Q4 2022 Bank of America Corp Earnings Call
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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 will be recorded and I am 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.
Good morning, welcome. Thank you for joining the call to review the fourth quarter result, I know, it's a busy day with lots of banks reporting and we appreciate your interest I Trust everybody has had a chance to review our earnings release documents, they're available, including the earnings presentation that we'll be referring to during the call on the Investor Relations section.
The Bank of America Dotcom website.
I'm going to first turn the call over to our CEO , Brian Moynihan for some opening comments and then ask Alistair Borthwick, our CFO to cover some other elements of the quarter.
Before I turn the call over to Brian Let me 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 that are subject to risks and uncertainties.
Factors that may cause actual results to materially differ from expectations are detailed in our earnings materials and S. T SEC filings available on our website.
Information about our non-GAAP financial measures, including reconciliations to U S. GAAP can also be found in our earnings materials that are available on the website, so with that take it away Brian .
Thank you Lee.
Thank all of you for joining us this morning, I am starting on slide two.
The earnings presentation during the fourth quarter of 2022, okay.
Our team once again delivered responsible growth for our shareholders, we reported $7 $1 billion net income after tax or 85 cents per diluted share. We grew revenue, 11% year over year and delivered our sixth straight quarter of operating leverage and again, we delivered a strong 16% return on tangible common equity.
If you move to slide three we list the highlights of the quarter, which had been pretty consistent throughout the year, we drove good organic customer activity and saw.
Significant increases in net interest income, which all helped drive operating leverage as revenue increased year over year, 11%. It was led by a 29% improvement in net interest income coupled with a strong 27% growth in sales and trading results by Jimmy Tomorrow on the team.
This growth well exceeded the impacts of lower investment banking fees and the impact of bond and equity market valuations on asset management fees in our wealth management business.
Positive contributions of our NII and sales and trading were also enough to overcome a decline in service charges driven by the fully implemented changes in NSF and overdraft fees in our consumer business.
Importantly, we improved our common equity tier one ratio by 25 basis in quarter four to 11, 2% and we achieved that without changing our business strategies.
Well well above our both our current 10, 4% minimum CET one requirement.
Bob the requirement that will have beginning next year and January of 10, 9%.
We added to our buffer about both growing loans and reducing outstanding shares in the quarter.
On a year over year year over year comparative basis, both net income and EPS are up modestly with strong operating leverage more than offsetting higher provision expense.
A higher provision expense is driven primarily by reserve builds this quarter result of loan growth in our portfolios and also our conservative waiting in our reserve setting methodology, which I'll touch on letters later.
Last year, we had large reserve releases net charge offs increased this quarter, but asset quality remains strong charge offs. The ball both both at the beginning of the pandemic as well as longer term historical levels and again I'll touch on this in a few pages.
All that being said the simple way to think about is pretax pre provision income.
Which neutralizes these reserve actions grew 23% year over year.
Let's turn to slide four side.
Slide four shows the year over year of annualized results in quarter. Four results were a nice finish to successful year in which we produced 27 $5 billion of net income on a 7% revenue growth and a 4% operating leverage.
While the year was strong full year earnings declined as a result of the loan loss reserve actions for the full year of 2022 again, we bought about $370 million reserves and by contrast last year and 'twenty. One we released $6 8 billion of reserves isolating those changes again, you'll see that P. PNR grew a strong 14% over 2021.
And as I said earlier the themes were characterized by good organic customer activity strong NII and all of this helped five years of responsible growth.
Slide five highlights some of the attributes of organic growth for the quarter and the year. This plus the slides will be included each earnings materials.
Materials that are in our appendix with show digital trends inorganic growth highlights across all the businesses are.
Our investments over the past several years and our people tools and resources for our customers and our teammates as well as renovating our facilities have allowed us to continue to enhance the customer experience record high levels and fuel organic growth in the fourth quarter of 2022, we added 195000 net new checking accounts, bringing the total for the year to more than 1 million.
This is twice the rate of addition that we had in 2019 in periods before the pandemic the.
