Q1 2022 Bank of America Corp Earnings Call

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Yeah.

Good day, everyone and welcome to today's Bank of America earnings announcement at this time all participants are in a listen only mode. Later, you will have an opportunity to ask questions. During the question and answer session. You May Register to ask a question at any time by pressing the star and one on your Touchtone phone.

Please note. This call may be recorded it is now my pleasure to turn today's program over to Lee Mcintire.

Good morning, Thank you Katherine and welcome I Hope everybody had a nice weekend and thank you for joining the call to review the first quarter results I Trust everybody has had a chance to review our earnings release documents as always they're available, including the earnings presentation that we'll be referring to during this call.

On our Investor Relations section of the Bank of America Dot Com website.

I'm going to first turn the call over to our CEO , Brian Moynihan for some opening comments and then ask Alastair Borthwick, our CFO to cover the details of the quarter.

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

These forward looking statements are based on management's current expectations and the assumptions that are subject to risks and uncertainties.

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

Information about non-GAAP financial measures, including reconciliations to U S. GAAP can also be found in the earnings materials that are available on the website.

So with that take it away Brian .

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

We opened our earnings call. This quarter, we get we want to acknowledge that there is a.

The humanitarian crisis, continuing to take place in Ukraine, and we remain watchful to provide assistance from our company to the creating citizens and stand ready to help further where we can.

Before I get into some discussion on the current outlook and activity I wanted to step back and focus on the Big picture about Bank of America, this quarter and a quarter that had a lot of variables show up we delivered responsible growth again, we reported $7 $1 billion of net income or <unk> per diluted share.

We grew revenue, we reduced costs and we delivered our third straight quarter.

Quarter of operating leverage coming out of the pandemic.

Net interest income grew 13% is expected to grow significantly from here, we saw a strong long loan growth. We grow deposits. We saw we saw a strong investment flows we've made trading profits every day during the quarter. We grew pre tax pre provision income by 8%. We had a return on tangible common equity of 15 and a half.

Or said.

All of this came in that quarter that saw a geopolitical conflict rising interest rates the pandemic rising inflation concerns and much much more.

I want to thank our team for delivering on our responsible growth once again.

So as you look at the statistics on slide two you can see some of those highlights you can see the organic growth engine that our company is delivering once again in our banking business you can see the strong loan and deposit growth.

We grew and expanded customer relationships across every business. In fact, we grew net new checking accounts by more than 220000 this quarter alone.

We opened new financial centers, and we renovated many others, we added more digital capabilities and crossed 50% of digital sales.

And our wealth management business as you can see over 160 billion of client flows over the year.

And more than four trillion in client balances, including Merrill edge. We saw both strong investment performance. In addition to banking flows over the past year. We brought on a significant number of net new households, 24000, Merrell and another 2000 and the private bank.

Across the combination of our consumer and wealth businesses, we saw more than $90 billion of investment flows. We've now have managed client balances, including deposits loan investments of more than five trillion dollars with us.

In global markets give me tomorrow and his team had a solid quarter of sales and trading results, which included a record quarter for equities.

Fight the market turmoil, we had zero days of trading losses, while the investment banking fee line was down from the record quarters of the past year Magic quadrants team produced solid results with a strong forward pipeline and we gained market share all of the stuff in several areas, including moving to number two in the mid cap investment banking.

From a broader enterprise perspective part of managing costs, while it comes from the drive.

The drive we have in the company to provide enhanced digital capabilities to our customers, which in turn drives adoption for their digital gave us occasion and lower cost. If you look at slide 23, and beyond and you can see we are now selling more digitally than we are in person.

Takes both to be successful well.

Well it makes them even more impressive is all the financial centers are now open and back to operating at their usual great capacity.

So, adding the digital capacity clearly increases our total production capabilities.

You can also see our digital sales are now twice the pre pandemic level, just three years ago, even more impressive because zelle and Erika volumes up more than four times to pre pandemic levels. We're now processing more outgoing zelle transactions in checks and in our.

Cash pro mobile App with our commercial clients, we see many 5 billion dollar usage days, there's a lot more stats no slides showing strong digital growth I commend them for you to see how our high touch high Tech innovative company drives organic growth.

This quarter I would say it was tested and once again, we maintain our focus on what we can control and grew responsibly turned out okay and earned our way through the turmoil.

So we talked to you during the quarter. Many of you express questions about the impact of microbiome, the macro environments and changes in our company.

The lingering impact of the pandemic.

On supply chain and business opportunities inflation in fed reduction of monetary accommodation.

<unk> in Russia, and Ukraine more bulk.

On the first order effect in second order effects, we do remain mindful of all these so could I slow down the economy happened, perhaps but right now the size of the economy is bigger than pre pandemic levels consumer spending remains strong unemployment is low and wages are rising company earnings are also generally strong credit is widely available.

And our customers uses at the lines of credit is still low.

They have capacity to borrow more.

What we are all focused on the ability to use their tools to reduce inflation.

Yeah, we all know that would take interest rates.

Rate hikes, and a reduction of the balance sheet, we predict it will slow the economy from 3% growth in 2022 to a little below 2% and 24.

23, excuse me that is back to track so with interest rates hikes comes better NII.

Cause the fed had to push harder to sell inflation, perhaps that is why we run stress test each quarters to look at scenarios to see what would happen in a highly inflationary environment.

If rates move up faster it by their application to capital I'm sure and you saw some this quarter, but in the context of the capital built those impacts are manageable.

The impact increases earnings also and then overtime to buy bonds pull back to par.

All that results in a rebuild of the capital quite quickly.

But for some short period of time that catheter usage, along with customer uses might slow share repurchase that are a bit but it will be temporary.

What if we're wrong and things do get tougher we already know what that looks like in 2020 as we built significant reserves. We also built 90 basis points of capital during the economic shutdown period.

Rates moved against US in earnings fell so we have already proven resilience, we continue to focus on responsible growth and the things we control.

Go to slide three.

I want to mention that shows some of the strength, we see in our U S consumer base.

Bank of America consumers spent at the highest ever quarter, one level, which is double digit percentage increase over the 2021 level that you can see in the upper left for my card spend at the data we have seen a strong recovery in travel entertainment and restaurant spending in the upper right you can see that by the way even when the fuel costs up 40%.

But more from last year fuel.

Fuel represents about 6% of overall debit card credit card spending.

Get a lot less of overall spending S cards, you can see in the lower left is 21% of all spending.

Importantly, despite march of last year, including our stimulus bonus we saw the spending in the month of March 2022 on a comparable basis to 2021, 13% higher by dollar volume and we saw a seven 4.4% increase in the number of transactions that's about dollar volumes and numbers of transactions rose nicely.

And as you would expect.

The methods by which people spend continues to shift away from cash and checks.

It's a great place for digital alternatives and you can see that below.

Our data shows continued growth in the average deposit balance across all customer levels.

Suggest capacity with strong spending continue.

On an aggregated basis average deposit balances were up 47% from pre pandemic levels.

15% higher than 2021.

And then momentum continued through quarter, one, particularly in a low balance accounts, which grew in February to March continuing a streak since mid last year.

Now a couple of examples so you can see how this works.

We looked at the pre pandemic customers, who had one to $2000 of clear balances B B a C. Today. They had at that time pre pandemic that an average balance of one point for a one $1400.

You take that same cohort of customers the same customers.

In 2022 versus 2000, 1919, and they have an average cleared balance now of $7400.

So an increase from 1400 to $7400.

If you go to the next cohort up does with 2000 to $5000 of clear balances and the pre pandemic their average was $3250.

Now those same customers today have an average clear bouts of $12500 what does that tell us the consumers are sitting on lots of cash why is this true or you know high wage growth high savings limited.

By limited enabled spending but what it means is a long tail to consumer spend growth and in April through the first two weeks spending is growing even faster at 18% over April 2021.

The other economic sign posts posted a continuation of loan growth.

