And Brian and Paul.

Brian a question for you can you talk a little bit about <unk>.

FIC trading you've lost share and 'twenty and 'twenty.

And I think coding and for Q1.

What are you thinking about this business what are your plans for it.

Well play and sort of keep running it the way, we do and if you look at it year over year.

Integrated business markets, Jimmy does a good job it's up.

Showed you on.

Sure.

It's one of the highest gear that's ever had 15% of whatever it is up year over year. So they do a great job, we don't play and certain areas, which Brian which run on a given quarter.

And interestingly enough when they don't run for <unk>.

Net about that and.

And so we have of more of a stable level of of.

Of revenue. So if you look on page 24, you will see that 13, two to 13, three and 12 915 to so we had a very good year and of FIC was up from eight 4% and 97 and revenue which is substantial and.

Some of the areas, we don't trade and so we're more credit driven and that's that's what.

And that drives us versus some of the competitors were happy of the business. They do a great job and it's really there to help drive the connectivity between our issuing clients and our investing clients and well.

And isn't it tended to do drive it.

Can I just have turned off.

Yes.

Happy to sort of see what data youre looking at but I don't think we're losing market share and FIC.

Yeah.

I think we're actually gaining market share and perhaps not as much as we're gaining and equities, but we're gaining market share certainly and the segments for investing within FIC.

Paul your growth rates have been below peer so are you doing that by.

Segment of business like Brian was talking about and parsing that out between commodities of macro and and credit products or is it something else because certainly if we look at.

And your growth rate you've been up here too.

And so several quarters in 'twenty and 'twenty.

Some of the peers.

And not all of the peers right.

Lots of price in Europe because.

Yeah, but bad up yes.

Peoples and you'll see that we are gaining market share and fac.

Okay. Okay. So we'll go back and compare with the Europeans.

Different question, Paul for you and MBS premium amortization expense, how much of what was that this quarter.

I don't think we're giving the exact number but it was up and it did impact.

And would say meaningfully and.

Hi.

And from here.

What kind of where we're going to need to see mortgage.

Customer mortgage rates.

<unk> and go higher.

And for that number to stabilize and go higher.

Excuse me for that one of the stabilized and go lower.

Alright.

Yeah, Yeah, but if you ill give you the sense of its impact, though if you look at the decline and net interest yield for the company.

A third of it was due to premium and amortization.

And the quarter and kind of.

And so by the time.

The fourth quarter guide that you were giving us for NII to be much better how much of a reversal of the <unk>.

And you're forecasting and that MBS premium amortization and debt.

And that guide.

Well.

I would look at the debt I would look at the forward rates to get it for you to estimate that.

We're not assuming that it goes up.

And that guidance because if you look at the forward curve.

<unk>.

And by the end of the year are up.

From where they are today.

And I was.

Yeah, Mike.

My question was how much of your expecting it to decline Paul and I know.

Got it.

I understand you were asking for the dollar amount and I'm not going to give you the dollar amount.

And now the dollar amount, but any sense of percentage since you said one third of the of the decline came from that any of any sense of you know.

Oh, I'm not asking for a precise element I'm not expecting that but any sense of maybe we can follow up I mean, I don't have it off the top of my head and I could probably give you some sense of how much what percent of the improvement is from that but I don't I just don't have it off the top of my head.

The other thing, but I would point out just to keep in mind as you're thinking about.

The write off of.

Of premium is that.

It's not just at this point do too.

The decline in rates you have to remember that the portfolio has gotten bigger too.

Okay.

Okay.

<unk> been hurt more than others buy it so obviously that ship turnarounds and later in the U S.

And that's a meaningful.

Sort of tailwind and.

S mortgage back and problem.

And mortgage rate.

Increase.

Yeah.

Alright. Thanks.

Next question is from Kevin Who's been with Jeffries. Please go ahead.

Thanks, Good morning.

And one accounting follow up for you. Paul just you mentioned the low double digit tax rate and that other fee line for where the ESG investments go through has been pretty volatile, but a pretty big negative number and I just wanted to see if there's any way you can help us understand just what that looks like when you are helping us understand and you know the tax rate is and that's the other.

<unk> of it.

Yeah sure I can I can try to help you with that.

I guess, there's two ways to triangulate on it.

Look at the other income.

Line for the company Okay.

And.

With respect of modeling that line.

It's going to bounce around a lot quarter to quarter.

But for modeling purposes.

A good assumption going forward absent unusual items would be about a loss of 200.

And that line.

Except for the fourth quarter.

We will normally be higher as it was.

This year, given the seasonal increase and partnership investments.

We saw this quarter I can give you a lot more there's lots of things and that line item, but the volatility is often driven.