This net growth has led to a 10% increase in car customer checking accounts since the pandemic, while keeping that 92% of our accounts are primary checking accounts of the household and the average opening balance not the average balance per average opening balance in these new accounts is over $5000.
We also produce more than 1 million new credit cards, the sixth consecutive quarter of doing that bring us back to levels that we generate pre pandemic quite a quality you can see on appendix slides 28 for our consumer remains very high in new originations.
Verify digital users grew to 56 million with 73% of our consumer households, fully digitally active we have more than 1 billion logins to our digital platforms each month.
And that's been going on for some time now digital sales are also growing and they now represent half of our sales in the consumer business, Eric our virtual digital assistant is now handling 145 million interactions this past quarter.
Past 1 billion interactions since its introduction just a few years ago. This saves a lot of work for our team when you move to the <unk> business. The wealth management business. Our advisors grew by 800 in the second half of the year. Our team added 28000 net new households across me on the private bank in 2022, we experienced solid net flows despite the turmoil in some markets.
By the way during 2022, our average Merrill household opening where the balances of $1 $6 million again very high quality account openings on flows when confined across all our investment platforms.
In our.
Consumer wealth management business, we saw 125 billion of net client flows this year.
So we continue to see increased activity around boats investments in our business and our banking products diversified bank element. It has it is a strong differentiator for us as a company. It also supports the healthy pretax margin.
This helped the G. When business delivered strong operating leverage for the year and they grew net revenue and net income to records.
In our global banking business, we saw solid loan production and growing use of digital platforms throughout the year and added new clients to our portfolio.
As you well know they are overall investment banking fee pool was down however, kinder to deepen and expand client relationships with our build out of commercial bankers.
Our global Treasury services.
Business.
We also grew revenue 38% year over year as a result of both rates as well as fees for services on cash management.
In global markets, we had our highest quarter fourth quarters sales and trading performance on record growing 27% from last year ex DVA.
This was led by strong performance of our macro FIC businesses, where he made continuous investments of the past 18 months equities had a record quarter for performance as well.
Let's move to slide six and talk about operating leverage.
As I've said to you for many years one of the primary goals. This company was important part of our shareholder return model has been to drive operating leverage.
Those efforts, including investments made for the future coupled with revenue growth produce 18 straight quarters of operating leverage as you can see leading up to the pandemic.
Beginning last year and a third in the third quarter of 21 2021, I told you that we've now started achieving operating leverage and got back on streak six Sandler six quarters of operating leverage. Despite all the things are going on out there and the team continues to drive towards that for 2023.
So I thought I'd spend a few minutes on the discussion of topics. That's been important too as we've just talked about investors over the last couple of months deposits and credit So let's go to slide seven.
First on deposits there are several factors impacting deposits as our industry works through an economy works through an impressive period a surge in deposits from the pandemic related stimulus impact of monetary unprecedented monetary easing impact of high inflation and then the reversal that was unprecedented pace and size of rate hikes.
In monetary tightening.
But on a year on year basis average deposits of $1 93 trillion are down 5%. This reflects the market trends and in fact reflects high tax payments to the government in quarter two 2022.
In addition, as.
As we move forward through 2022 customers with excess cash invest minority cash sought yield as rates increase for money market funds direct treasuries and other products.
It's probably more relevant discuss the more near term trends comparing third quarter of 'twenty two to fourth quarter of 'twenty. Two average deposits were down one 9% noninterest bearing deposits are down 8%, while interest bearing deposits are up 2%. The mix shift is especially pronounced in treasuries services in the global banking business.
Corporate treasurers managed $500 billion of pause as they have with us the impact of their activities has a change in the mix on.
On a personal side you can see.
The checking accounts that balances floating down a little bit from core expenses and spending well more affluent customers put money into high yielding deposits in the market we.
We do manage all of these products differentially and the discussion is just deposits by business segment, you can see on slide eight and we'll talk through that.
So this breaks down our deposits in a more near term trend in the upper left you can see the the full year across the for the whole company going across the page up their left hand chart. We also put in the rate hikes that you can see.
From the chart you can see the heavy tax payment outflows in second quarter than we saw the acceleration of rate hikes and deposits to move to products seeking yield in certain customer segments.
