Q3 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.
Please note this call maybe recorded and I will be standing by if you should need any assistance. It is now my pleasure to turn today's program over to Lee Mcintire. Please go ahead.
Thank you Catherine.
Good morning, welcome Hope everyone had a good weekend. Thank you for joining the call to review our third quarter results I Hope everyone's had also had a chance to review our earnings documents released earlier this morning.
As always there available, including the earnings presentation that Brian and Alister will refer to during the call on the 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 I'll ask Alastair Borthwick, our CFO to cover the details of the quarter before.
Before I turn the call over to Brian I'll, just remind you that we may make forward looking statements and refer to non-GAAP financial measures during the call.
Forward looking statements are based on management's current expectations and assumptions and they're subject to risks and uncertainties factors that may cause actual results to materially differ from expectations are detailed in our earnings materials and the 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 our earnings materials are available on the website and in the dogs. So with that I will turn it over to you Brian . Thank you.
Good morning, and thank you for joining us I want to start by sending our thoughts to the impacted areas from the devastation of the recent storms, especially are impacted teammates and their families.
Our teams.
We remain busy assessing those clients and associates.
Shifts in impacted areas.
So I'm going to start on slide two of the earnings materials. This quarter Bank of America reported $7 $1 billion in net income or <unk> 81 cents per diluted share.
We grew revenues, 8% year over year, we delivered our fifth straight quarter of operating leverage every business segment delivered operating leverage this takes us back to our five year, Brian before this pandemic.
Highlights this quarter were also once again marked by good organic customer activity.
This was coupled with a significant increase in net interest income.
In addition, the teams adapted well to our new capital requirements and as a result, our common equity tier one ratio our CET one ratio improved by nearly 50 basis points to 11% moving 60 basis points above its current minimums.
The decline from prior year reported net income and EPS comparisons reflect a reserve build versus a reserve release last year at the same time, however, our asset quality remains strong as net charge offs and several other metrics in fact improved in the second quarter 2020 to pretax pre provision income grew 10% year over year.
From a return perspective, we produced a 15% R. A T C you're getting a 90 basis point ROA.
Our efficiency ratio this quarter dropped to 62%.
Taking out the litigation it would've been 61%.
So even while investing in marketing and people and technology and physical plant. The team continues to drive operational excellence.
As a way to think about this is we currently operate at bank of America with less people than we had in 2015 seven years ago.
Let's go to slide three there's continued investments over the past several years in our people tools and resources for our customers and teammates.
As well as our new and renovated financial centers has allowed us to continually enhance the customer experience. If you will organic growth as we drive responsible growth in the third quarter alone. We added more than 400000, plus net new consumer checking accounts we have.
Added one 3 million new credit card accounts, we added 100000, new funded investment accounts in our consumer business customers are finding it increasingly convenient access to test digital users grew to 56 million logins by those use users cleared 3 billion in the past quarter of 1 billion per month Erika.
Erica.
Surpass 1 billion interactions since it was introduced four years ago this quarter.
It's become a primary interaction method for our clients with more than 130 million interactions this quarter alone.
When you look at our sales, 48% of third quarter sales of digital.
36% year over year increase.
This occurred even as we fully reopened our financial centers and at our teammates also Sally.
Now once again you can find all these digital statistics and more in the appendix of our earnings materials usual I encourage you to look at those statistics for every one of the lines of business not just consumer they compare favorably to competitive measures, we see because we when we see people who actually publish their numbers.
At the same time 27 million customers visit our financial center in the quarter.
This highlights the importance of having both high touch and high Tech approach.
The golf Spanish business, we added 400 advisors this quarter, our advisors added nearly 6000, new households, and the Maryland private bank areas. We saw some solid net flows despite the turbulence of the markets.
80% of our G. When customers are digitally active 30% of the new Merrell accounts are opened digitally.
That combined with a cut the consumer investments business has seen more than 100 billion of net client flows year to date.
We continue to see increased activity, both both had investments as well as the banking products in this area this quarter.
<unk> opened a record number of bank accounts do you I'm also saw its 15th consecutive.
Quarter of average loan growth the banking capabilities and success differentiates our platform.
The business grew revenue deliberate operating leverage and saw a record pretax pre provision growth even in choppy markets.
As he turned to global banking.
Ending loan balances were down linked quarter. However, we did see solid production in this area.
It was offset by client pay downs decrease in the value of foreign denominated loans.
Loan sold to manage our risk weighted assets, which helped us build the capital levels I talked about earlier as.
As we look at global markets. The team had a strong third quarter in sales and trading performance in fact in the third quarter of 2000.
22 were the strongest since the third quarter of 2010. It grew 13% from last year. It was led by strong performance of our macro affect business, which benefited by investments made over the past year, we had no trading loss days this quarter.
But let me also make a few points using the customer activity highlighted on the continued resilience of bank of America's broad customer base.
So if you look at slide four you can see some.
Points about the overall health there.
Demonstrate what's going on in the customer base.
I'll make a couple of key points first consumers continue to spend at strong levels second.
Consumer customer average deposit levels for September 2022 rate remain at multiple other pre pandemic levels you can see that in the lower right. There there's plenty of capacity for borrowing as credit and card balances Bac are still 12% below pre pandemic levels and the payment rates on those credit cards that 1000 basis points over pre pandemic levels.
So im spending a couple of thoughts.
Perspicacious analysts might wonder, whether talking inflation and recession other factors with Fructify.
It.
So we're spending growth we just don't see here at bank of America year to date spending of $3. One trillion through September is up 12% compared to last year second as you look across the periods you can see the trend of year over year spending as we entered the pandemic, we saw spending decline in quickly recover and grow across the quarters, while still strong in September .
10% spending growth has slowed just a bit from the 12% year to date pace, which shows you that early in the year was a faster year over year growth rate.
But still strong in the first two weeks of October showed that strength, that's still growing at 10%.
Notable that isn't just inflation that is driving spending as transactions are up single digits year over year pretty consistently.
You'll also note on the bottom left the continued growth in goods and services, particularly retail toward experiences of travel entertainment well.
Well for your price volatility continues it is not currently impacting spend levels in this quarter as prices stabilize.
Although customer liquidity.
The level of customer corporate liquidity remained strong average deposit balances of a consumer customer remained at high levels relative to a year ago.
These bouncers still multiples of the pre pandemic period, and they were largely unchanged at these elevated amount amounts for the month of September .
These deposit levels suggest continued capacity resetting at healthy levels.
On slide five we show you as we did last quarter. Some other impacts some other stats about resiliency.
You can see what do you look at early or late stage card delinquencies.
They all remain well below our pre pandemic levels. These are decades old loves and we're just now seeing a gradual move off these lows in early stage delinquencies late stage delinquencies are still 40% below pre pandemic levels keep.
Keep in mind asset quality metrics were strong even before the pandemic.
On this page what you see is at 30 and 90 day card delinquencies if you.
Compare them against the average for the past five years, leading up to the pandemic a period of growth and unemployment falling.
Those averages about 183 basis points to 91 basis points respectively.
So the current ratio delinquencies would have the worst in 30% or more to even approach that five year pre pandemic average at a time of economic growth and falling unemployment.
So consumers remain resilient.
Let me take a couple of minutes to talk to you quickly about the balance sheet and I'll turn it over to Alastair.
How did you think about loan and deposit balances.
Balances in general we're seeing what we expected.