Gotta go we highlight the green shoots of our loan growth.

We then deliver the growth in quarter, two and quarter three and quarter four despite P. P. P run off in the changing economic conditions.

Good day, where we are today, we focus on adding volumes to give you a progression through the quarter.

If you go to slide four you can see the highlights of that growth in the upper left.

In the upper left of the slide.

I wouldn't mind, you that in quarter four we highlighted to you that up to $55 billion of growth in that single quarter 16 billion with global markets.

We did not expect that to hold true for quarter. One of 2022, so as we thought global markets did come down $5 billion. This quarter. Despite that overall commercial loans grew at $13 billion from quarter four excluding P. P. P that means commercial loans, excluding global markets grew $17 billion.

The billion dollars every single customer group global banking large corporate middle market business banking group as well as commercial loans in wealth management.

That improvement came from new both new loans as well as improving utilization rates from existing clients.

You can see in the top chart loans that moved back above our pre pre pandemic levels on the right hand side of the slide and you could see it being led by commercial.

Consumer loans continue to grow linked quarter as well. This is despite typical seasonality and despite the continued suppressed credit card balances you can see in the lower left mortgage loans grew $4 billion originations remained at high levels and pay downs decline.

Card loans declined $2 billion from quarter, four driven by the transfer of a billion six affinity card loan portfolio to the held for sale category.

Absent that transfer card loans would have declined very very modestly, whereas the previous quarter, one quarters they've declined several billion.

On slide five we provide data around consumer clients leverage and asset quality as compared to pre pandemic periods, which further supports our belief that the consumer remains in good shape on the upper upper left we looked at our credit customers that have both a credit card and a deposit account with us.

As you will note the average car balance of our credit card customers to have deposit relationships are still 8% lower than they were pre pandemic. They continue to pay down their balances on a monthly basis at a higher rate than pre pandemic.

And as you know delinquency rates are significantly lower.

Further it further as you can see it in my earlier point. These borrowing customers said those additional significant additional savings of average deposit balances were up 39%.

So a lot of strength or dry powder as it's called.

So what if we went to the motives modest FICO more modest amount of low FICO customers. They have a busy looking at that small subset of our base you can see a similar trend even stronger on cash balances and lower debt levels.

And you see in the bottom chart. We believe this is not just a phenomena b S. C. As industry data points around that service levels are having near historic lows and household deposit and cash levels are three trade higher than we entered the crisis.

No we're.

On Russia. This is not an area of material direct exposure of bank of America.

More than a decade ago, we've reduced our exposure in Russia, what it is.

<unk> resolved and having 90% less before the most recent crisis.

Our current very limited activities in Russia are focused on compliance with all sanctions and other legal and regulatory requirements are lending and counterparty exposure to companies based in Russia totals approximately $700 million and is limited to nine Russian based borrowers.

It is largely comprised of top tier commodity exporters a history of strong cash flows to continue to make payments.

Prior to the Ukrainian vision, he's exposure, but mostly investment grade report report all of them on a reserve criticized a corridor. One allowance includes increased reserves for this direct exposure and I just note that even with the addition of these loans. The reserve over criticized we still declined $1 7 billion in this category during the first quarter.

We continue our daily monitoring of sanctions in interest paying which is might impact. These laws. We also evaluate our portfolios and continue to do so considering second order impacts of this crisis.

Currently we believe this to be modest.

And reflect our international strategy to focus on large multinational clients.

They have geographically diverse operations.

Our quarter, one allowance for credit losses reflects all these things as well.

On Russian counterparty risk our teams have done a tremendous job trending down our exposures at the end of quarter, we have de minimis, meaning less than $20 million counterparty exposure with a single Russian based counterparty.

Very limited impacts from quarter in any of those impacts are.

Trading results for this quarter.

So responsible growth has served us well here and if you might know after the 2014 Crimea conflict, we intentionally reduced our exposure in Russia has not been our top 20 country risk exposure table since 2015.

So a few comments on NII.

And then I I remember the rate increases came late in the quarter and had little first quarter 2022 had I impact and there were two fewer days of interest in the quarter and decreased P. P. P pes or hurt NII growth yet yet.

Yet, we still grew and I buy to $200 million in line with our guidance. We gave you last quarter.

The forward curve expectation for higher interest rates and our expectations are for the loan growth. We expect significant improvement to the next several quarters Alistair will expand on this point for you.

We have more than two trillion dollars of deposits and $1 four trillion of those are with our consumer wealth management clients with more than 40% of those low to no interest checking.

That is a franchise that isn't rivaled, we will benefit as the rates move off the zero floors, allowing us to earn more money on the checking deposits.

Deposits I know some several of you were wondering if deposits continue to grow as rates begin to rise. So we went back and looked at the last rate rising cycle.

In the last decade, we pinpointed the peak.

Peak rate pay to customers during the quarter reflective of the peak fed tightening. We then went back and looked at the 12 months preceding growth rate in deposits and in fact during that 12 months preceding that peak.

Deposits grew 5% driven by organic growth engine.

Our market share gains and overall economic growth.

If you go to page slide six you can see the common equity we would talk about capital.

Just to start off our capital remains strong with 10, 4% CET, one ratio well above our nine 5% minimum requirement.

As you can see seven billions of earnings net of preferred dividends generate 41 basis points of capital.

As you look at just look on the right hand side of the page you can see the protein basis points that capital was used to support our customers' growth that's a good thing.

We also returned $4 billion to shareholders in common dividends and share repurchase.

At present about 27 basis points of use.

The spike in Treasury and mortgage backed securities rates caused the fair value of it or a F. S debt securities decrease and lowered our C. T. One by 21 basis points. That's the part that goes to the calculation of our cap well one wouldn't expect its impact every quarter, we're well positioned we were well positioned for the spike as you recall we invested in.

Much of our securities books, and held to maturity due to a huge excess and stable deposit base. We have two trillion dollars of posits unless in a trillion dollars in laws.

In addition to be cautious we hedge a large portion of securities in the a F S portfolio protecting it for much larger hit the Aoc I.

I remind you. This is the securities mature they have a site C. I reverses and a higher rates result in higher and I over a relatively short period of time.

That should result in higher earnings that will benefit CET, one ratios on an ongoing basis more than offset the negative upfront a OCI impacts.

The last thing I would note is our balance sheet growth to support our customer needs. Our G. SIB buffer will probably move higher by 50 basis points beginning in 2024.

I E, 10% regulatory minimum well. This is nearly two years away we continue to move towards getting this new higher minimum over the next couple of years will lift to gradually move to target C. T. One range of 10 75 towards 11%.

Importantly, while we grow into this range will be able to support our clients will be able to continue to increase our dividend and we'll be able to continue to buy back stock.

With that let me turn it over to Alastair.

Thank you, Brian and I'll start with the summary income statement on slide seven.

You can see our comparisons illustrating 3% year over year operating leverage Purdue.

Produced by growing revenue and managing our costs well.

That was nearly enough to overcome the change in provision expense driven by the $2 7 billion reserve released in the year ago period.

Compared to a 400 million released this quarter.

On asset quality more broadly we continue to see very strong metrics.

Net charge offs remained low and in fact, they're down more than 50% in just the past year.

Consumer early and late stage delinquencies are still below 2019 levels.

And resorbable criticized moved lower again in Q1.

Looking ahead, we continue to feel good about the asset quality results of our consumer and commercial businesses near term given our customers' high liquidity low unemployment and rising wages.

We produced good returns again this quarter with an R. O T C E of nearly 16%.

And we delivered $4 4 billion of capital back to shareholders driving average shares lower by 6% year over year.

Looking forward.

And with continued expectations of growing NII.

Combined with strong expense control.

Spec to drive operating leverage and see our efficiency ratio of work back towards 60%.

So, let's turn to slide eight and the balance sheet.

And you can see during the quarter, our balance sheet grew 69 billion to a little more than 3.2 trillion.