But in large part what you've seen in the course of the quarter four it's been stabilization of a more normal client activity.
Pulp we ended quarter 422, with 1.93 trillion dollars in deposits roughly the overall level as we added in quarter three ending deposit balances.
So let's look at those differentiated by business and consumer looking at the Upper right chart. We show the difference between the movement through the quarter between the balance of low to no interest checking accounts to somewhat higher yielding non checking accounts money market and savings accounts and it's limited portion of C. DS across the quarter, we saw a $24 billion decline in total down too.
Percent.
We have seen small declines of customers' continued higher levels of spending to pay down debt and also move money to their brokerage accounts even in this business.
Higher wages have offset this.
While we saw a decline in quarter for deposits and consumer correspond. We also saw brokers levels of consumer investments increased 11 billion capturing a good portion of those deposits.
In general think of these consumer deposits are being very sticky of one trillion dollars.
That stickiness, along with net checking account growth reflect the recognition and the value proposition of our relationship transactional count with our company.
It also has industry, leading digital capabilities, we offer and the convenience of a nationwide franchise.
It also reflects that the customers aren't mass market segments have fewer excess cash investment style cash balances.
56% of the one trillion dollars in consumer deposits remain in low and no interest checking accounts.
Because of all that overall rate paid in this segment remains low at six basis points.
In wealth management, which you can see at the bottom left of the chart more than 300 billion of deposits.
It became more stable across the fourth quarter.
They also you'll also hear you also witnessed a shift to higher yielding preferred deposits as you can see on this labels from lower yielding transaction deposits as these customers have more excess cash and move them to seek higher yields.
Orders early in the quarter, we saw modest declines in balances, but November as rate hikes began to slow in the probability of future rate hikes became less.
People would move their money and we saw an uptick in balances that we've moved through the quarter. This reflects the seasonal inflows that happened in the fourth quarter for wealth management clients at.
At the bottom right chart, you can see the most dynamic part of this equation a global banking deposit movement as it moves across $500 billion in customer deposits. This just the shift here is what drives the mix total for the company, it's pretty typical with the exception that it happened very quickly in quarter four driven by the pace of rate hikes.
In a rising rate environment, where companies operational funds are more expensive. We anticipate these changes, particularly the high liquidity environment as clients use both kathryn inventory yield pay down debt or manage their cash for for investment yield we have seen in the Mexico banking interest bearing deposits moved from 35% last quarter to 45% in quarter four.
And obviously, we're paying higher rates on those deposits to retain them.
Customer pricing here is the customer customer by customer customer basis based on the depth of relationship the product usage and many other factors.
So overall deposit rates paid as a percent of fed funds increases are still very favorable to last cycle.
Even as rates are rising much faster than lifecycle.
Last cycle I would note as well to the last cycle. The fed increases had been rapid and we'd expect to pay higher rates as we continue to move through the end of the interest rate cycle. So just remember what we were paying more for deposits. We also get that on our asset side that is simply why DNI as our net interest income is up 29% from quarter four 2020.
Two versus quarter four of 2021.
Now, let's move to the second topic I wanted to touch on specifically which is credit.
And this begins on slide nine.
First it is an electrical truth that our asset quality of our customers remains very healthy.
On the other hand is it possible to gain say that the net charge offs are moving to pre pandemic levels. So in the fourth quarter. We saw net charge offs of $689 million increased $169 million from quarter three.
The increase was driven by both higher commercial and credit card losses.
These charts show they are still very low in the overall context in commercial we had a few.
Ah photocopies specific loans were not related not predictive any broader trends in the portfolio. These were already reserved for in prior periods and based on our methodologies went through charge off in quarter four.
Credit card charge offs increased in quarter four as a result of the flow through of a modest increase in the last quarters late stage delinquencies.
Should continue as we transition off the historic close and delinquencies to still very low pre pandemic levels.
Provision expense was $1 1 billion in quarter. Four in addition to higher charge offs provision included roughly $400 million reserve build this was higher than quarter, three reflecting good credit card and other loan growth combined with a <unk> reserve setting scenario. So let's just stop on our reserve setting scenario.