Monetary policy tightening on deposits, we see clients with excess liquidity looking for yield without being a global banking movements, you can see from moving from noninterest bearing to interest bearing.
Counts or.
Our wealth management business, where we saw our clients shift out of brokerage sweeps into preferred deposits or other investment products like treasuries that we offer.
But if you look at our core customer base, where the transaction balances drive yeah. That's the outcome. We are seeing steady balances driven by new account activity and a good value proposition we have for our customers.
When you think about loans consumer loan balance growth was led by card and reflects increased market and continued reopening of financial centers building high levels of new customer relationships and commercial while average loans rose 16 billion linked quarter or 12% annualized you did see a modest earnings decline as good loan production was offset by the sale.
Our syndication of $3 billion of loans and also by $4 billion of negative foreign currency impacts.
We obviously took activity on balance sheet optimization, which helped our R. W. A discussion that happens.
It would be just sort of a W. Hayes and led to the capital levels I talked about earlier.
We have provided an update in the appendix.
As to the credit transformation of a loan portfolio and a few other consumer credit support slides that help illustrate the quality of our portfolio. After years of responsible growth we update those slides again this quarter to show you that and you can find them in at Pemex, and I recommend them to you.
So in summary client activity remains good.
So that's improved quickly in a customer's resilience and health remains strong.
We've also manage our expenses very well, we drove operating leverage to manage the balance sheet, well and approve capital either increased our dividend and bought back a modest amount of shares.
We call that responsible growth with that I'll turn it over to Alastair.
Thank you, Brian and I'll start by adding a little more detail on the income statement and refer you to slide six highlights.
You can see here revenue of $24 5 billion grew 8% with NII, improving 24% year over year, while our fees declined 8%.
And I'll cover the NII improvement in just a moment.
Our noninterest income.
<unk> T and the levels of market activity drove a year over year decline in investment banking and asset management fees, while sales and trading benefited from investments made in the business.
The volatile market conditions.
Additionally service charges moved lower for two reasons first in consumer we completed the sweeping changes around insufficient funds from overdraft and Jim Martin a 90% reduction from June of 2021.
Second our corporate service charges declined as earned credit rates increased for clients and that overwhelmed organic growth in the gross fees associated with Treasury management services performed for our clients.
Expenses this quarter were $15 3 billion and they included the settlement of our last large remaining legacy mono line insurance litigation.
As you likely saw on October 7th we filed the 8-K announcing a settlement that resolved all of the outstanding litigation with them back and that dates all the way back to the 2008 financial crisis.
We recorded 354 million in litigation expense this quarter above previous accruals for payment of the settlement.
And without that litigation cost or expense would've been just below the 15 billion Mark.
Okay, let's move to the balance sheet and then look at slide seven where you can see during the quarter. The balance sheet declined 38 billion to three points zero seven trillion.
That was driven by a 46 billion to climb in deposits and coupled with a 53 billion decline in securities.
Our average liquidity portfolio declined in the quarter, reflecting the decrease in deposits and security levels at 941 billion. Our liquidity still remains 365 billion above pre pandemic levels just to give you an idea.
Just how much our liquidity has increased.
Shareholders' equity was stable with the second quarter at 270 billion as earnings were offset by capital distributed to shareholders.
And the change in OCI from rate moves.
We paid out 1 billion eight in common dividends and bought back $450 million in gross share repurchases and that covered our employee issuances in the quarter, leaving no dilutive impact for shareholders.
The OCI declined $4 4 billion as a result of the increase in loan rates and we saw the impact primarily in two ways first.
I had a reduction from a change in the value of our a F. S debt securities that was a billion won and that impacted CET one.
Second rates also drove a $3 7 billion declaimant, you'll see all from derivatives and that does not impact CET. One that reflects cash flow hedges, mostly put in place last year against some of our variable rate loans and that protected us against CET one.
With regard to regulatory capital, our supplemental leverage ratio increased to five 8% versus our minimum requirement of 5%, which still leaves plenty of capacity for balance sheet growth and our two like ratio remains comfortably above our requirements.
Okay, Let's go to the CET one waterfall on slide eight and we can talk about that as you'll recall back in last quarter, we talked about our June CCAR results, where our stress capital buffer increased from two 5% to $3 four.
And that increased our overall CET one ratio minimum requirement from 9.5 to 10.4.
As of the beginning with the fourth quarter.
Our capital levels today remains strong with 176 billion of CET, one and through the good work of our teams we improved our CET one ratio by 40 basis points compared to June 30th taking us to 11% that leaves us well above our new 10.4% minimum requirement.
So we'll walk through the drivers this quarter first it's $6 6 billion of earnings net of preferred dividends and that generated 40 basis points of capital.
And then also importantly through optimization of the balance sheet and managed our R. W. Eight balances down and that added 26 basis points more of capital ratio improvement dividends.
Dividends used 11 basis points of capital.
This quarter the movement in Treasury and mortgage backed securities rates caused the fair value of our E. S. S debt securities to decrease and that lowered our CET one ratio by seven basis points.
We remain well positioned for the rate movement because of the hedge of a large portion of this portfolio continued room to protect us from a OCI movements, while benefiting NII since fluid since swapped to floating so we feel like our teams rose to the challenge.
Well this quarter in terms of increased capital requirements.
On slide nine we've laid out of average loans.
And looking at those loans and providing a bit more detail on a year over year basis, you can see 12% average growth as commercial loans grew 17%.
Consumer loans grew seven.
Within consumer credit cards grew 12%.
Focusing on more near term growth versus the second quarter of 'twenty two our average total loans grew 8% on an annualized basis.
Led by 12% annualized commercial loan growth and 21% annualized credit card growth, while other consumer loans were relatively flat linked quarter.
This slower linked quarter growth included two notable impacts that Brian mentioned.
We saw good <unk>.
Marshall loan demand and we also saw FX valuations adjustments as a result of the strong dollar and then some loan sales and syndications that lowered our RTW ways.
Partially offsetting some of the strong card growth in consumer loans, we sold about 1 billion of residential mortgage loans.
Adjusting for the FX impact and loan sales loan growth from Q2 was closer to the industry's growth rate.
Let's focus now on deposit excuse me slide 10, and you can see there that our average deposits year over year or up 1% at 1.6 trillion.
Noninterest bearing deposits were down 3%, while the interest bearing are up 4%. So overall, we grew our deposits.
As you would expect in a rising rate environment, we've seen some shifts from noninterest bearing into.
Interest bearing and it's important to understand the makeup of these moves.
In consumer our total deposits are up 7% year over year.
These are core and foundational elements of the customers' financial activities.
<unk> seen growth in both noninterest bearing and interest bearing balances and we remain very disciplined on $1. One trillion of total consumer deposits well fed funds has allowed us to be in a courtroom.
So customers see the value in their total relationship with us who their personalized card of engagement.
Industry, leading digital capabilities and rewards, we expect that to continue.
Do we expect deposit rates to increase yes of course, and we will remain both disciplined and competitive and that is built into our asset sensitivity.
On a linked quarter basis, our consumer deposits moved lower by less than 1%.
In wealth management total deposits were flat year over year and again, it's important to understand that as expected. These are the clients, who generally have more excess liquidity and have historically saw higher rates both in deposit accounts as well as movements outside of deposits, where we offer alternatives.
For those claims.
While flat year over year within that we saw a $12 billion decline in year over year average deposits on.