This reflected $14 billion of growth in loans and the growth of our global markets balance sheet as customers increased their activity with us.

A decline in cash this quarter was associated with that growth in global markets.

Our liquidity portfolio was stable compared to year end and at 1.1 trillion.

Represents roughly a third of the balance sheet.

Shareholders equity declined $3 4 billion from Q4 with a few different components I would note.

Shareholders' equity benefited from net income after preferred dividends of $6 6 billion as.

As well as issuance of $2 4 billion in preferred stock. So that's $9 billion that flowed into equity in Q1.

And we paid out $4 4 billion in common dividends and share repurchases.

A OCI declined as a result of the spike in long rates that Brian referenced.

And we saw the impact in two ways.

First we had a reduction from a change in the value of our a F. S that securities that was $3 4 billion. That's the piece that impacts E T. One as Brian noted.

And second rates also drove a $5 2 billion decline in OCI from derivatives, but does not impact CET one.

That reflects cash flow hedges against our variable rate ones, which provides some NII growth and protected C. E. T. One at the same time.

With regard to regulatory capital since Brian already talked about CET, one I'd simply note that our supplemental leverage ratio was stable at five 4% versus the minimum requirement of five and still leaves us plenty of capacity for balance sheet growth.

And our T Lac ratio remains comfortably above our requirements.

Turning to slide nine we included the schedule on average loan balances and in the interest of time, the only thing I would add to Brian's earlier comments.

And for your perspective is simply a reminder, that P. P. P loans are down 19 billion year over year.

A few billion of those left.

Excluding P. P. P. R. Total loans grew at 18 $9 billion.

Or 10% compared to last year.

Moving to deposits on slide 10, first let's look at year over year growth.

And across the past 12 months, we saw solid growth across the client base as we deepened relationships and added net new accounts.

Our year over year average deposits are up 240 billion or 13%.

Retail deposits with our consumer and wealth management businesses grew 190 billion.

And our retail deposits have now grown to more than 1.4 trillion, where we lead all competitors.

Looking at linked quarter growth from Q4.

And combining consumer and wealth management customer balances are retail deposits grew 53 billion in just the past 90 days.

With our commercial clients are up nicely year over year and.

And we simply note that Q1 decline, which is entirely consistent with previous years seasonal trends.

Turning to slide 11, our net interest income.

On a GAAP non FTE basis, and I I in Q1 was $11 6 billion.

And the S. T E. NII number was $11 7 billion. So I'll focus on F T E.

Net interest income has now increased one 4 billion.

From the first quarter last year.

As Brian noted, that's a 13% increase driven by deposit growth and a related investment of liquidity.

NII was up 200 million versus the fourth quarter as the benefits of lower premium amortization and loan growth more than offset the headwinds of two less days of interest accruals and lower P. P. P fees.

So, let's pause for a moment to discuss asset sensitivity because I want to make a couple of points as we begin.

What the fed has signaled to be a cigna.

The significant rate hike period.

Remember.

Sensitivity is a measure of NII for the next 12 months above unexpected baseline of NII given changes in interest rates and other assumptions.

In an environment of sharply rising rates each quarter.

The baseline of NII actual NII increases and therefore, the future sensitivity declines.

Now, we typically disclose around asset sensitivity based on a 100 basis point instantaneous parallel shock in rates above the forward curve.

And then on that basis asset sensitivity at March 31st was $5 4 billion of expected NII over the next 12 months.

90% of that sensitivity is driven by short rates.

That $5 4 billion is down from $6 5 billion at year end, largely because higher rates are now factored into and running through our actual or baseline NII.

Now you asked the question last quarter about the same sensitivity on a spot basis relative to our current curve.

And given that the yield curve is projecting 125 basis points of rate hikes over the next three meetings.

We thought it was appropriate to provide that disclosure.

So in a 100 basis point shock.

Two the current curve using spot rates are.

Our sensitivity to that kind of move would be $6 8 million or $1 4 billion higher than on a forward basis.

So assuming rising rates as reflected in today's forward curve and if we see continued loan growth I would just reiterate what we said last quarter that we expect to see robust and I I growth in 2022 compared to 2021.

We're not going to provide numerical guidance for the full year.

Because the changes in interest rates have proven quite volatile and just the last 90 days, let alone a year.

Do provide that asset sensitivity. So that you can use it as guardrails to think about changes as you modify your own assumptions.

I do have or want to provide a nearer term expectation.

I'd say that if loans grow and the rates and the forward curve materialize.

We would expect to see NII in Q2.

Increased by more than 650 million over the Q1 level.

And then grow again.

Significantly on a sequential basis in each of the following two quarters.

Okay, let's turn to expenses and will use like 12 for that discussion.

Our Q1 expenses were $15 3 billion down a couple hundred million from the year ago period.

I'll focus my remarks on the more recent comparison versus Q4, where we're up 600 million.

And as expected and we convey to you last quarter. The Q1 increase was driven mostly by seasonality of payroll tax expense of roughly 400 million. We also experienced modestly higher wage and benefit costs.

As we look forward, we continue to invest heavily in technology people and marketing across our lines of business.

And we've continued to add new financial centers and expansion in growth markets.

We modestly increased our full year, New Tech initiative budget for the year to $3 6 billion.

And that's on top of.

Excuse me.

That's on top of more than 35 billion that we put to work over the past 12 years to help us build powerful more secure and scalable technology platforms.

This is the investment that's allowed us to maintain a leadership position in patents among our peers. We had 512 of them granted in 2021, and we're maintaining a similar pace. This year. We think this is one of the things that's helping us to protect our moat around leadership positions in places that matter most to customers.

In addition to modestly higher marketing cost this year. Our investments also include adding up to 100, new financial centers.

And we also plan to renovate more than 800 more during the year.

We will also continue our upward March on minimum hourly wage towards $25 by 2025.

So how do we pay for all that.

Continued work on operational excellence and digital engagement.

And as we look to Q2, we expect our expenses to be down modestly from Q1 as much of the seasonal payroll tax expense abates.

And it's somewhat offset by investment timing.

Inflation and the cost of opening up more fully for traveling client entertainment because it feels like we've got a lot of pent up demand for face to face meetings by.

By our clients and our people.

So, let's turn to asset quality on slide 13, as you can see.

Asset quality of our customers remains very healthy.

Net charge offs this quarter were better than our expectations. Once again and remained below 400 million down 52% compared to Q1 2021.

Provision expense was $13 million in Q1, as a reserve release of 362 million closely matched.

Net charge offs in the quarter.

And that reserve release was primarily in our consumer portfolios.

On slide 14, we highlight the credit quality metrics for both our consumer and commercial portfolios.

And I'm happy to answer any questions later, but a couple of things are worth repeating.

Consumer delinquencies remained well below pre pandemic levels.

And despite reporting our commercial Russian lending exposure and reserve criticized those levels still declined 1.7 billion from Q4.

N P. L saw modest increase and that simply reflects a small amount of consumer real estate deferrals expiring with the exploration of the cares Act.

Yeah.

Turning to the business segments, one thing we'd ask you just to keep in mind for each of the businesses is Q1 expense includes the seasonal payroll tax expense, which has negatively impacted efficiency ratios our profit margins in Q1.

And as usual Q1 of every year includes segment capital level evaluation.

And you'll note, we put additional capital against each of the businesses due to their growth.

And as usual we've tried to include business trends in digital stats for each segment. So let's start with consumer banking on slide 15, where you can see the consumer bank earned nearly $3 billion.

That's 11% up over Q1 2021.

Revenue growth more than offset the larger prior period reserve release.

Probably most easily identified by looking at pre tax pre provision earnings which grew 32% year over year.

Revenue grew 9% on and I I improvement and expense declined 4%, creating 13% operating leverage and the fourth consecutive quarter of operating leverage for our consumer team.

Notable customer activity highlights included our 228000 net new checking accounts opened in Q1, which represents our 13th consecutive quarter of net new consumer checking account growth.