Our scenario, our baseline scenario contemplates a mild recession, that's the base case, the economic assumptions and a blue chip and other methods, we use but we also add to that a downside scenario and what this result.
And is 95% of our reserve methodology is weighted towards a recessionary environment 'twenty and 2023.
That includes higher expectations of inflation, leading to depress GDP and higher unemployment expectations.
This scenario is more conservative than last quarter scenario not.
Now to be clear just to give you a sense of how that scenario plays out it contemplates a rapid rise in unemployment to peak at five 5% early this year in 2023, it remain at 5% or above all the way through the end of 'twenty four obviously much more conservative than our economic estimates that are out there.
We included again the updated slides in the appendix pages 36, 37, a highlight differences our credit portfolios between pre financial peep into Emmett concurrent.
Status. We also again gave you the new origination statistics for consumer credit on page 28.
The work the team has done on responsible growth continues to show strong results from an outsider's view you don't have to look any further than that fed stress test results. We've had the lowest net charge offs or peer banks antenna left 10 of the last 11 stress test.
Now ill turn to slides 10 to 12, we included some longer term perspective.
We just showed.
Long term trends for commercial net charge offs total consumer chart.
Charge off rates and more specifically credit card charge off rates. This compares those ratios to pre financial crisis during the recovery after the financial crisis pre pandemic and then through the pandemic.
So that gives you a long term perspective, which they keeps in content keeps in context. The idea that we're moving off the bottom and credit costs towards the level, which is.
Normalizing to pre pandemic, but that level is very low in the grand context of banking.
So before I move to Alastair I wanted just a update.
Comments on consumer behavior.
Consumer deposit balances continued to show strong liquidity with a lower cohorts of our consumers continue to hold several multiples of balances. They have is it paying down debt to get these balances are drifting down, but they still have plenty of cushion left and while they're spending remains healthy we continue to see the pace that you you year over year growth.
No.
In the aggregate in 2022, our consumers spent 4.2 trillion dollars, which outpaced 2021 by 10% you can see that I'm slide 35 to.
Two things to note on that consumer spending pace there continues to be a slowdown.
Year over year growth percentage earlier, this earlier until 2022 or 14% year over year, they've now moved to 5% year over year in the fourth quarter. So what is this been mean well that level of growth in year over year spending is consistent with a low inflation, 2% growth economy, we saw pre pandemic.
They're also moving from services to experience from goods to service and experience and spend more money on travel vacations and eat.
Eating out and things like that that is a good for unemployment, but continuous maintained service side inflation pressure.
With that let me pass the mic over to Alister to go through the rest of the quarter Alastair.
Okay. Thanks, Brian and let me start with the balance sheet and I'll use slides 13 for this.
During the quarter, our balance sheet declined 23 billion to 3.05 trillion driven by modestly lower global markets balances.
Our average liquidity portfolio declined in the quarter, reflecting the decrease in deposits and securities levels.
At 868 billion it still remains 300 billion above our pre pandemic levels.
Shareholders' equity increased 3.7 billion from the third quarter as earnings were only partially offset by capital, we distributed to shareholders and roughly $700 million and redemption of some preferred securities.
We paid out 1 billion eight in common dividends and we bought back 1 billion of shares which was 600 million above those issued four employees in the quarter.
See I was little changed in the quarter as a small benefit from lower mortgage rates was more than offset by a change in our annual pension revaluation.
With regard to regulatory capital, our supplementary leverage ratio increased to five 9%.
First is our minimum requirement of 5% and that obviously lease capacity for balance sheet growth.
And our T Lac ratio remains comfortably above our requirements.
Okay, Let's turn to slide 14, and talk about C. E T. One where as you can see our capital remains strong as our CET one level improved to 180 billion and our CET one ratio improved 25 basis points to 11, 2%.
That means in the past two quarters, we've improved our CET one ratio by 74 basis points as we've added to our management buffer on top of both our current and 2024 requirements.
So we can walk through the drivers of the CET one ratio this quarter and you can see earnings net of preferred dividends generated 43 basis points come.