Our brokerage platform with some shifts from sweeps to preferred deposits within the platform.
While narrow bank deposits.
And deposits with private bank have grown 12 billion.
The higher tiered preferred deposit products represent a little more than 20% of the mix of deposits and they're moving largely inline with short term rates.
While the other 80% or so.
The products are paying much lower rates.
On a linked quarter basis, we saw total she went on deposits declined by 7% further highlight these trends.
And global banking, we hold about 500 billion in customer deposits and we saw a 7% year over year decline.
In a rising rate environment, where excess balances can be more expensive, we typically see some runoff.
Particularly in the high liquidity environments as claims supposed to use cash for inventory built.
And begin to manage their cash for yield and we've seen the mix of interest bearing deposits moved from 30% a year ago to nearly 35%.
And we're paying an increased rates on those interest bearing deposits.
Pricing is largely customer by customer based on the depth of relationship and many other factors and again, we're not really seeing anything unexpected here.
Because at this point, it's still favorable to the last cycle and as we would just note relative to the last cycle, if that increases are being pretty rapid.
And we'd expect to pay higher rates as we continue to move through this rate cycle.
It's probably too early to say right now if at the end of that cycle. The percentage of those rate pass throughs will be similar to the last cycle.
Turning to slide 11, our net interest income on a GAAP non FTE basis NII in Q3 was $13 8 billion.
F T E N I remember it was $13 9 billion focusing on F. T E.
Net interest income increased $2 7 billion from Q3 21 or 24%.
And that's driven by benefits from higher interest rates, including lower premium amortization.
And from loan growth.
The second quarter NII is up 1.3 billion driven largely by the same factors plus an additional day of interest in the quarter.
Year over year now average short term interest rates have increased 200 plus basis points driving up the interest earned on our variable rate assets, while we've maintained discipline on our deposit pricing and that has driven really 1 billion improvement.
Long term interest rates on mortgages have increased even more than short term rates.
And that's improving fixed rate asset replacement and driving down to refinance some of mortgage assets. Therefore slowing the recognition of premium amortization recognized in our securities portfolio year over year that premium amortization was improved a $1 billion.
And Additionally, lower securities balances over the past six months modestly offset the benefits of year over year loan growth.
But then net interest yield was 2.06 and that improved 38 basis points from the third quarter of 'twenty one.
20 basis points of that improvement occurred in the most recent quarter.
And as you will note excluding global markets activities, our net interest yield was $2 five 1% in this quarter.
Looking forward.
As it relates to and I I guidance I'd like to make a couple of comments and first let me make a couple of caveats.
Our guidance is going to assume interest rates and the most recent forward curve and that didn't materialize.
That we see modest loan growth.
And modest deposit balance changes with market based deposit pricing increasing baked in.
With that said, we expect and I I in Q4 to be at least 1 billion in the quarter higher than Q3.
So last quarter. When we were together we told you we expected to see consecutive NII increases of about 1 billion in Q3.
And another billion in Q4.
And that would make a total of 2 billion in Q3 and Q4.
Given we've just put up 1.3 billion in Q3 and that outperformance and refresh of our expectation for Q4 at 1.25 billion.
Saying that aggregate quarterly improvement won't be the 2 billion. We initially thought.
Increased to.
Around $2.6 billion or more.
Turning to asset sensitivity and focusing on a forward yield basis.
At September 30th declined <unk> 7 billion to $4 2 billion of expected and I I over the next 12 months with my roughly 95% of the sensitivity driven by short rates.
And on a spot basis, our sensitivity to 100 basis points instantaneous rate hike would be five proteins.
Okay, let's turn to expense and will use slide 12 for the discussion.
Third quarter expenses were $15 3 billion and were flat with the second quarter.
Litigation costs for our settlement in Q3, nearly offset defines agreed to last quarter on a comparative basis and it's nice to bring resolution to these matters.
Without the costs associated with the resolutions in both periods expenses would've been just less from 15 billion.
We continue to make steady investments in our people technology marketing and financial centers and what allows us to help pay for these investments are the operational process improvements we've talked about.
And the increased digital adoption rates by our customers and by our bankers.
Our head count this quarter increased by 3500, and if we adjust for the release of our summer in terms of our head counts actually up by closer to 5500, we welcomed the 18 hundreds move full time associates from college campuses around the world into our company this quarter and we hired another 3800 net new people.
On top of that that included just less than 3000 across our various lines of business and another 1000 and staff and support and technology positions to support those lines of business and with all the great benefits. Some talented people already at this company with our great brand it highlights the bank of.
Because a great place to work.
As we look forward, we'd expect our fourth quarter expenses will lend our full year reported expense at approximately 61 billion.
That obviously includes the costs noted for resolve them in the second quarter and third quarter regulatory and litigation matters. So without that our expenses are expected to be a little lower than the 60 billion level, we talked about earlier in the year.
And we're proud of our team's discipline around expense, particularly in this inflationary environment.
At the same time, we're modestly increasing our level of investment and the company's future.
Our growth.
Turning to asset quality on slide 13, I don't want to start by saying just as Brian that the asset quality of our customers remains very healthy.
Net charge offs of $520 million declined 51 million from the second quarter that decline was driven by prior period charge offs associated with the sale of some non core mortgage loans, we discussed last quarter absent those losses net charge offs were relatively stable with the prior period.
Provision expense was 898 million in the third quarter.
And that was $375 million higher than the second quarter.
We built 378 million of reserve in the period compared to a modest release in Q2.
The reserve build in the quarter, primarily reflects good credit card loan growth.
Camp and microeconomic outlook.
Uh huh.
Even as we build our reserves for the future. This quarter, we saw many of our asset quality metrics continued to show modest improvement.
Npl's and reserve over criticized both declined from Q2 and you can see that in the supplement.
On slide 14, we highlight the credit quality metrics for both our consumer and commercial portfolios and there's only one point I want to make looking at this slide and that is delinquencies because our consumer delinquencies remained well below pre pandemic levels.
And as Brian noted earlier, we're watching closely the early stage card delinquencies as they begin to increase modestly.
Lastly, the recent hurricane impacted some areas, where we have strong market shares for many of our businesses and our teams have spent the past days assessing the damages and insurance coverage due to the loan level and.
We've already incorporated that analysis into our reserves for the quarter.
We compared our analysis two other large storms in recent years like Sandy Harvey and Irma were we encourage just a small amount of financial losses.
Uh huh.
Turning to the business segments, let's start with consumer banking on slide 15.
And Brian shared earlier, we've got organic growth across the checking accounts the card accounts and investments picking up this quarter not necessarily because if I remember were doing differently in the past 90 days, but as a result of many years of retooling and continuously investing in the business we.
We have the leading retail deposit market share we have leadership positions among all of the important products with a leading digital bank with tremendous compute capabilities for consumer and small business clients. We've got a leading online consumer investment platform and the best small business platform offering for our clients. So as a result.
<unk> customer satisfaction is now at all time highs and that is helping us to drive strong financial results.
The consumer bank earned $3 1 billion I'm, good organic growth and delivered its sixth consecutive quarter of operating leverage while we continued heavy investments for the future.
The impact of strong year over year revenue growth of 12%.
Partially offset by an increase in provision expense.
The provision increase reflected reserve builds this period, mostly for card growth versus a reserve release in the third quarter of 'twenty, one our net charge offs remain low and stable.