Certainly in the fourth quarter.

Those partnership losses, other things and that line or.

Equity investment gains gay.

Gains and losses on the sale of debt Securities and there is some mark to market income and there are.

For our FBL loans of fair value loans and related hedges, so there's going to be volatility and there I would use of loss of around 200 per quarter.

And when a larger loss and the fourth quarter.

Yeah understood. Okay, Great and then just a follow up just on you mentioned the progress that has been happening and the franchise as we kind of get a little bit closer of reopening a lot of those card and and consumer related fee items or so kind of hanging in there you know plus or minus.

And what do we think needs to happen and for those to start moving the right way. Obviously, you got all of this excess liquidity still weighing on fees and overdraft etcetera. So is this is this a new normal or with the economic improvement do you expect to see also of that stuff start you know massive fees start to improve as well.

And I think.

The biggest line item is the interchange.

Type.

Dynamics, and both debit and credit and they're growing but day.

And if they are recovering from.

And the deficit as I spoke about earlier, so that yes.

That should help and and the numbers of transaction accounts go up but remember we've had a strategy that is.

And two to lower.

And our clients.

Overcharges overdraft charges by our safe balance accounts, which were 3 million accounts.

Round numbers, and we're trying to get customers to.

And really use our services and the way that benefits and the most and so.

So that works against the overdraft line as this year, but dollar volume goes up so we'll see but what's really also.

Yes.

Driving this is just sheer numbers of growth and accounts will be the driver of it will grow slowly, though because we have been constantly taking down we of the lowest percentage of overdrafts as total fees and consumer of any of the large peers and will continue to drive that down because that means the customers and good shape.

Got it Okay and last thing and any any quick update on the merchant and how that's progressing along as well and and now that that we've seen and other kind of full quarter of that broken out.

Yes, I think it's still.

It's still getting we put the new system and we're starting to sell it that we feel.

And he is a core part of our business but.

One of the things and sell tobacco.

Our sales process, which is more integral to.

And the types of people use merchant services to be opened more and that's obviously affected by COVID-19. So it's okay, but we need to improve it.

Alright got it thank you Brian.

Next question is from Jim Mitchell with Seaport Global Please go ahead.

Hey, good morning.

Maybe just a little bit on consumer loan growth. It seems like you deliberately shrunk residential mortgage and auto look pretty good but credit card was a little sluggish I think given typical seasonality so.

And are flushed with cash and how do we think about the demand for for lending going forward.

And you gave some nice color on the commercial side on a monthly basis, how do we think about that.

The consumer side.

Well, let me just.

The issue was if you think about.

Being a large consumer lender and especially you watch your unsecured space.

March.

April may of you.

And we pulled in.

And even and small business space. So the good news is that we.

And we're reverting to norm and so in December for example, we had.

The 198000 booked accounts and credit.

What card.

<unk>.

No.

And 191000 and Thats, the highest really going back to pre Covid days, but we are running 300000 back then so yes, we got we got some work to do to get it back to the full amount and the card side for example in terms of.

Mortgage.

Again.

We are careful there, but also we were <unk>.

And sort of on rates and we do.

Moving on to look at debt, so, we booked about $7 billion and unsecured lending side, including mortgage and that and our core consumer business and.

So we feel better about that auto pick back up but you know home equity is down to $1 billion of quarter or something like that when I was running three or something so we've got some room to go but the good news is the card stable for balances of sort of stabilized and at.

And at the $85 million of some seasonality, but at least day.

Stabilized there and then and mortgage looks like we're picking back up a bit as we've made some adjustments and gone back to the more normalized underwriting and and at.

It has been strong so we'll see it play out but youre right, we had to pull back and add lost about half of the credit card volume on a given month and more pick back up.

From a 150 at the low point to 200, but we've got some work to do.

So is the uptick in and marketing spend sort of reflective of that push to sort of reengage with consumer and we should expect.

And some nice sort of improvement going forward.

Paul our Mark and you realise around consumer product capabilities. So yes, okay.

Okay, great. Thank you.

Our next question is from Gerard Cassidy with RBC capital markets. Please go ahead.

Good morning, Brian and good morning, Paul and I.

Brian just to follow up on that consumer commentary you gave and in your prepared remarks, I think you said that you brought your underwritings and Youre, bringing your underwriting standards back to the pre COVID-19 levels two questions I guess two parts to it can you give us some color of how.

They changed when you and tightened them up and now they are back to normal.

And the FICO scores on the consumer side and was it also and the commercial side did you do the same thing and some color on what's changed today there.

Yes, So let me start of the commercial side.