Common dividends used 11 basis points and gross share repurchases use its six basis points.
And while the balance sheet was down loan growth drove a modest increase in our W. Eight using three basis points of CET one.
We were able to support our loan growth.
And return on capital.
And add to our capital buffer in the same quarter.
Let's spend a minute on the loan growth by focusing on average loans on slide 15.
And here you can see average loans grew 10% year over year, driven by credit card and commercial loan improvement.
On a more near term linked quarter basis loans grew at a slower 2% annualized pace, just driven by credit card.
The credit card growth reflects increased marketing enhanced offers and reopening of our financial centers delivering higher levels of account openings.
Mortgage balances were up modestly year over year and linked quarter were driven by slower prepayments.
Commercial growth reflects a good balance of global markets lending as well as commercial real estate and to a lesser degree custom lending in our private bank and Merrell businesses.
Turning to slide 16, our net interest income on.
On a GAAP non FTE basis NII in Q4 was $14 7 billion and the F. T E N I a number was $14 8 billion.
Focusing on FTE net interest income increased $3 3 billion from Q4 of 'twenty, one or 29% driven by a few notable components.
First <unk>.
Nearly $3 6 billion of the year over year improvement in NII was driven by interest rates.
Year over year. The average fed funds rates has increased 359 basis points driving up the interest earned on our variable rate assets.
Relative to that fed funds move the rate paid on our total deposits increased 59 basis points to 62.
And focusing just on interest bearing deposit rates paid the increases in 91.
So even while fed funds rates have increased 140 basis points more than the last cycle.
At this point, our cumulative pass through percentage rates still remain lower in this cycle.
That includes an increase in the pass through rates in the past 90 days due to the unprecedented period of rate hikes.
Included in the rate benefit was 8 billion improvement in the quarterly securities premium amortization.
Long term interest rates on mortgages have increased 345 basis points from the fourth quarter of 'twenty, one, which has driven down the refinancing of mortgage assets and therefore slowed the recognition of premium amortization expense recognized in our securities portfolio.
The second contributor is loan growth.
All the securities Paydowns, and that's added nearly 400 million to the year over year improvement.
And lastly, partially offsetting the banking book NII growth just described was higher funding costs for our global markets inventory now.
Now that is passed on to clients through our noninterest market, making the lines. So it's revenue neutral to both sales and trading.
And to total revenue.
As you can see in our material global markets NII is down 660 million year over year.
Okay, turning to a linked quarter discussion.
NII is up $933 million from the third quarter.
Driven largely by interest rates.
At 933 million increase included a $372 million decline in our global markets and Uh Huh.
The net interest yield was 2.22% and that improved 55 basis points from the fourth quarter of 'twenty, one nearly 30% of that improvement occurred in the most recent quarter with the primary driver being the benefit from higher interest rates, which includes a 13 basis point benefit from lower premium amortization.
As you will note excluding global markets, our net interest yield was up 18 nine basis points to 281%.
Looking forward I would make a couple of comments.
As I do every quarter, let me provide the important caveat regarding our NII guidance.
Our caveats include assumptions that interest rates and the forward curve materializes.
And we anticipate card loans will decline seasonally from holiday spend paydowns.
Otherwise, we expect modest loan growth.
We expect a seasonal decline in global banking deposits.
And then the other deposit mix shifts experienced in Q4 may continue into the first quarter in the face of more rate hikes.
We also expect the funding costs for global markets to continue to increase based on higher rates.
And as noted the impact of that is recognized and offset in noninterest income. So it's revenue neutral.
So starting with the fourth quarter NII of $14 8 billion.
And assuming a decline of roughly $300 million of global markets NII in Q1.
Which would be similar to the fourth quarter decline.
That would get us to a Q1 number around $14 5 billion.
In addition, we have to factor in two less days of interest, which is about $250 million. So that would lower our starting point to 14.25 billion.
We believe the core banking book will continue to show the benefit of rates and.
The other elements and can offset most of the day count.
So we're expecting Q1 NII to be somewhere around $14 4 billion.