This occurred as we began to implement our previously announced insufficient funds and overdraft policy changes, which lowered our service charges about $18 million.

So during this time, we saw counts grow.

We saw expenses declined.

We also grew investment accounts, 7% and we saw those balances grow 10% from Q1 'twenty one.

350 billion.

And that included 20 billion of client flows.

And once again, we opened nearly a million credit cards in the quarter and grew.

Average active card dependence and saw growth in combined credit and debit spend of 15%.

Our continued investment in digital capabilities drove activity with our customers as we crossed 50 per cent and digital sales this quarter.

And we continued investment in our financial centers opening another eight in the quarter.

It's also worth noting that small business saw continued growth in loans.

In deposits and in spending small business card spend was up 28% year over year gives you an idea of how small businesses are reopening for business.

I'd also draw your attention to slide 22 in the appendix. We've shared this with you previously and it's simply highlights the origination strength and quality of our consumer underwrite them.

Throughout everything our underwriting standards have remained consistent.

Moving to slide 16 wealth management produced strong results, earning $1 1 billion.

And that represented 28% year over year growth driven by strong revenue improvement good expense management and low credit costs.

Bank of America continues to deliver wealth management at scale across a full range of our client segments and with the best advisors in the industry. According to Barron's rankings.

That coupled with our digital leadership.

Delivering a modern merrell and a modern private bank for clients to enterprise relationships and our clients and advisors have recognized the value in a holistic financial relationship that extends across investments planning and.

Banking.

And that's what helped drive the 150 billion of clients' balance flows that you see here over the past 12 months not only did we see strong investment flows with more than 70 billion.

But deposits grew 59 billion up 18% and we added $22 billion in loans over the same period, marking our 48 consecutive quarters of average loan growth in the business.

Just consistent and sustained performance from the team.

Revenues grew 10% to a new record and were led by 25% growth in NII on the back of those solid deposit and loans increases.

As well as a 9% improvement in asset management fees.

Expenses increased 4% driven by higher revenue related costs and resulted in over 600 basis points of operating leverage.

And we generated nearly.

7000, net new households in Merrill and more than 800, and the private bank this quarter.

Moving to global banking on slide 17 the.

The business momentum with our commercial clients remained strong in the first quarter.

The business earned $1 7 billion in Q1 down $450 million year over year, driven by the absence of a large prior period reserve release.

And lower investment banking revenue.

Revenue improvement of 12% year over year reflected higher leasing related revenue and NII growth, partially offset by lower investment banking fees.

Net interest income grew on the back of strong loans and deposit growth.

And the leasing revenue improvement included more ESG related investments, particularly in solar.

As well as the absence of weather related losses recorded last year.

While the company's overall investment banking fees of $1 5 billion declined 35% year over year.

We gained market share in some important areas and recorded a number of three banking overall fees.

And importantly, our investment banking pipeline remains quite healthy.

Provision expense reflected a reserve build of $177 million compared to a $1 2 billion dollar released in the year ago period.

This quarter's provision includes reserves taken for Russia exposure and other considerations for loans growth.

Offset by continued improvement in asset quality metrics.

Finally, we.

We saw expense declined by 4% driving strong operating leverage.

Switching to global markets on slide 18, and as we usually do I will talk about the segment results excluding DVA.

Q1, net income of $1 5 billion reflects a solid quarter of sales and trading revenue and it includes a new record for equities.

The business generated a 15% return in Q1, even with a 12% increase in the capital allocated to the business.

Our investments in this business saw good results as our financing clients continue to increase their activities with our company.

Focusing on year over year sales and trading contributed $4 7 billion to revenue.

First as Q4 that was a 58% improvement a little higher than typical seasonality and versus Q1 'twenty. One we saw a decline of 8% as the prior year included higher commodities results due to weather related events thick declined 19%, while equities improved 9%.

That decline reflects the higher prior period commodities and a weaker credit trading environments and it was partially offset by improved performance across our macro products, especially rates and foreign exchange.

The strength in equities was driven by strong performance in derivatives.

And year over year expense declined reflecting the absence of costs associated with the realignment of our liquidating business activity to the all other unit.

As well as some Q1 'twenty one accelerated cost for incentive changes.

Absent those impacts expenses were up modestly.

Finally on slide 19, we show all other.

Which reported a loss of 364 million declining $620 million from the year ago period.

Revenue declined as a result of higher volume of deals.

Particularly solar.

And therefore higher partnership losses on ESG investments.

And this is partially offset by the tax impact in this reporting unit.

Expense increased as a result of costs no recorded here in this segment.

Following the Q4 realignment of that liquidating business out of global markets.

And as a reminder, for the financial statement presentation. In this release the business segments are all taxed on a standard fully taxable equivalent basis.

So in all other we incorporate the impact of our ESG tax credits.

And any other unusual items.

For the quarter for the company, our effective tax rate was 10% benefiting from ESG investment tax credits and excluding the tax credits.

<unk> rate would have been roughly 24%.

We expect our effective tax rate in 2022 to be between 10% to 12% absent any tax law changes or any unusual items.

And with that.

Let's open it up please for Q&A.

And as a reminder, if you would like to ask a question. Please press star and one on your Touchtone phone you can remove yourself from the queue by pressing the pound key.

First to Glenn Schorr with Evercore Your line is open.

Hi, Thanks very much.

And forgive me if this is a dropped long but.

Listening to all your your your comments about the consumer about spending about no real stress in credit net.

Net charge offs nonperforming that service levels, all that sounds great.

And in the past I think higher rates were designed to leverage from the system and caused some recession. So the market's trying to assign some percentage chance towards the recession, yeah and every comment I came out of your mouth doesn't sound like we're going towards the recession. So I wanted to see if I can.

<unk>.

On your thoughts around today's environment versus history, and then also.

Specifically ask what you did with the ins and outs in reserves and if you've changed any macro scenarios as you bake in a seasonal rhythms that thanks for that and thanks for bearing with me.

Thanks, Glenn so.

You are right to pick up on the commentary because Brian highlights the strength of the consumer.

Which remains extraordinary.

And at the same time, what we see on the asset quality side of commercial is just continued steady improvement as the economy reopens. So that's what we're seeing that's contemporaneous.

Are you asking the question about.

What does it look like in the future and.

And we're obviously aware of what the fed is trying to engineer.

So going through this.

Every quarter as we always do we have an opportunity to think about how we look at our reserves.

And this quarter, we took some of the upside out.

We've got a little more weighting towards a baseline a little more towards downside. So that's one thing we've done.

Second thing we've done is we've upped.

Our forecast for inflation.

So we see that playing through in those scenarios are a little more weighted towards inflationary.

Third we have adjusted GDP growth down.

Largely based on Blue chip consensus.

So we like you are looking at two things number one we're looking at what we're seeing and the actual results and number two we're thinking about how we balance that going forward with our scenarios.

Yeah.

Good and I think just generally is if the fed has attached to.

To break any inflation out of the system and you know our GDP assumptions by Kansas.

Partner team yards for.

The economy, the slowest growth rate from this year into next year.

The question of Great debate as a soft landing hard landing et cetera, but I think that's what's unusual. This time is how much cash is sitting in the consumer's accounts. If you are sitting here.

When they start normalizing rates and in the middle of last decade late to middle of last decade, you you Wouldnt have seen the consumer balances sitting with those multiples I gave you early in their accounts and then having.

Tremendous borrowing capacity left in terms of unused credit lines and same on the commercial side. You know lines are bouncing along just above the low point and so we continue to adjust our reserve levels 2000 are said to factor in.

Base case includes higher inflation through the rest of the year into next year, our seats of reserves set by that.

<unk> case, which is a 40% weighting to adverse frankly equal you know maybe 40% of the actual reserves we have.

Because the restaurants are.