While reported earnings were only modestly up year over year pretax pre provision income grew 12% year over year, which highlights the earnings improvements coming through without the impact of the reserve actions card.
Card revenue was solid and increased modestly year over year spending benefits were mostly offset by higher rewards costs.
Service charges were down 338 million year over year as our insufficient funds and overdraft policy changes were in full effect now by the end of Q2 and because of the scale of the business and the diverse revenue we fully absorbed that revenue impact and then my benefiting from the benefits of overall.
<unk> satisfaction lower attrition in our client base and lower cost associated with fewer customer complaints calls.
Associated with <unk>.
Less nuisance fees.
Expense increased 11% from business investments for growth, including people.
Til and marketing along with costs related to opening the business to fill our capacity much of the company's increased salary and wage moves in the quarter impact consumer bank in the most.
Also continued our investment in financial centers opening another 16 in the quarter, while we renovated nearly 200 more.
Both digital bioterror and operational process improvements are helping to pay for those investments and as revenue grew we've improved the efficiency ratio to 51%.
Moving to slide 16 wealth management produced strong results earned over one 2 billion.
It's a particularly strong result, given both equity and bond market levels.
They remained unchanged for the rest of the year. This would be only the first time since 1976 that both equity and bond markets were down for the year.
Now the volatility and generally lower market levels have put pressure on revenue in this business and what's helping to differentiate Merrill and the private bank right now.
It's a strong banking business.
In this case to the tune of 339 billion of deposits and 224 billion alone. So while many of our brokerage peers face to close and revenue and margin we've seen year over year revenue growth of 2% and a margin of 29% driving a sixth straight quarter of operating leverage.
So enough revenue growth from banking products in Q3, but.
But more than offset declines in assets under management and brokerage fees.
Our talented group of financial advisers, coupled with our powerful digital capabilities allowed modern Merrill to gain 5200 net new households in.
Private banking 550 more in the quarter, both up nicely from net household generation in 2021.
We added 24 billion of loans since Q3 of 'twenty, one growing 12% and this marked our 15th consecutive quarter of average loans growth in the business consistent.
Sustained performance.
Assets under management flows before building in the quarter I'm forty-two building since this time last year.
Expenses increased 2% driven by continued client facing hiring and higher other employee related costs.
Our advisors are increasing their impersonal engage where the claims and that's partially offset by lower revenue related incentives.
On slide 17, you'll see our global banking results, where we earn 2 billion in Q3 on strong revenue growth as higher and I I more than offset lower noninterest income.
Earnings were down year over year, driven in large part by the absence of a prior period reserve release.
Our 7% revenue growth is quite healthy given the more than 40% decline in investment banking fees, coupled with lower leasing revenue.
While the company's overall investment banking fees declined 1 billion year over year and a continued tough market.
Investment banking fees did improve modestly from Q2 and the teams did a nice job of holding onto our number two ranking in overall fees in a tough environment.
Otherwise earn fees, we saw a decline in corporate service charges.
As enterprise.
Credit rates rose with increased rates and that outpaced the growth in gross treasury service fees generated from new and existing clients.
I'd also amongst U G T S benefits greatly from the NII off of deposits.
But more than offsets this so our year over year total GTS revenue was up 44%.
We also had lower leasing related revenue comparatively.
The provision expense increase reflected a reserve build of 144 million in Q3 22 compared to a 718 9 million release in the year ago period.
With regard to expenses, they increased 5% year over year driven by continued investments in the business for example in commercial banking our strategic hiring over the years. It's just continued to increase our client and prospect calling efforts.
Switching to global markets on slide 18, and as we usually do we'll talk about segment results excluding DVA.
<unk> continued geopolitical tensions and the changing monetary policies of central banks around the world continue to drive volatility in both the bond and equity markets.
As a result.
It's another quarter the favorite macro trading while credit trading businesses faced the continued challenging market environment with wider spreads.
And recession concerns so the third quarter of a net income of $1 1 billion reflects a good quarter of sales and trading revenue.
Focusing on year over year sales and trading contributed $4 1 billion to revenue improving 13%.
Thick improved 27%, while equities declined 4% improvement was primarily driven by growth in our macro products.
All our credit traded products were done.
And we've been investing heavily over the past year and several macro businesses that we.
Identified as opportunities for us and we were rewarded this quarter the.
The decline in equities was driven by lower client activity in Asia, and a weaker performance in cash partially offset by good performance in derivatives, where we saw increased claims activity.
Year over year expense declines.
Reflecting the absence of costs associated with the realignment of liquidates in business activity that we took in the fourth quarter of 'twenty one.
And the business generated a 10% return in the third quarter.
Finally on slide 19, we show all other which reported a loss of 281 million decline from the year ago period, driven by litigation settlement that I noted earlier.
Higher tax expense.
Our income tax expense I, just want to mention one thing that made our tax rate a little higher this quarter and that is with the recent passage of the inflation reduction act of 2022.
Among other things had incorporated there was a change that allowed solar energy investments to elect production tax credits.
Versus upfront investment tax credits.
And those production tax credits have the potential to earn more credits over the expected life of the production facility.
So as a result, our third quarter tax expense is approximately 150 million higher due to the net reversal of tax credits accrued for 2022 solar just taken in the first half of 2022.
That were recognized under.
Initial investment tax credits at a time and we replaced with production tax credits.
Aluminum pack this culture that net benefit to the shareholder overtime. This drove the effective tax rate a little higher this quarter to more than 14% still obviously benefiting from our ESG investment tax credits and excluding the impact of the ESG tax credits tax rate would've been approximately 24%.
Given the changed noted for solar investments, we expect our fourth quarter tax rate to be similar to the third quarter tax rate.
And we will examine the further effects of these changes and how they impact full year 2023 and report on that next quarter.
And with that I'm going to stop there.
And open up for Q&A.
And if you would like to ask a question. Please press star and one on your Touchtone phone you made with China yourself from the queue at any time by pressing the pound key.
Our first question today from Jim Mitchell with Seaport Global your line is open.
Hey, good morning, guys, maybe just on NII I think theres a lot of uncertainty around deposit behavior betas are what the catch up rate could be with deposit pricing, but you guys indicated that you do you're still pretty asset sensitive. So how do you think about the trajectory of NII next year can you kind of keep growing from.
The Q4 level through next year.
Posed to me so why would you.
It's really sorry.
Yeah, Yeah. So the short answer is yes, we believe so.
And we believe that really for three reasons. The first one is.
We're still expecting future rate hikes.
And you know there's going to be some lag to their impact.
So you'll start to flow some of that in Q1 for example, the late hikes in this quarter.
Second we're.
You know, we're anticipating once loans growth was still pretty good at this stage. So we're anticipating that will keep going on the loan side.
And then third we've got an opportunity to re strike our balance sheet.
Their rates with every opportunity that was things come off of our existing securities portfolio. So we've got our assumptions in there to be competitive on deposit pricing in each of the various segments, but yes. We believe we'll grow NII next next year.
But <unk> run rates.
Yes.
Okay, and then maybe as a follow up you guys have done a pretty great job on hedging and OCI risk and the F. S book.
My understanding is that the benefit is there sort of a delayed start swaps is there.
A material benefit coming from from those swaps in the fourth quarter and beyond.
So we think about so that so it's just the way our own L. M projected over the course of the next couple of years, we had some forward starting swaps those are going to pay us a floating in the fourth quarter and that's a contributor to the NII growth in the fourth quarter, but I think you should assume a little bit third quarter, most all in fourth quarter.