Beyond Q1 with increases in rates slowing and if balances continue their recent stabilization trends expect less variability in NII for the balance of 2023.
Okay, let's turn to expense and will use slide 17 for the discussion Q4 expenses were $15 5 billion and they were up 240 million from Q3, driven by an increase in our people and technology costs.
In addition, we also saw higher costs from our continued return to work and travel and cost of client engagement.
We've seen pent up demand for our teams gathering back together in person to drive collaboration and to spend more time with our clients.
Inflationary pressures continued but our operational excellence improvements as well as the benefits of a more digitized customer base helped to offset those pressures.
Our head count this quarter increased by 3600 from Q3.
And as we faced increased attrition in 2022, our teams were quite successful in their hiring efforts to continue to support customers.
As the attrition slowed in the fall our accelerated pace of hiring outpaced attrition, leaving us with growth in our head count.
As we look forward to next quarter I would just remind everyone that Q1 typically includes 400 to 500 million and seasonally elevated payroll taxes.
In Q1 will also be the first quarter to include the costs of the late October announcement by regulators of higher FDIC insurance costs.
And as a result of holding the leadership share in U S. Retail deposits that will add 125 million to each of our quarterly costs.
A total of 500 million for the year.
These things will put expenses around 16 billion in the first quarter before expectations that they should trend back down again over the course of 2023.
On asset quality, we highlight credit quality metrics on slide 18 for both our consumer and commercial portfolios and since Brian already covered much of the topics on asset quality I'm going to move to a discussion of our line of business results starting with consumer on slide 19.
Brian noted the earlier organic growth across checking accounts card accounts and investments was strong again this quarter and that's as a result of many years of retooling and continuous investments in the business. So let me offer some highlights.
At this point, we have the leading retail deposit market share we have leadership positions among the most important products for consumers.
And we're the leading digital bank with convenient capabilities for consumer and small business clients.
We also have a leading online consumer investment platform.
And a great small business platform offering for our clients and importantly, when you combine all of these capabilities with improved service.
This point customer satisfaction is now at all time highs.
And we produced another strong quarter of results in consumer banking that resulted in $12 5 billion and net income in 2022.
For the quarter consumer banking earned 3.6 billion on good organic growth.
And delivered its seventh consecutive quarter of operating leverage while we continue to invest for the future.
Note that our top line grew 21% while expense grew 8%.
The earnings impact of 21% year over year revenue growth was partially offset by an increase in provision expense.
And that provision increase reflects reserve builds this period compared to a reserve release in the fourth quarter of 2021.
Net charge offs increased as a result of the card charge offs that Brian noted earlier.
While this quarter's reported earnings were up 15% year over year pretax pre provision income grew an even stronger 36% year over year. So that highlights the earnings improvement without the impact of the reserve actions.
The revenue improvement reflects the full or value of our deposit base as well as deepening with our deposit relationships I'd note. The growth also includes.
A decline in service charges of $335 million year over year as are insufficient funds and overdraft policy changes were in full effect by the end of Q2 of this year.
And as a result of those policy changes, we continue to benefit from the better overall customer satisfaction.
And the corresponding lower attrition.
And the lower costs associated with fewer customer complaint calls obviously as a result of fewer fees.
The 8% increase in expenses reflects business investments for growth, including people and technology, along with costs related to reopening the business to fuller capacity.
And remember much of the Companys minimum wage hikes.
And quarter to increased salary and wage moves impacts consumer banking, the most of our lines of business and therefore impacts most year over year comparisons.
Also continued our investment in financial centers for the year, we opened 58, and we renovated 784 more.
And against all of that both digital banking and operational excellence helped.
Helped us to pay for investments and that allowed us to improve the efficiency ratio to 47% an impressive 600 basis point improvement over the year ago period.
Before moving away from consumer banking I want to note some differences to highlight just how much more effectively and efficiently. This business is running.
Since even just before the pandemic, it's easy to lose sight of how well. This business is operating from an already strong position in 2019 and you can see some of the stats on slide 17 in the appendix.
Yeah.
And we can best summarized by noting we've got 318 billion more in deposits.