Judgmental and and precision and things like that so you know, we're very strong reserve and we're very mindful that I think is very different to think about the situation where the consumers. The unemployment is already so low and the consumers are sitting with money and I think that puts more attention on the fed to how they architect a successful.

A lot of change and they know that but on the other hand, it's a better place to start.

I appreciate all that one little tiny follow up is in global banking I noticed 2 billion more allocated capital.

Deal activity is down but you mentioned pipelines are good. So maybe you could just talk about just what's going on there. Thank you.

Well, we don't have a great deal to add there.

We're coming off of <unk>.

Record quarters last year.

And we're we're just operating in the market conditions.

That will give them the volatility has obviously been hardest felt in equity capital markets.

And in a high yield.

And across the board, we'd say our pipelines look very strong so.

You know I think when I asked Matthew we said somewhere between strong and very strong. So that should tell you everything you need to know, but obviously, we need market conditions to cooperate.

Perfect. Thanks, so much.

Our next question comes from John Mcdonald with Autonomous Research Your line is open.

Hi, Good morning, I was wondering if you could talk a little bit about expenses and operating leverage are you still thinking that expenses will be flattish this year and the $60 billion ballpark, Brian and you did mentioned expectations for the efficiency ratio is your operating leverage improves with NII maybe that in March.

Down from kind of a mid sixty's to low sixties I think he said.

Yeah announced or gave.

Give you some detail, but just simply put John we expect to be relatively flat for 2022 versus 2021.

That's the guidance, we gave you last quarter, we don't see anything different this quarter.

Okay. That's helpful and then on Alastair, maybe just a little more flushing out about the capital and how you're managing the C. E. T. One obviously you're generating already.

Capital each quarter above you know what you are paying out the dividend and it seemed like 30 basis points this quarter and that probably gets better at the same time it sounds like you're maybe going to manage up to around 11 over the next year or maybe you could just give us some of the dynamics there and how that plays into the ability to do some buybacks.

The rest of the year. Thanks.

Yeah, So no change to our approach John relative to prior years I think the waterfall that we laid out on slide six is pretty pretty constructive.

First priority for Us will remain just invest in growth will support our clients.

I'll, let them get after the teams get after the loans to help our clients there.

Secondly, it will make the dividend payments.

And then we will have capital left over for share buyback as we have had in the past.

We'll make those decisions in the context of future rate environments and future capital requirements I think Brian pointed out to you that you know we're going to we're going to build capital over the course of the next couple of years by about 50 basis points a.

We've got seven seven quarters. So it's it's a small a small amount every quarter they will be doing.

John just you said operating leverage.

I'm proud of the team that we have three straight quarters of operating leverage.

Our growth was strong there that's different than what we've seen out there generally but remember during the year.

As the rates rose in the pre pandemic setting and you know glenn's question about soft landing hard landing inherently weighs on everybody's mind. The simple fact is we had.

20 straight quarters of operating leverage and we're starting to see that come through and and if you look at the consumer efficiency from the first quarter a lot last year. This quarter you plenty of efficiency ratio. This has all come through NII. It all falls to the bottom line and therefore, you end up with a.

Fairly significant impact in those businesses, which are obviously highly sensitive growth in NII.

Got it.

That's helpful. Thanks very much.

Our next question comes from Mike Mayo with Wells Fargo Securities. Your line is open.

Hi.

Ryan and Alistair I was wondering if you can just make a distinction between the economic regulatory and accounting outlook. So from the economic standpoint, you're marking to market your assets and your securities and you saw a swing to a N C. I bet, you don't mark to market that $1 $4 billion of deposits.

From a regulatory standpoint M. C. I causes you to slow buybacks I believe you said, but from an accounting or earning standpoint.

Maybe maybe you win in the end, maybe you don't so I know youre, not giving specific guidance for NII, but just at a basic level. It's your guys.

You know earnings outlook better.

Because of the NII and the higher payment rates and a better efficiency or is it worse, because you have less buybacks, maybe more provisions due to the potential for a recession.

Well, Mike you know those are all the pieces, but simply put I think Alistair said.

I pick up next quarter, so you'd be you pick up the 200. This quarter you put that in the bank did you pick up another 600 million plus next quarter and then it grows from there out so yes, that's tremendous operating leverage and as we just said to John expenses are flat. So that flows through the bottom line you know all the different vagaries of it.

Not only regulatory accounting versus GAAP accounting, but also what cats the counts in the capital ratio calculations, if there's not a day.

You said $1 four trillion as two trillion dollars of deposits.

<unk> trillion for just on the consumer you know for people side of the business and even on the business side, we only have operational deposits and so yesterday there was a very long deposits, we extract the value through investing and that's why I put into held to maturity and you know the cash flow off that had a maturity portfolios 20.

20 odd billion dollars a quarter, even in a rate environment changes so.

At the whatever hit we had to see T. One the growth in NII and the growth in earnings power in the.

Covers up inside of a year.

And so we feel very good about that so.

The better rate environment whenever we come off the zero floors. It makes us a lot more money you know that and we know that.

Can you elaborate a little bit more on what you mean by operational deposits I know you've talked about that and the linkages and I guess, that's the reason why you would expect deposits to be more sticky, but you know can you elaborate a little bit more you mentioned that zelle and air can volumes are up more time.

Higher than pre pandemic. So I guess, you have a little bit more lock in but if you could elaborate more.

On the consumer side that people being wealth manager consumers in general consumers.

Ah the trillion for you, we're at 40% or more in checking accounts and that's the money people have in motion in a given day and what the big volume as it comes from you know frankly, you got 35 million checking holders, which is a new record for us and so that's that's important in all the feature functionality helps them a retention.

For our preferred customer base in the consumer segment, which represents 70% to 80% of all of the deposits.

Nine point, something and so those customers stay with us a long time, when I've met operational counts on the commercial side.

We all the cash is money in motion for those commercial customers meeting its part of their day to cash flow, so whether it's small business customers.

It's business banking customers, which are under $50 million revenue companies or even middle market. You. This money is coming in and out every day and so it's it's very stable it doesn't disappear from the scene and if you look at our GTS revenue you can see the global transaction services revenue on the page and go back and you'll see it's grown nicely year over year and that's due to.

The stability of that deposit base and what we see so it's not going to move away from the balance sheet.

That's the point I said about <unk>.

But the rate rising cycle last rate rising cycle.

Yeah.

Money supply shrank you know on the other day, we grew deposits, 5% and so we'll see what happens because it's different but we feel pretty confident.

Alright, thank you.

I would add is you know when Brian talks about.

Operating.

One of the reasons, we highlight that 90, 293% of our consumer accounts are primary.

And we've had 99% plus retention rate on those accounts so.

These are sticky deposits such what we're just trying to make sure everyone understands.

Alright, thank you.

Yeah.

Well go next to Betsy <unk> with Morgan Stanley . Your line is open.

Hey, Thanks, Good morning, two questions one on expenses I know you mentioned cause here.

Are you still anticipating relatively flat and that you would deal with inflation pressures et cetera from a you know some of the opportunities you have to get more efficient on could you give us a sense as to how long do you think you can stay flat for like is that going to be into 'twenty, three as well and can you unpack some of the things you're doing.

To get more efficient I know you did a ton of efficiency pre COVID-19 . So what's last thanks.

So Betsy if you remember coming into the pandemic, we had hit the point, where he brought expenses down and said, we you know we know where the operating leverage companies. So we'll get revenue growth faster than expense growth, but we'd start to grow modestly then you have the pandemic had a lot of expenses coming in and out but and so when we say flat year over year you basically.

Meaning twenty-three versus 'twenty two you have in that 59% to $60 billion range. You know our view is that our goal is to keep that down to a modest expense growth if any and as we move to 'twenty four et cetera, but we are fighting all in fighting all this discussion you had but the key is to have the revenue grow much faster than that and that's a week.

That's what we expect to see is that our it kicks back up in the efficiency ratios as Mike or John referenced sort of kick back down pretty nicely.