And that's that's probably it.
Okay, great. Thank you.
We'll go next to Erika Najarian with UBS. Your line is open.
Hi, good morning.
I want to watch it.
Wanted to ask a question about expenses.
Hi.
I'm bearish on the stock.
Bearish investors, it's not some sort of comp.
Tom shop.
Two how your closest peer one of your closest peers.
On expenses for them not just with you, but not sooner heard you loud and clear on the 61 billion Husky.
The litigation settlement for full year 2022.
As you think about coming years.
Think about the investments that you've made you've highlighted the head count additions in the third quarter, it's well the application of a wanted to personal lines expense growth still hold as we look forward or doesn't play soon and investments change that range upward.
So erika.
We continue to invest heavily along multiple dimensions.
Technology.
Restructuring and all the physical plant.
Marketing and so you know it but yet through the core operational excellence discipline. This company has and is shown as I said earlier seven years. Later, we have the same number of people the companies a lot bigger than it was in 2015, you know and so we continue to reposition money from things we can eliminate the work by engineering and work with you in the technology.
Investments, we made to enabling the customer uses that technology and tile back into the production side of the company and so we don't.
Yeah, I think if you think about just this year's third quarter, <unk> 22 versus third quarter 'twenty one.
Take it out the litigation was about $600 million increase in expenses year over year.
Millions of that's marketing.
Another chunk is.
Another couple of hundred million dollars technology. This poorly not annual to quarterly numbers and then on top of that you know that.
The amount of physical plant changed in that time is if you had not only in our branches that all over our company. So yeah, we feel strong with continuing to increase investments technology will go up.
15%, yet this year versus it being 23 versus 'twenty and those expense numbers were giving you and what we pay for it by not investing in hoping something happens.
We expect the things to Fructify near terms and bring bring forth the fruit and drive.
The expense efficiencies and effectiveness and that's how we can take the managers in that time period. I gave you the head counts flat to managers came down 10000 people in that period of time and invested all in frontline people put up sort of a client.
Got it.
Second question and.
On more significant buyback activity by them now I think that the E. T. One build a certain coming faster than what the street expected and I'm wondering do.
Do we need to see Duncan.
Welcome to marathon I get to that 11, 4% before having a buyback activity.
You could manage.
Javier buyback activity argue about Saddam 11 point for personal loans.
T y.
<unk> 2024.
G E M.
So we.
We bought back shares this quarter and still grew their capital.
Our job is to drive a.
Our company to serve our customers in that first order of business for our capital is always but healthy or you know the growth in the balance sheet, especially on the lending and an end market side and so you you should expect a spike buybacks will continue to increase but remember we are now sitting above what we were supposed to be sitting at on 112024 and so.
Next year as this is already here, so obviously to the the trade between building a buffer up a little bit more as you said from where we are now to a 50 basis points over the requirement.
Is a little bit differently already exceed the o'clock requirement, so well, we'll put a little bit towards the buffer will support the organic growth a little bit towards your buffer and then use the recipe that said back to you guys.
Okay.
We'll go next to Glenn Schorr with Evercore ISI. Your line is open.
Thanks very much.
I'm curious you as you can.
Capital builds was.
Who is going to be able to.
Mitigation, you mentioned no loss days in the quarter. Despite all this market volatility.
So I think you've mentioned some loan sales I don't know if that had to do some de levered loans working off book, So I Wonder if you could talk about.
Arnold you know you'd mitigation going forward include in that what's left in there.
The leverage loan book to to distribute thanks.
So there's.
There's a couple of things that are going on there I don't want to confuse them. Let me first talk about the leverage for instance that that we just walked through our numbers. It's in the numbers we pushed it to do it every week. So that's included when you look at those global markets or investment banking results. They include anything Virginia investment banking I don't think that's what Brian was referring to what Brian was referring to is.
B R. W. A optimization that we're doing as a company.
To make sure that we're in a great place to serve our customers and to be in a position to have the flexibility for buybacks in the future. So.
Couple of things that we did there.
We did sell some loans you saw that in prior quarters and all other you can see some of the legacy loans, we were able to sell in prior quarters. This quarter, we sold 1 billion of loans in consumer and wealth for maybe a billion in global bank and so it's not it's not big but it's important for us just to make progress in different areas and then.
Most of the RW lay optimization, Glenn that we've been doing is pretty quiet its take luby's securities that are 20% risk weighted asset and as they roll off and remember there's like 15 billion of them roll off every quarter, we can replace those with treasuries at a higher yield so we're getting more yield.
And we're reducing the yard W ways with that.
And then the other thing I'd, just say on our W E optimization as well.
We'd probably tap the brakes, a little bit loan production this quarter and a couple of places.
And we did a little bit of C. D S hedging here and there.
And you'll see if you look at our numbers, you'll also see that global markets. Just the way that customers are demanding balance sheet. The balance sheet is still growing.
But they are WD said, a little bit lower so there's a lot that goes into our W rates, but its ability here a billion there you've added all up and it makes a difference.
That was awesome I appreciate that.
And I guess very much related you just touched on it a little bit.
Curious.
You are prime and Super Prime Bank in consumer land, you gave us enough details I know, how you're thinking about growth there.
On the commercial side.
Given what we're all facing in this potential real buzzsaw other economy, how do you approach risk and.
And what business to take on I don't know if you can include in that thought I'm still kind of maturity wall Youre looking at on the commercial side of the book.
Thank you for all that I appreciate it.
Because I know.
We always say to ourselves.
Teammates is that you have.
The responsible growth across the last decade, plus leads us to where we are and so youre not going to do anything like this afternoon to change your the impact.
Candace and her team have makeup.
Meg of growth out there.
This quarter, but the fourth quarter. The first couple of quarters next year modestly negative growth.
Youre not going to change your portfolio overnight. So then the question is how do you manage it right. So, but we have limits across all the different categories and you can see the spread of risk in our supplemental book you can see that nobody is a big part of it.
Then we look at.
Customer by customer and anticipate who is gonna be.
Needing money in terms of refinancing, but also in terms of just operating like we did during the pandemic went through every single loan.
A company with 5 million of rather than more in our company on a quarterly basis for water and sure. We had it. So we've worked yeah. We worked the construct of the book the way underwrite client selection.
The structures of the deals etcetera, and it ended up in a in a spread of.
Diversity among industries in the U.
U S versus non U S et cetera, but then on top of that we always work in the book hard in our ratings integrity is very high as we can see it as measured in the snacks and other things against the other party is very rare that we have much to do and everything we have waited and we make sure we test that continuously with our credit review team on existing cats with them.
F screeners team because that in the end of the day to make sure we're not fooling ourselves in and we continue to look at that and frankly I think this quarter. We still had upgrades exceeded downgrades. If you look at Mpls and reserve over criticized they both went down this quarter again and so yeah, we're seeing improvement in the credit book, even though all of that parade a horrible that.
You sort.
Sort of alluded to.
And it wouldn't take a person's acacias person to to read that to say that because it's in the paper every day, but right now the credit continues to improve but it's what we did in the last 12 years 13 years at birth Oh. This in good stead as we head into this thing.
Thanks, Brian I appreciate it.
The next question comes from John Mcdonald with Autonomous Research Your line is open.