10% more checking customers.
92% of whom are primary.
28% more investment accounts.
And absent the card divestitures, we've increased the amount of new card accounts by 4% on a P.
Payment volumes are 36% higher.
Servicing those customers with 387 fewer financial centers because of our digital capabilities.
And it's allowed us to need 10% fewer people to run the business.
Our combined credit and debit spend was up 35% digital sales increased 77% and we sent and received three times the number of zelle transactions.
All of this allowed us to run the business with fewer employees and lower our cost of deposits ratio below 120 basis points.
Moving to slide 20.
Wealth management produced strong results, earning $1 2 billion on good revenue and 29% profit margin.
This led to full year records for both revenue and net income.
21 seven.
And $4 7 billion respectively.
This was an especially good result, given the nearly unprecedented negative returns of both the equity and the bond markets at the same time this year.
The volatility and generally lower market levels put pressure on certain revenues in this business again in Q4.
But what helps differentiate merrill and the private bank.
Is a strong banking business at scale with 324 billion of deposits and 224 billion of loans. So despite a 14% decline in asset under management and brokerage fees year over year.
We saw revenues hold flat with the fourth quarter of 'twenty one.
Our talented group of wealth advisers, coupled with powerful digital capabilities generated 8500, net new households, and merrell in the fourth quarter.
While the private bank gained an impressive 550 net new high net worth relationships in the quarter, both were up nicely from that household generation in 2021.
We added 20 billion of loans in this business since Q4 of 'twenty, one growing 10% and marking the 51st consecutive quarter of average loan growth in the business. Despite securities based lending reductions related to the current market environment, that's consistent and sustained performance by the.
Teams.
Our expenses declined 1% driven by lower revenue related incentives, partially offset by investments in our business.
Moving to global banking on Slide 21, and you can see the business earned $2 5 billion in the fourth quarter on record revenues of $6 4 billion pretty remarkable given the decline in investment banking fees during this year.
Lower investment banking fees higher credit costs, and a modest increase in expenses were mostly offset by stronger NII.
And other fees.
Overall revenue grew 9%, reflecting the value of our global transaction service business to our clients.
And our associated revenue growth, while investment banking fees declined a little more than 50%.
The company's overall investment banking fees were $1 1 billion in Q4.
Declining $1 3 billion year over year, and a continued tough market still we increased our ranking in overall fees for the full year 2022 and number three is we've continued to invest in the business.
$612 million increase in provision expense reflected a modest reserve build of $37 million in the fourth quarter compared to a 435 million released in the year ago period, and pretax pre provision income grew 13% year over year.
Expense increased 4% year over year and that was driven by strategic investments in the business.
Including hiring and technology.
Switching to global markets on slide 22, and as we usually do I'll talk about the segment results excluding DVA.
You can see our fourth quarter record results were a very strong finish to a good year. The continued themes of inflation geopolitical tensions and central banks changing monetary policies around the globe continue to drive volatility in both the bond and equity markets and repositioning from our clients.
As a result, it was another quarter that papered macro trading while our credit trading businesses improved also our spreads fared better than the prior year.
Our fourth quarter net income of 650 million reflects a good quarter of sales and trading revenue, partially offset by lower shares of investment banking revenue and it's worth noting that this net income excludes.
$193 million of DVA losses, this quarter as a result of our own credit spread movements.
Reported net income was $504 million.
Focusing on year over year sales and trading contributed 3.7 billion to revenue.
It was improved 27% that's a new fourth quarter records for this business besting the previous one by 21% and at $16 5 billion in sales and trading for the year. It Mark the best in more than a decade.
Fake improved 14, 9%, while equities was up 1% compared to the quarter a year ago in the FIC improvement was primarily driven by growth in our macro products.
While credit products also improved from a weaker Q4, 'twenty one environment, we've been investing continuously over the past year in our macro businesses, we've identified those as opportunities for us and again, we've been rewarded for that this quarter.
Year over year expense increased about 10%, primarily driven by investments in the business.
Finally on slide 23, we show all other which reported a loss of 689 million and that was consistent with the year ago period.