And this is about sort of the relationship side of commercial business business banking global commercial banking global corporate investment banking basically in March April you stopped prospecting frankly, because it was sort of impossible due plus you want to make sure I understood. The portfolios. We've done quarterly portfolio of used every single loan going through to make sure of the ratings of right make sure we understood with the customer so I would make.

And we understood and where theyre going to Kevin and flavors.

Over the course of the time here as sort of group of customers, which are in and <unk>.

<unk> and Paul talked about that are difficult and the rest of the customers are solid and good shape and in fact frankly their credit has been improving as we looked at it by quarter.

And so about four months ago, we moved into prospecting with very narrow list of prospects for business Bank of Gulf commercial banking think for middle market and.

Yes.

The upper end of small business across all of our markets.

Recently, we flipped and they can go back to full prospecting, except for limited and industries that you would expect and the.

Small business side because of the nature of the business. It was it was a little more dramatic and we've we've opened back up and we're getting we're up.

I think and the fourth quarter and give you a sense we were up.

50% in terms of originations quarter over quarter, but we're still.

And we were up a lot more than that more than 50%, we're still down 50% year over year up 100 plus per cent and.

Quarter to linked quarter I think.

And so new commitments of 135% per year over year, so down 47% of that shows you that it's coming through and we will see that happened and small business side.

And that was probably the slowest because they're the most risk and so.

For the commercial side when you go to the consumer side.

Audi was we basically.

And we stayed on the Ltvs on the commercial.

For consumer mortgage side.

We basically stopped.

FICO requirements, we slow down and do the market dynamics home equity slowdown auto.

And went back out more quickly just because of the secured nature of and short term nature of it. So we felt good about that and probably will always super prime and stay there, but its really whats changed and consumer and the west.

Last few months has been to move and we're back to probably 80% 90% of the ability to generate that we had we were down probably 20% and we moved back up and so we'll see that flow through but it was really just until you had some clarity of where this thing was go and you had to be careful for awhile, so that bodes well to economic activity and loan growth and future.

Very good. Thank you and then Paul in your comments you were talking about having greater confidence with the deposits to go further out on the yield curve, you've talked a little bit of about that already.

The question is.

What changed on the confidence side that now youre comfortable to take those deposits and move them further out versus maybe six months ago.

Sure.

No.

What's changed is.

And the level of deposits right, we continue to get more and more deposits in.

B.

Reviewing as Brian noted earlier, we're of the deposits are coming from predominantly high quality of deposits.

<unk> et cetera, and new accounts.

Three.

When you look at just the sheer growth of the money supply.

Coupled with the expectation as we come out of this recession that the velocity of money will likely increase.

And it's hard to build and case that we're going to see a significant decline and deposits and the U S.

And we're going to get.

Our fair share if not more of.

And of those deposits so.

Because of how we run of our business on both commercial and the and the retail side in terms of.

Focusing on our high quality of deposits, we just feel good about the deposits we have.

Yes, and Joe.

And just make it.

Sort of straightforward.

Yes.

Once you got by.

And this was on femoral and move in debt.

And especially on the corporate side that this was going to be liquidity state whether it could be a little more interest and the consumer side you always know of those are going to hang but the reality is debt.

And the big inflow and the commercial side you have to make sure of it wasn't of him.

Very good and Brian and Paul Hopefully, we will see you guys had bad this year and person.

But we'll try and OXXO.

Okay. Thank you gentlemen.

Next question is from Brian Klein of Huntsville, with K B W. Please go ahead.

Yeah. Thanks, I just have one question regarding the reserve levels overall.

When you think about it I know there was some changes with this quarter driven and I think my qualitative factors, but I guess when you look at relative to the base case, how much of the reserve is still related to qualitative factors, meaning that if the base case comes true that could be released over time.

Yeah.

Yes.

I'm not sure we well.

Yeah.

I'm not sure we give the exact.

Methodology, but let me just give you a sense if you take a reserve setting weighted in other words, what we set the reserve by December for year end 2020, because we've said it before the statistics.

The unemployment rate was seven 8% and per year, and 2021 of the six 6% and obviously.

The actual was was way of 100 basis points cost below that so you would expect as you have more confidence that the for pad isn't.

And to a narrow range and the for probability two things are going to happen as you go for one is the sheer dollar volumes of <unk>.

Activity is.

Changed and so you're dealing with less in terms of charge offs and things like that but it which gives you confidence of where the path is but most importantly, as you think about real reserve setting and lifetime reserves is that.

And the economic assumptions are clarifying and the and of the.

Covid era is clarified and with the vaccine and as we see that Youll see the uncertainty come down pretty quickly on the other side of that when that shows up and our assumptions. So we weighted.

Downside nearly 50% of the elements that weighting will come down over time and.