Got it and then the other question is just you know further right backups you know, obviously 10 years already at two way and it's up 50 bps from March 31st.

I think it's like three three we get the same kind of hit US. This past quarter can you just give us a sense as to how you're dealing with that right back up is there anything you would do differently would you move you know any I S. At H T. M. R. You know would you would you engage in this new accounting rule that's been finalized.

And in March 28th that that enables you to do lastly, our hedging on H Tanbark, I mean does any of that matter to you and then.

Just give us a sense as to how much longer this right back up. It is are you now or would you change how you're dealing with it. Thanks.

So the piece that will match the most will.

It will be the F S securities.

And we've talked before about the fact that we have you know about 200 billion of treasuries there.

Swapped all swapped the floating precisely to insulate us. So I think that's one of the reasons you see.

Our a O C. I hit is much smaller than many others.

Yeah. So then it's just a question of managing around the 50 billion or so of securities that we have there.

Aren't swapped to floating.

And I just note that that number has come down a little bit month. After month after month I think it will keep coming down.

We have some ability obviously to hedge that if we choose to and so we'll manage our interest rate exposure as the environment develops from here.

Okay. Thanks.

Yeah.

We'll go now to Matt O'connor with Deutsche Bank. Your line is open.

Hi, I was hoping to get a little more detail on the noninterest income trajectory in the back half of the year. If we follow the foreign curve and I. Appreciate you don't want to give explicit guidance goes maybe a month from now the rate environment will change, but it's also you know the key driver for Franco Nevada, because earnings from here on and off.

And probably positive stories, so wanted to again and maybe I'll start with <unk>.

Last quarter was up more than $600 million. If you follow the forward curve it seems like that quarter over quarter increase could actually accelerate in the back half of the year.

So maybe I'll.

Without further to run with.

Yeah. So look I think we broadly speaking I agree with you.

We obviously don't control rates.

So that's why we're always reluctant to to give guidance over the course of the next.

270 days.

But we're very levered to rates going up from here.

And you know we said in our remarks that we believe the second quarter will be up.

At least $650 million in NII.

And I think if you look at the forward curve, Yes, you would expect to accelerate over the course of that over the course of the year.

And then we tried to give you the broad outlines around.

$5 4 billion versus four with $6 8 billion versus spot, it's obviously very meaningful.

But we're only prepared to look at over the course of the next 90 days because we feel like we've got pretty good confidence around that.

I think the other thing just to remind us.

Our next meeting is may.

So you'll see like the fed meetings and the hikes and the forward curve really do accelerate things in the back half of the year.

And how do you think if we do get kind of the second 100 basis point rate increase at the markets.

To pay then what does that.

It looked like in terms of your rate sensitivity and then just kind of squeeze them similar but at some point to rate hikes, not help noninterest income or it helps it doesn't seem like that's sort of picks up thank you.

Yeah.

Well you know I think just the fact that you've got 5.4 billion compared to $6. Eight tells you a little bit about successive rate hikes become less valuable.

But we're probably a long way from where they stop having value.

So look we expect as Bryan talked about we were kind of at a rate floor when rates are zero.

And obviously, we will get significant benefit over the course of the next 100 basis points.

I like you would anticipate less from the fall 100.

But again, we're going to capture a lot of value because our strategy is based around operating accounts and commercial.

<unk> primary accounts and consumer.

Yeah. The question always is.

If the fed is hiking rates because of inflation.

Inflation that they cant get back under control and Yep.

You got to look at the stuff out so everybody focuses on NII, but you've got to look at what's going on in the economy generally so that's why we have such significant reserves in case, it's a harder landing them people.

At this I would like to engineer them and that's why we run the company with such balanced but generally yep.

The higher sustained rate environment will help us.

A lot more money and you saw that.

You pick up it hasn't picked up yet.

You know 16, 17, 18, and you'll see it happen again, you've already seen happened I mean, just think last year first quarter. This year first quarter, we have a 1 billion and four more NII per quarter. So that's you know it's already helped us as as loan and deposit growth or match with some modest rate increases.

Thank you very much.

Our next question comes from Erika Najarian with UBS. Your line is open.

Hi, Good morning. My first question is a follow up to what Matt was asking about Alistair could you give us a sense of what the deposit repricing assumption is in the plus $6 8 billion in sensitivity for the first hundred and yeah.

Given your focus on primary operating accounts.

Contrast that with Chunkier rate hikes, how should we expect deposit repricing to behave in the second hundred basis points.

So we normally take a look at our deposit betas over the course of history.

And if you go back to the last week, so I called 15 through 19.

On average that you can't you can't.

Obviously very different by account and line of business and client, but on average it was somewhere between 20 and 25 per cent for bank of America.

We'd hope to perform a little better in this cycle just based on the value we deliver to clients, particularly in things like digital et cetera.

But for now I think that's a reasonable assumption.

It's difficult to project out.

First hundred versus second hundreds I mean that over to Matt.

And for the first couple of hundred it's going to be pretty.

I would hope pretty stable.

But at some 0.1 would think deposit betas would drift higher.

We'll obviously be able to give you guidance on that in the future based on what we're actually seeing.

Got it and I just wanted to clarify something Brian that you said to Betsy did you say that you expect 2023 expenses to be between 59, and 60 billion and then for modest growth to return in 2024.

We said 22 is flattish.

'twenty, one and then grow modestly then.

Got it Okay got it and then the follow up question there is.

And your trajectory.

Good for you know getting back to 60 or 60% on the efficiency ratio what kind of timeframe are you thinking in terms of when you can accomplish that relative to the forward curve.

But I think that.

If we make progress each quarter basically where you know run at 66 were down year over year.

I think if I gave you the specific quarterly crossed over I basically give you an earnings projection for the rest of the quarter. So Erika I think.

If you look at the businesses Youre starting to see them.

Dropped more in line, obviously, we always have.

Such a huge wealth management business, which is a 27% pretax margin, which is industry, leading moves up to 30% last quarter.

The impact that becomes a bigger part of our business than others, but you'll.

You'll see relentless progress, but I can't give you the exact quarter.

Got it and just one last question on capital.

9.5% and.

A higher G. SIB surcharge when is that is.

Effective by January one 2023, so therefore, your minimum goes up by 50 basis points and Brian what how are you thinking of buffers relative to your new minimums I think one of your counterpart said that he was no longer thinking about first upon buffers as he thinks.

Of capital management going forward.

So Erika our G SIB minimum would increase effective January one 2024.

So we've got seven quarters to build towards that.

Bryan talked about operating and managing the company's 75 to 100 basis points.

Above our regulatory minimum.

That's obviously exactly where we are right now and so over the course of the next seven quarters. We just expect to build about 50 basis points of capital.

Got it thank you.

Well go now to Ken <unk> with Jefferies. Your line is open.

Hey, Thanks. Good morning, just wanted to look at the commercial side of loans at fourth quarter loan growth ex PPP was great and 10 in this quarter a little slower just wanted to ask you about just that end demand question are there any.

Why chain any interchanges in line utilization and just what are you seeing out there on the commercial demand side. Thanks.

Well our clients are definitely seeing supply chain challenges, they're working through admirably, but also seen inflation.

[noise] anything.

Labor and wage pressure so you know.

That I think we all know.

At the same time the economy is returning more towards normal.

Line utilization was returning more towards normal to that's part of what's driving our lunch growth. So.

Over utilization and commercial no and banking is 31, 7%.

Pre pandemic, our normal was around 35.

So you know that's another three point, 30% figure that's like $15 billion to $20 billion of loans potential as the economy continues to heal and as clients begin to take out utilization back. So it's one of the reasons, we're still comfortable with loan growth.

And we see the same momentum that we have over the course of the past 12 months.

Important in the small business area our originations are.

Strong and back past pre pandemic levels.

Quarterly originations.

And you're seeing home equity come back up even though mortgage would fall off I think pre pandemic, we did 3 billion.