Morning morning, Thanks, I wanted to ask about the NII assumptions and maybe just your outlook around loan growth and what you're seeing in the economy, where you where do you expect from loan growth you mentioned modest and then also Alastair just the pace of deposit deposit mix shift and betas that you're kind of building into your <unk>.
Look would be helpful. Thanks.
Well on the loan side I'd say.
We talked about at the beginning of the year that we thought loans would be high single digits, and we slightly outperformed that obviously.
This quarter was a little bit of a night today.
Reset for us in some ways.
Didn't see that so much in consumer because of the card card goes just came through.
Commercial certainly we probably held that back just to touch. So we think we'll resume that sort of high single digit maybe mid if things begin to slow a little bit.
So we've got that in our forecast we said it was in the path that we've been on.
With respect to deposits.
I'd say on betas, obviously, we're just increasing those because we've got to be competitive in this environment and their own balances or do you think there's a.
There's a sense that the industry will be flattish that'd be done we think we're going to outperform the industry ever so slightly so that's what's largely baked into our assumptions at this stage.
And in terms of funding that the gap between the loan growth and flattish deposits Securities came down a fair amount. This quarter can you continue to run down the securities portfolio and what kind of volume do you get from cash flows off the book that yeah.
Yeah. So the securities portfolio runs off at about $15 billion a quarter.
There's a little more this quarter, because we actually had an opportunity to sell some securities that offset some gains some losses and freed up some iwa's. So we took advantage of that this quarter.
And so the securities number this particular quarter was a little larger but I think on an ongoing basis. John you should assume that we've got 15 billion that just comes in and then broadly. We've got you know 175 billion of cash at the Central Bank and we got another couple of hundred billion of stuff, that's mostly treasury swap to floating so we got lots of ways to pay for one score for the future.
Okay, Thanks, and if I could just clarify the discussion I mean, Erik around expenses of 61 billion. This year includes the litigation.
Did you say next year, you're kind of targeting low single digit expense growth would you say positive operating leverage.
Yeah.
Yeah, I think we said that it closer.
Litigation in the next year. He said you have basically.
Yep sure Inquisitive litigation and next year, we said at some point, we'll get back to the 1% to 2% rise, we'll just have to see how some of the ins and outs a play in terms of some of the stuff running off this year still leftover pampa them, but you have to look at the $15 three for three quarters in a row, you know honestly each quarters had a little bit of something in it Jon.
Do you think about the first quarter, where they had the FICA and that type of stuff in the second quarter had the regulatory seven circled obligation. So we're bouncing around low fifteens, we expect that run rate to kind of hold.
Great. Thanks.
Well go next to Mike Mayo with Wells Fargo. Your line is open.
Mike Hi, I'd like a little bit more details on how you add employees and resources for the additional revenues from the second quarter to third quarter. Your profit margin on the new revenues.
The 100% I mean that means about 2 billion expenses up there that's clearly that's not sustainable.
But I would like you to if you can tie that into slide 22, more digital users and sales out now aircraft 1 billion interactions are your headcounts not growing a whole lot now how long can you keep that going in.
Yeah.
Erratically, all this digitization over the past few years equates to like how many employees or how much in expenses or what type of terminal efficiency level relative to the past.
So I think Mike.
That's a lot of questions, but I'll try to sort it out a little bit are certainly a lot. There's no terminal efficiency ratio. Our idea is is when you work on expenses are not working on the ratio.
It ends up in a ratio of your work on the actual dollar spent and so they can keep working on investing heavily to to drive that and the digitization of all the operational process in the company is what you see on slide 22 in the consumer side and you see it in the other slides on some of the.
Wealth management and commercial operation is still a lot of paper and up in the GTS business that we continue to take out so yeah. That's what we're trying to do but it's really not what's what's driving the near term growth in employees has yeah. There's obviously financial adviser growth you saw the 400 this quarter, that's investing in that and that training programs and stayed with it.
And and hiring some people into the opposite especially outside of our footprint to get them growing again, there's investment in consumer banking commercial bankers.
Those are not huge numbers of big investment and the GCI V platform over the last year I think 1000 teammates last couple of years and so those investments will come in but but also you know where we're investing to drive the operational excellence platform and actually ensuring that we've got a great customer service are the only all the things that go on but a major part of it frankly is.
Getting even though we have less branches you ever you're less numbers of units we have more people in them because we continue to build out the relationship management capabilities of branches. As you said on page 22. The work goes out of the branches from the day to day sort of service things, we're putting more and more on relationship management and that's why you see 400000 plus.
New checking households, this quarter.
Which is a record for us going back to pre financial crisis, We don't know how far back. It is and you could look at you know small business originations are going up if you look at merchant services sales, which.
That was an investment in our sales force there and investments. So it's just a combination of driving that and they will continue digitization allows us to continue to be efficient effective in and frankly clouded the money.
Say back into marketing back into more technology to make us even more effective and then into people, where we need them, but you know Tom Scribner. It runs up our operations group sees a lot of stuff ahead of you can take out.
Bruce Thompson of credit operations platform across all the businesses a lot. They can take out at the time and we just got to work at it.
Like I think it's we don't necessarily translate it into.
That's sort of idea of how many more people this digital thing.
Placer.
Productivity metrics, but if you looked at by different line of business. It just take consumer for a moment the.
50% of our consumer sales and I were taking place digitally you can almost think about that being the equivalent of 4000 more financial centers.
And it turns out if you get to 35 million people banking in your pocket with a mobile phone it makes a big difference.
And then just a quick follow up then I'll say, Brian you said before and I benefits would.
Come barreling through to the benefit of investors that was the case. This quarter do you expect that to continue to be the case over the next year.
Yes.
We said it last quarter and I hope, but proved it through there to what you asked about last quarter.
And alright. Thank you, okay, what things might you have to think about it.
If you go back and look at the consumer page in the deck, you'll see it.
The cost of deposits.
Just the overall cost of all the stuff.
Against deposit basis continues to basically be 110, or 20 basis points, which is down from 300 basis points.
15 years ago, and that that is extremely leverages and by the way with a profit margins. He runs back up to 30% and driving through it. So yeah, we're letting that ni pour through which then drives those numbers.
And then one quick follow up.
That's it for someone else with it they didn't really know the consumer deposit betas are outperforming for you than for some others well why is that outperforming Alan do you think that's going to last.
The consumer if you go to the page on deposits, there's only one.
If theres a distinguishing fact that goes on a consumer that is.
At our company and generally which really drives off the tremendous value proposition, we have to be the core transaction core relationship.
Our bank for our customers and if you look at page 10, you can see that the.
Interest checking noninterest bearing accounts.
The dollar volume of deposit as a total percentage of deposits are a very high percentage and that's what we focus on and that that allows you to you know those are zero or very low rates because the amount of services that come around them. They have access to 3900 branches to our call centers to the digital platform to the ability to get legs out payments, it et cetera et cetera.
And that's what drives it so it's it's a it's the beta is a product of the mix more than it is a product of any pricing strategy because zero.
Just.
Zero.
Non interest bearing checking or zero in any rate environment.
Alright, thank you.
Our next question comes from Matt O'connor with Deutsche Bank. Your line is open.
Oh good morning, the Taco Bell was obviously softer than expected or we've got north of us really expected.
And it doesn't seem like much revenue drag from that.
Can you kind of flip the script here and when you get into certain bedroom for Ah and I guess I'm thinking you know what.
If you look globally there from peers that are needing to build capital.