And so when that comes down over time Youll see the reserves releases come away from that the second thing is as the duration of the rest of the crisis comes in with more certainty more people vaccinated. You'll also see the lifetime calculation include the other side of the river to a bigger bigger portion and so that will drive it so both of those things.

Change it and.

As Paul said earlier, if you look at our underlying economics team they have the economy crossing over.

Where it was before and growing past in terms of share size at the end of this year and our reserve setting takes it into next year and things like that so we are using a more conservative case, which implies judgment.

Great. Thanks.

We'll take today's last question from Charles Peabody with for Telus. Please go ahead.

Yeah.

The first deals with what's going on and the regulatory front.

And we just had two new potential of <unk> to the SEC and <unk>.

Under the CFPB.

And what sort of issues you thoughts.

And my emerge with these appointees and Morris.

And the consumer side, because that's what I'm hearing.

She is going to be.

Some of the things that cause.

Is gonna be a crackdown on pay day lending.

A graph fees use areas rates artificial intelligence and use it red lining.

And most of those probably effect plus the overdraft fee.

But are there anything you can think of that might affect Q3 and.

Specifically, what sort of things Mike.

Okay for that piece.

Well.

Yes, a decade plus ago, we started changing it before the rules of change.

Posture and overdraft fees, realizing that are more stable.

Customer base was vastly better for the franchise and the operating efficiency and so.

No.

We welcome of industry, which has a great consumer.

Oriented path to it because that's how we run our company we've been doing it that way for a long time, so our fees on overdrafts have been declining.

Really as a percentage of fees every year and probably and gross dollar amounts most years and so we're not dependent on those larger because of how we run the business being corp customer checks 90%.

<unk>.

Primary checking accounts and household and therefore, they tend to overdraft less and this year for the stimulus and stuff and season.

Yes.

Even lower so.

We welcome and we introduced this new loan product that basically it gives us right.

Good day, and emergency loan for $5 and debt is our response to allowing our customers have been with us for a while to access their money for really no interest at all and and use it and anticipation of paying us back quickly.

Other things we've done to really help our retail customer segment, which is the mass market customer segment.

Manage their lives effectively and so we don't have of business Bill and those kind of fee structures and that's we're not.

And that's why we're and.

We welcome that and regulation of brings the market for us because as the most efficient and the best brand and the best customer service largest franchise and that's fine with us.

Okay.

And my follow up question deals with us.

Great.

And I recognize the fourth for on historical basis was very strong.

Okay.

So for people there.

And for all banks Lee.

For FIC trading revenues didn't.

And so my question is Paul.

Jim.

Yeah.

A little more conservative and the fourth quarter and already has a year.

That's one thing.

It's making for difficult.

The expectation.

Hey, Joe Charlie Charles You really cut now this is Lee you really cut net I'm not sure. We picked up I think you were asking.

A question about <unk> and <unk>.

Something but we Couldnt hear you.

Basically the FIC trading results and the fourth quarter on a historical basis were very strong.

But they dismissed and assessments not just of Bofa and Jpmorgan at city of Goldman everybody and.

And so I'm trying to understand is there something of an environment, that's changing and sneaking one more difficult.

Too aggressive and their expectations.

I don't know.

And develop those expectations, but our team had a good year and Jim and the team drove of.

For the business well they do it consistent with how we run the franchise and keeping the balance sheet.

Third of the balance sheet and the $35 billion of cap way of the market's business and for the year we earned.

Above well above our cost of capital and they did it.

Yes.

And think about the environments almost by month depreciate. So we feel good about it and.

And so I'll, let Lee for we outlined of some of the broader questions, but we don't set out of other People's estimates, we only set our own so Lee.

Let me I think that was the last call early.

That's right Brian.

Let me finish here and let you get about today.

2020, let's close the book on that it was a strong year by the team.

And as we think about what we face.

While the operating environment with work from home.

Massive customer deferrals of diminished over the course of the year massive borrowing net paid us back of deposit inflows and government programs to implement changes and those government programs multiple cases of those government programs and yet the team did a great job. So I. Thank the team for all of the hard work they did.

And we finished the year stronger them.

The stronger quarter of the three during the crisis, we continue to see asset quality.

And and mitigate now and so we feel good where back of the market buying back stock today.

And it will by $3 billion plus this quarter.

Our strong balance sheet capital ratios allow us to do that and as we also said and I Trust and the third quarter and we continue to push out from here and expenses year over year will be flattish.

Fighting despite the fact, we're investing heavily to have the best franchise. So thank you for your support we look forward to talking to next time. Thanks.

And this will conclude today's program. Thank you for your participation you may now disconnect.

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