So we have room on the consumer side and on the commercial side for further loan growth as the.

As people sort of normalize or behaviors and activities.

And nowhere.

You all read about the car industry. The line you just uses a car.

Colorado dealers is really low and it just as example that can't keep enough inventory on the on the law.

Got it and one follow up on that piece I know investment banking trading are going to be hard to forecast, but just any thoughts on some of the consumer related and brokerage related fee areas and you know theres been some you know some underlying.

You know moving parts. There just can you talk about just the growth trajectory of <unk>.

Some of those fee areas.

And I guess, we're just kind of leave the I'd be trading to we will see what happens in the markets.

Yeah, but I think a wise to do that when it comes to the card side I'd say flattish.

You know, we're managing to the total client relationship there that remains something that we're focused on total value.

So well.

Well, we'll see some growth there.

Well see it in balances will see it in NII, mostly I will see it in the deepening elsewhere.

On the asset management side.

Mostly it will be around market levels. So, we'll followed out as you will closely and a little bit of net new household growth and flows growth again. This year. So that's how we're thinking about it but I would say.

Across all kind of flattish slightly maybe slightly up.

There's only one thing to bear in mind.

It's just as a reminder.

On insufficient funds and overdraft, just remember that those start started to kick in in February .

And the remainder will pass through in March So that's probably like a start in may and that's probably a $750 million.

You know hit for the year, if you like on total fees.

Yeah. Thanks for that reminder, thanks Alastair.

Yeah.

Well go now to Steven <unk> with Wolfe Research Your line is open.

Hi, Good morning, I wanted to ask a follow up on the earlier discussion on the 60% efficiency ratio. If we look at what you achieved last cycle your terminal efficiency trajectory of closer to the upper fifties once the fed funds rate eclipsed 200 basis points and wanted to get a sense, whether there was a credible case for delivering it.

Better than 60% efficiency ratio to the cycle or are there structural factor supporting our higher terminal efficiency in.

In this coming cycle.

So Stephen you.

Thank you.

The dynamics could it be how big a wealth management business sits as a percentage of the total.

And just the dynamics of that business and that's always what constrained it's even though the rest of the businesses. If I if I remember at peak cycle. Both global banking went well below 50 considerable went well below 50, and then between markets and wealth management wealth management's done.

A great job of growing as loans and deposits that will help it but that's always going to be the debate and you should be cheering for strong wealth management revenues, even if it means a little less efficiency ratio.

Okay, well certainly be cheering for that Brian maybe just for my follow up on capital.

I know, we spent a lifetime talking about any OCI volatility and the like when I was hoping to get a better sense of given.

Given that our W. A growth has actually been the biggest source of capital consumption over the last couple of quarters, it's up about 9% year on year, just given the pace of continued strong loan growth that's anticipated.

Level of organic our W. A growth should we be underwriting as we think about the capital algorithm going forward.

Well I think what you're looking to is some of the RW Baird growth has been coming from a pretty significant loans rebound.

Particularly in commercial.

And I think you're looking at some of the investments we've made in our global markets business. Some of that's a little seasonal sort of pops up in Q1.

And some of it is year over year.

So going forward I think our growth.

With plenty of capital to support the growth that we expect in terms of RW race.

That pretty closely and getting the economies beginning to return to something more normal after bouncing around a bunch.

So this quarter when you think about those risk weighted assets 14 basis points Brian .

Brian talked about a third a third a third for share repurchase dividend and growth in that.

That's probably a fair starting point.

That's great color thanks for taking my questions.

Our next question comes from Vivek <unk> with Jpmorgan. Your line is open.

Thanks for taking my questions a couple of them.

Hmm.

What are you I heard the commentary about deposit balances, Brian familiar that there's still very high in the lower end customers.

If we start to get a little more granular more very recently are you starting to see any draw down with higher spending because of inflation.

Any color on that I know.

A quarter they are but as we start to look forward to see how things are progressing and are we seeing that yet.

It's actually the opposite of that they grew faster from February to March and that's partly because of tax returns the vector to have it basically the broad way to think about it is beginning.

Around it may of last year, they grew up sort of 1%.

1% not annualized but 1% per month pretty consistently 1% to 2% are higher at the lower end balances only in the month of November I think we saw a slight down draft in the lower end balances and that pick back up in December it grew it grew.

<unk> February March each month. It grew this quarter and the March month was the strongest so we might we might we haven't seen the data for April yet, but it's it is growing very strong all the way up into the people who carried pre pandemic you have 10 to $20000 of balances are still growing very strongly so so we're not seeing.

That deteriorate at all yet.

A completely different question for you folks securities growth didn't see that this quarter, even if you ex out the you know the mark to market stuff.

What's your plan for that and are you planning to grow securities balances should we be or where you know what are you thinking at this point.

It all comes down to deposits.

If we keep growing deposits, we've got to put them to work. So oh. So you can give me more detail, but you got to remember that what drives the size of our balance sheets or right hand side, not a left and so to.

To try and we grew at 200.

180 190 odd.

Billion dollars deposits last year first quarter. This year first quarter. So if we grow deposits, but you should be cheering for on a core basis. We do we will then grow invest those deposits in a careful way.

And Vivek if you look at this quarter. We added 8 billion of deposits. We added 14 billion of loans, that's always going to be our first choice in terms of investment.

Securities balances came down a little bit 13 billion.

And remember if you go back over the course of the past couple of years.

Independently, we didn't see the loans growth.

So in many ways. That's why we've purchased some securities that was to replace the loans that were coming off.

Well, that's not what we're seeing right now we're seeing the loan growth.

So our first use will always be for loans.

And if we keep seeing the same kind of loan growth were seeing right now the securities may decline overtime. They may stay flat, we'll see it depends on deposits.

How about in terms of liquid assets what level should we think should we expect you would bring that down to because those.

Those have come down a little bit you know when you look.

At them quarter over quarter, and Theyre also down some year over year is there room for that to come down further and what sort of a run rate for that assuming let's assume deposits were flat and it didn't go down didn't grow much.

Modestly windows, where can that be drawn down too.

Yeah. So liquidity is down in the quarter, that's largely based on funding the global markets business with seasonal.

If you look year over year as our liquidity numbers, you'll see our.

Global liquidity sources at $1 1 billion or up like a school from Q1 of last year.

H T L. A surpluses up you know it that's largely based on things like again, Bryan Bryan talks about what deposits are two trillion.

We have were probably more liquid now than we've ever been.

And we've got plenty I think as we continue to grow deposits in the future I hope our liquidity just continues to stay where it is or go higher.

Thank you.

Yeah.

And we'll take a follow up from Mike Mayo with Wells Fargo. Your line is open.

Hi, I was a little disappointed about the question related to terminal efficiency I get if you waited just wealth management, but with all the technology investments shouldn't your incremental pretax margins be greater when your new revenues in it so shouldn't your terminal efficiency.

Our business makes suggest it would be better than it was before for example, specifically your pre tax margin in 2021 was 38%.

Where should your pretax margins be on new revenues that are generated.

The new revenues generate will generate more larger profit my mic and the efficiency ratio.

Yeah.

Let's always see wherever we get two but it'll keep coming down and we were.

Moving every.

All the way through until.

Until the pandemic and with operating leverage every quarter and and and I think it is.

I'll go back and check on a quarter by quarter I think it improved every quarter leave aside some seasonality, but yeah, we will keep driving it down head count.

Yeah. This quarter was down another 100 people. It was down 4000 last year, we are adding salespeople, we're opening new branches, we're investing franchise we've opened.

Seven 810 markets and we have $30 billion of new deposits in those branches to give you a sense and there's only 140 branches. You know you know our strategy, Mike. So it's always going to come down to balancing all of that but yeah. The other day, we're saying expenses are flat this year and that improvement is going to flow to the bottom line.

Yeah, that's a pretty strong impact efficiency, especially because it's going through the businesses are you even the wealth management business.