Maybe there's some opportunity for further share gains in areas like markets and global banking.
Yep Yep look there.
Good position on capital even after the increased stress capital buffer results, which.
No surprise, our industry and our company.
And we feel that as you well know and and didn't get relief, but we have looked at in the future.
But the capital improvement.
Really didn't take a bunch of revenue honestly the only place we had a whole it was be careful almost.
Your loan production and the high end businesses I E. G C I b other than that that the <unk>.
Markets business has an allocation emphasize a balance sheet in capital and arguably way, which basically yeah.
Right.
Able to keep all the results were not even use it up and you know do you mean, it give me tomorrow and her team do a great job there the rest of that everything else is there was no real change in and frankly, where we are now those changes are.
Tapping has gone for this quarter already and we're out doing.
And what we should do.
And then separately just the little nerdy modeling question, how should we think about the timing of the tax credits being pushed out driving the tax rate slightly higher if you're an off rather not all other fee line.
I think as viewed in front of them with a talk for Ricardo.
Yeah. So I would think about it this way the effective tax rate for Q3, and Q4 likely a little bit higher.
And our original guide of 10 to 12, but for the full year should end up right around that 12% Mark.
And then you know I'd say this year, you're right in the fourth quarter and all other.
We have to take into account the fact that the E. S. G deal some of their time and so I think for your modeling I would use $700 million.
And after tax loss for the fourth quarter is the most likely.
I'm talking all other no.
And if you're asking me with respect to be.
Consolidated other income.
Then I'd use something very similar to the fourth quarter of 2021.
Where we had an $800 million pretax loss. So just used out there okay.
Okay, and that's the high watermark of a year right.
Yep.
Yeah, it's just the seasonal nature of these ESG deals and their installation generally.
Thank you.
Okay.
Okay.
Our next question comes from Ken Houston with Jefferies. Your line is open.
Hi, Thanks, Good morning, I, just got another question or two on fees can you just walk us through the some of the Delta is in like the service charges line just talk about I know you had mentioned on both you know the overdraft run readings are deposit changes and and and E. C or it's just you know how much of that is embodied by now and what should we look for.
Going forward from a from that that those areas. Thanks.
So Ken I think with respect to card you know kind of flattish because I would think about it right now a little bit of fourth quarter seasonal maybe that they should benefit their service charges. Most importantly on the consumer side all the M. S. F O D. We're not about the steady state run rate so that that wont be here.
And that's again in Q2.
This point forward.
The commercial part you're right to highlight with the commercial business. The G. T S businesses, adding clients, we're doing more with clients. So that's adding gross fees.
Many of the clients prefer that earnings credit adjustment.
That they essentially pay.
Interest receive interest and then pay fees so.
That came down probably 150 million this quarter I think you should expect that to come down again next quarter, just just with the way rates are going.
And then the other the other the other fees are probably pretty straightforward wealth will be all about market levels with a one month lag based on where the markets are invest.
Investment banking kind of flattish I would think it would be hoping for a little bit of positive at some point, but not necessarily this quarter.
And then sales and trading.
Your guess is as good as ours, but we generally point to sort of 15% seasonality in Q4 compared to Q3.
And what kind.
Off of obviously, a pretty good pretty good period.
Let me Ken just.
One of the things I think it goes a little bit to Mike's point, a little bit to some of the other points is that about.
80 odd percent.
Exactly I think it's 84, if I got it right of the interchange goes back to the customer base in terms of rewards products either directly through our own rewards programs or through some affinity group program. So you know obviously as charges go up a fair amount of that goes back now what does that produce in value.
Credible value so a lot of that in our preferred rewards our fee structure, which goes a reward structure, which goes across all products and our company. Yeah. If you even just look at the preferred segment and why deposit pricing and the stability of our accounts is different and that appears to be the last cycle. We'll see what happens. This time is that you know that.
Reward structure cement, our customer relationship and so that then has a 99% retention rate plus of those preferred customers are have about 80% of all the deposits. Our consumer segment and you know they are very stable important customer base. There's all the customer bases are so you have to think through on those fees were effectively investment fees.
And the duration of the cost base the length of a customer base of the profitability of the customer base stability of customer base and the fact that then we could not produce a lot more customers because we're not having to replace our run off and so and so as you see so many feline staying with NSS F O D by doing what we've done the attrition rate is obviously dropped to the floor and you're seeing more production of that account.
There is and these are all related to total revenue per customer profit per customer.
Opposed to any individual decision.
Great. Thanks for all that color.
One separate question on <unk>.
You mentioned that as credit continues to improve and you're seeing some some underlying he's just working through just remind us just where you are in terms of your scenarios from a seasonal perspective and if the economy does in fact change you know how waiter or you already to an already worsening scenario.
Yeah. So this quarter.
Very similar to last quarter, we use blue chip consensus as a baseline.
I'm talking 50 different economists some of whom are in the middle of some of whom are pessimistic themselves. Some of them are more optimistic that's 60% that's the baseline.
40% is downside scenarios that we've rebuilt.
And there.
That's the weekend them that we're applying and in this particular quarter just to give you an idea can once again, we increased our forecast for inflation in that scenario.
We increased unemployment in that scenario and.
And we decreased G D P through the course of the next couple of years. So all of that that you know that.
A few quarters now in a row, where that pattern was continuing.
Again, this quarter and we'll just keep adjusting that overtime.
First on <unk>.
Crow economic situations that develops over time.
Oh, so just to get them.
So.
Yes, it's a 5% unemployment like now and then continues all the way through next year. So there's a inherent conservatism built into that.
Reserving level, that's our reserves near 60, 40 and has those kinds of.
Uh huh.
Those kinds of statistics around so while it has inflation, but more importantly, it's based on that kind of unemployment level, which is 150 basis points over where we are and where we are in October . So it would be pretty quick five at the end of the year.
Thank you very much but it moves it moves even higher than that next year just to give you an idea of sort of in the mid fives, just just to give you a general sense.
Understood. Thank you.
We'll go next to Vivek G&A joke with J P. Morgan Your line is open.
Hi, Thanks, just a couple of questions.
Brian and Alistair.
Hung on marks a quick one how much were those in the third quarter.
So we didn't call that out the back just for the simple reason that was smaller this quarter, we run those through the P&L every week as you know so the results that you see in global markets and investment banking did include them last quarter, we called it out last quarter, but it was just bigger but this quarter, we didn't feel we needed to.
Okay, Brian you talked about tech spend being up if I caught it correctly, 15% and frankly is that right and if so what's the dollar amount of tech spend is that are you expecting it and that either this year or next year.
This year we were.
33 next year, we'd move up 15% off a three or four or something like that.
Okay. This is for the new appointment.
Development type of effect.
They have been.
People talk about the the overall numbers like 10 billion just did for the platform and all that stuff. This is purely newco.
Yeah, Yeah got it.
And what are you expecting as the impact of two key on deposits what are you modeling in.
Well, we're we're obviously muddling through it and probably the same thing you are we're gonna have to price competitively for deposits in an environment where.
Obviously market based.
Expectations are changing every day so.
We're anticipating it's going to be a little bit tougher from this point forward, but that's already baked into it.
I guess to get more precise as fast as you have better resources and better data than we do what.
What data is where do you expect betas to get to.
Well, that's going to differ by customer base and I don't want to get into this on this call just because it's.