And then one other follow up I mean, I don't think there's a recession this year, but I've been wrong before and the stock market is telling us there might be a pretty good chance of a recession, so Brian and Alistair you know why do you think the chance of a recession is in 'twenty 'twenty. Two you have a lot more people data businesses insight I ended.

The U S economy, and you need to have a percentage for that for your provision for loan losses. So is this 50% chance 20% chance what do you what do you think Brian kind of gut feel and alister by the numbers.

You know I think.

If you are too.

<unk> argued a critic of it an observer thanks, Mike, but the reality is as you know we have economists are predicting recessions and you know all the adage is about them, but they're out in the routing as they always have a prediction for recession.

It runs around 10% to 20%. According to economists talk to me, but let me flip to what you really said, which is we waited the adverse scenario factor at a 40% factor in our baseline reserve setting that produce a formulaic reserve, which is around 40% of our total reserves.

And so we have reserves on top of that the basis for tough times. So yeah, I'm not going to shatter box with you about a soft landing hard landing and all that stuff, but you know the reality is they've got to take the inflation that system. They know that they are raising rates to do that but there's tensions against how.

Z a hard that's going to be obviously, a pandemic war, but also this issue that the massive amount of stimulus is still out there being spent so we're braced for every scenario. We model every scenario, but we don't I don't put a specific percentage I just that's somebody else's job to do that but our economists do not have a recession predicted.

And in terms of this year at around 3% growth next year, a little above 2% and even though there may be some quarters that are it showed modest growth I think they're all positive I got it right.

Understood. Thank you.

Our next question comes from Gerard Cassidy with RBC. Your line is open.

Hi, Brian Hi, Allison.

How are you.

Good thanks.

Oh. So you guys are very well positioned as you pointed out are for your balance sheet for rising interest rates, which seems very very likely this year obviously.

And obviously you guys are not a P T bolt, but the ban on crude battleship to term you know the balance sheet into a position and when the fed finally seeds, let's say in hitting inflation knocking it down they stop raising rates, maybe you didn't have to cut rates to get the economy going when do you guys start thinking about.

You know after the fed succeeds at reducing inflation that you may have to reposition the balance sheet and not be as asset sensitive.

We don't know there are just a start.

We pay you know this as well as anybody having been around this industry for.

A number of years, let's just say.

Yeah at the end of the day. The reason why we have securities investments is because we have two trillion dollars of deposits.

And a trillion dollars of loans and so we gotta do something with the money and the deposits are stable the core checking accounts there.

Core operating accounts for commercial customers. So we put it to work to extract the value for your for the shareholders and so.

It's not that we leave the balance sheet. It says we do all the work we do in the core franchise to grow the number of customers.

You have 10 or 15% since pre pandemic in core consumer checking customers.

To grow that.

Commercial customer base small business base, etc that results in us having a balance sheet that is positioned.

Up to two two.

To the benefit of rising rates, because we have so much zero cost deposits and so.

You know, what we don't sit there and say, let's move to the balance sheet, what we do as you try to protect it.

Cautious way other risks so we hedged the.

A couple a year or so year and a half ago. There were a lot of questions about Oh, my gosh, you're investing and rates are low and we told people you hedged it and now you're seeing the benefits of those hedges that gave up NII from then till now to protect the capital and that's what we did so we're always trying to manage.

Extracting the value of deposits given and then look the other side and see the capital constraint question and the impact of capital C. Other constraints honest, but it's it's really we and we don't invest in treasuries and mortgage backed securities. We don't take any more credit risk in the carrier and then they you know the treasury book for lack of better term because we take enough in the company. So I just don't.

We don't sit there and say, let's move around just how do we invest this and we may move a little shorter or longer than what we invest in but frankly, we swapped a lot of it the short just to protect ourselves so that we'd be able to redeploy to higher rates in the future.

Very good and then as a follow up.

On the G. SIB buffer that you guys pointed out that will take effect I think you said 2020 for this 50 basis point increase is there any strategies you can employ that could actually reduce that buffer before we get there or is it really just retaining more earnings from your balance.

In your day to day operations.

I think.

We're growing through it because it has waived its calculated that are not sensitive to our size relative to the economy, yet the stock probably all these kinds of things in it that move it around a little bit but the reality is I wouldnt.

When we look at the core customer base, we wouldn't constrained core customer growth we can always.

Make efficiencies move stuff around and we still believe it or not as you can see any other category of loans, which.

They're not core to our franchise still leftover frankly from 15 to 17 years ago without a heck. It was you know.

That we could let run off and stuff like that or sell out and stuff, but the reality is is that the G. SIB buffers growing because our customer franchise is getting bigger and a method of calculation does not.

Adjust for business success, Besides the economy stock market cap increase all those things, which I think.

You have pretty good favor of garage so.

So we're gonna have to retain 50 basis points more capital so divide that 50 basis points by seven quarters and you have.

Think about us pulling that through.

The question of buffers to that number.

You should expect us to operate closer to that 10, 75, just because frankly the numbers getting so big.

<unk> you know, we've never had an issue of a.

The size of capital implied by that buffer to the minimum regulatory minimum.

I agree with that.

Capital.

The earnings power of the franchise generated 15, 5% return on tangible common equity this quarter and will continue to go up.

Strong based on the improvement.

Thank you I appreciate it.

Yeah.

We'll take our final question from Chris Kotowski with Oppenheimer. Your line is open.

Hi, Yeah. Good morning, Thank you.

You know recognizing that our held to maturity portfolio. It doesn't get mark to market I would think though on an kind of underlying core economic basis. It's it's it's it's never fun to have a large bond portfolio that's under water.

And you know just.

Looking at your year end disclosures it looks like you know the vast majority of that held to maturity portfolio is as you know agencies with more than 10 year.

Maturity and I guess, how do you look at the extension risk on that portfolio. You know again, recognizing it's not March but economically is there any way to protect yourself in in kind of a tail environment where rates go up you know.

Couple of hundred basis points like they did in 81 or.

So let me address that one I think Brian's earlier answer to the first part of it.

Which is where we're not interest rate traders, where interest rate managers through a cycle, we've got to deliver for our shareholders in low rate environments, and we have to deliver for them at high rate environments.

Those mortgages protected us in a low rate environment.

And now what protects us in a rising rate environment is precisely the asset sensitivity, we still have left in the company.

So when you look at that one 4 billion of growth.

No. We're telling you you should expect NII growth from here successively in each quarter, that's what protects us its that balance between capital.

Earnings.

And liquidity.

And just the cash flow off the portfolio, even in a very low prepayment rates scenario you got to remember.

You know people pay principal and interest people pass away and then people move.

Irrespective of mortgage rates refinancing and you have those numbers all that cash can be deployed at the higher rate structure. So it turns a little faster than people.

Because everybody takes it to zero.

Zero prepayment, but the cost the cash flow off of it.

Fairly significant civil redeploy that and walk back up a ladder, but and also remember economically yep. We don't market deposit. This is one of the great debates, we've all had in proper accounting for banks, but the other day the deposits yep.

Our growing.

Economically at a much faster rate than the than the <unk>.

Degradation on the mortgage backed securities portfolio.

Okay alright, thank you.

Yeah.

Alright, I think that's all my questions. Thank you for joining US again this quarter. It was a strong quarter by the team and I want to thank the team for all the great work they've done.

And the other day as we told you last quarter and a few quarters before that you'll go into a growth machine at bank of America is is driving hard growing its market share growing as deposits growing its loans and doing well in the market, we will accelerate the P&L from that growth with the higher rates as we told you will continue to hold expenses in check.

Driving operating leverage and that will always be a focus to get the most efficient growth we can't.

Strong customer activity, which we spoke about it continues.

Even in the first part of April here, and so that will end up driving it is good for our company to drive earnings. So thank you. We look forward to talking to you next time.

This does conclude today's program. Thank you for your participation you may disconnect at any time.

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