Competitively important to for US obviously, but you can assume that at the higher end of wealth. For example, I've shared that we're passing through most of that at this stage, that's going be very different versus our.
Noninterest bearing accounts it will be different for operational versus non operational and commercial so there could be in different places.
But I'm anticipating that they will just continue to drift up over time.
Thanks.
Yeah.
We'll go next to Betsy <unk> with Morgan Stanley . Your line is open.
Hi, just a couple of questions. One is on how we think about comp going into next year. We've got this inflation rate. That's obviously hum seems higher for longer and while we expect it comes down over the next 12 months and going into the year with a pretty high level.
Social security is even going up like 8% as we all know so wondering how you think about that you you've done a great job at you know being on the front foot with regard to minimum wage increases in your shop. So shall we expect more of that to come into next year's expense guide as well.
That's what I think.
That's a week.
We.
Are you over the last several months, we have done the fifth.
Sure success.
Program, we did our usual merit, we did have three five and seven merit increase rather that are under a $90000 in compensation based on years of service. We went from we accelerated 20 dollar starting wage which are $48000 a year now.
And we'll continue those patterns are but and the good news is we're seeing the attrition.
Attrition rate move start to move.
Back Yep Yep.
12% dropped to six moved back up to a 15 ish and has now dropped down in the low fourteens and each each month and starts to drop even more so.
We feel that we've got the right mix and and you know we all look at benefits continuously we.
Continued that it didnt vary and it benefits during that increased our childcare a benefit to doing a $75 per month per child.
Our tuition reimbursement in advance and so it's a it's a complex package, but you know we should have we been able to absorb all that and keep expenses bumps along with $15 three a quarter for last three or four quarters, and we'll continue to do that and that's where it comes down to also using that.
The technology investments and operational excellence investments to continue to reduce the aggregate number of people, we have working in and and pay those talented teammates we have even more of our book.
Okay, so expectation for that to persist, meaning flat expenses year on year as we go into 'twenty three.
Yeah, We've said that we would start growing in the 1% to 2% category and that's part of these types of inflationary things that you're mentioning that your higher now and then working it down.
Overtime, and so right now we're running a low 15 per quarter or 15 three.
And we expect it to.
Maintain and grow but most of that growth does come as you are saying into the compensation and it ebbs and flows where it goes on a given when the markets are driving more investment banking markets and wealth management and you know those come down a little bit and the other compensation comes up as we've changed the base pay and things like that.
But he didn't it's just it's it's a.
200.
14000 people to very complex discussion all over the world. So you there's no one answer for the whole team.
Yeah, I got that okay. Thanks, that's helpful color just one other one Alastair on you mentioned the securities roll off that you've been able to you know mixed shift towards a higher yields over time can you give us a sense as to what kind of pull to par are we should be thinking about for the model on the E. S.
See I had you've had to take yeah, how many quarters or years should we be thinking that gets erased over.
So I'd say on the treasuries generally speaking is just think about the duration of that being somewhere between four and five years.
And on the mortgages, it's probably seven to eight so it takes a while to pull to par and then there'll be some derivatives as well and I think the team can probably help you model that at some point, but those are those are broadly speaking about the numbers I would use.
Okay. Thank you.
Obviously, it'll it'll be faster for any securities that repay anytime.
Right Yeah.
Yeah got it thanks.
Okay.
We'll take our next question from Gerard Cassidy with RBC. Your line is open.
I went through my brain.
I'll start.
How much do you you touched on there as you know some early stage delinquencies in the consumer book and not so much with the hurricane but can you give us any color in your members obviously, a very strong but can you give us some color of what you're seeing there is it a lower FICO score customer anything you can read into it.
Yeah.
This is one of the things that.
They already have to careful because obviously when a person doesn't pay you the FICO is going down.
Factors so.
It is the origination statistics, we've put in the back of the deck. There are very strong remained strong.
And what we're seeing is yep I gave you the five year averages, which is still far exceed where we are today, we're still lower pre pandemic. So even though we're picking back up the the world quote normalization.
Good.
Asked people to be careful because we're moving back to what was all time lows and when I didn't put the bay area. So I think if you look in your auto business you know the number of.
Repossessions and stuff is down half on a monthly basis. So we built under responsible growth we built a book in the consumer side of the new would be durable through different.
Outcomes, which is what we do on the stress testing and what we do on the it had reserve setting process and stuff, but also through actual outcomes and what you're seeing is it's weathering a yep.
Do you have any notion of issues in the economy, well now and in our commercial book as we said yeah, we still see.
Upgrades exceeding downgrades at the simple way to think about it I think we're through the P&L provision cost.
The flat reserve build.
Pandemic was basically.
Billion dollars a quarter, we're running around that number now.
That that's building $400 million of reserves is little different constitution, and that means less charge offs to pick up you're going to see the reserve builds start to mitigate because sort of.
Sitting here with a pretty conservative scenario now and it'll all depend on that as we look forward, but it didn't.
The baseline is not baking in effectively a recession based on our budget.
I think too if you if you went back through our supplement over the course of the past 10 years, you're going to find these members are so low.
Squinting to see a change here.
And it's coming off of really historically.
Extraordinary numbers so.
It is a little bit of movement, yes.
But is it the second best of all time, yes.
Very good very good color.
Okay.
Up on the provision Brian you just mentioned about the $1 billion in the past.
If you took that worst SKU you guys. I think said 60 40 in terms of either a reserve build in terms of the base case on the economy versus a really difficult economy, if that really difficult economy went through 100%.
What type of provision on a quarterly basis would that push up too.
Yeah, I mean, I think we have that.
But remember that it's I'd be careful about that because basically the baseline now has built into it.
Fairly.
Yeah.
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The four pack in the near term and so I you know I I wouldn't speculate exactly the numbers, but it gets off.
A bunch of reserves with a 15% unemployment and a projection that that was going to go out of working but I think it was in the pandemic and you saw us move up if we're sitting closer to see what we called Cecil they want them Pan pandemic.
Implementation and then you can see some of that in our stress test. So I you know, we don't really speculate on that yet, but we have on stress tests to test it to make sure and you can see the fed stress test and the adverse case, you can see the numbers, frankly, which I don't think we'd ever materialized given yet.
You do in a period of time between that in there, but if that gives you some sense. If you look at those.
Very good I appreciate the color. Thank you.
Yeah.
We'll take our final question today from Charles Peabody with Portales. Your line is open.
Yeah. Most of my questions were asked already but I was just curious if you had any thoughts about how the Basel three and game might play out and the timing of implementation of that or any general thoughts and color.
So no particular updates at this point, obviously, we're waiting along with everybody else.
And once we get the Roes Charles will sit down and.
I'll start working through our own capital base, but obviously as Brian pointed out earlier, just the fact that we've now put ourselves in a position where already we're ahead of where we need to be in January of 2024, We've got a lot of flexibility at this point for whatever the end game does come up with.
Thank you.
Okay well. Thank you for all your questions and your attention. Let me just summarize for the third quarter of 2022, you saw our responsible growth in action. Once again, we had organic growth in all businesses, we get topline.
Revenue growth driven by the NII increases we had strong expense control flat expenses for the third straight quarter operating leverage for the fifth straight quarter and a good.
Good work on that is that we had good risk management and you can see that we're still running strong our risk parameters and we built the capital to the end state one 124 levels that we need.
That's what we call responsible growth and now you're saying interaction. Thank you.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
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