For the quarter the effective tax rate was approximately 10% benefiting from ESG investment tax credits.
And certain discrete tax benefits, excluding those discrete items, our tax rate would have been $12 five per cent.
And further adjusting for the tax credits it would've been 25%.
Our full year GAAP tax rate was 11%.
And we would not expect 2023 to be a lot different so with that we'll stop here.
We will open it up please for Q&A.
And if you would like to ask a question. Please press star and one on your Touchtone phone again that is star and want to ask a question you can remove yourself from the queue at any time by pressing the pound key we'll take our first question from Glenn Schorr with Evercore. Your line is open.
Hi, Thanks, very much I need a little more help you gave a lot, but I need a little more help on NII for 2023, I you walked us through the 14th floor.
The starting point on the quarter and your words were less variability in NII for the rest of 'twenty three.
So I guess my question is you've got a lot of loan growth.
You have a few more rate hikes, hopefully coming through and I understand the opposite the flip side of that is deposit migration from outflows in betas, but could you fill in those blanks cause I think.
I know I wont speak for everybody. So I know I am still expecting some growth in NII.
For the calendar year. So maybe you could talk through some of those pieces and maybe the the outflow in global banking noninterest bearing is a big piece of it. So thank you.
Glenn I'll I'll start with just you know just by way of context, obviously.
We're coming off a period with historic inflows for pandemic deposits.
And now in Q4 were beginning to see the impact of quantitative tightening and a number of sharp rate rises so that.
That obviously creates some uncertainty we don't necessarily have a playbook for that we've just got to see how actual balances perform and we've got to see how would the rotation and the rate paid developed so it's dynamic it's evolving and we manage I mean forecast that weekly so when we lose.
<unk> out for you the actuals on page seven and eight of the earnings presentation.
To show you, what we're seeing in real time around.
Alan says and mix.
So what we've said with respect to this quarter coming up as we got to adjust for the day count as we would every year.
That's timing and we'll get that back obviously in Q2 and Q3.
And then we highlighted the global markets NII impact its always been there.
The last couple of quarters, it's been around $300 million.
It is revenue neutral to shareholders as we play in time, because we pass that along to clients and we captured elsewhere and sales and trading but it does obviously impact the NII that's why we're highlighting it.
But as it relates to the forecast.
Look we feel like the modest balance declines are kind of in there that that may continue.
And this continued rotation from some of the noninterest bearing to interest bearing we got some pricing and rate pressure. So that's in the back of our mind too and the only final thing I'll just say is.
We're reluctant to go a whole lot further out you know like last year, we declined to give a full year guide.
This year, we feel that way in particular, because it's just a much more.
Sensitive environment, when we're modeling when interest rates are a 5% than when they were at 50 basis points. So for all those reasons now I will say that that's the final point, we just got I think we've got to stay patient because we got to see how rates and balances.
And rotation shakeout and as rates return to more normal and as customer behavior and you can sort of see it. It's it's it's behaving in maybe a little more normally.
We should be able to resume our upward path over time, but we got to see how this shakes out and that's why we don't want to go out beyond Q1 at this stage.
Fair enough I feel bad for all of US maybe a quick one on credit.
Good to see charge offs down given everything that's going on the world, but can you talk through that the big Guy the $1 6 billion dollar sequential pick up in criticized book from last quarter, what's driving that and how you feel about reserves against that thanks.
Yeah. So so youre aware the main driver there.
Is.
Commercial real estate and it's specifically around about 1 billion of it is office.
Obviously, there's a significant amount of change going on in office.
And what we've chosen to do is as rates are rising here, we're pushing that through the models.
And you know, we just with the debt service coverage it comes down.
We pushed through the downgrades. So so we've chosen to do that the performance is still okay. So we're not concerned with the performance, but we're just making sure we're being tight on the modeling there is obviously, a a portfolio where I think you know this.
We're pretty focused on making originations into office buildings that are leased up Jen.
Generally at 55% LTV at origination.
And 75% of that book is class a office building. So we're not alarmed there. We're just following our own process with respect to making sure. We're current on the debt service coverage.
Okay.
Thanks very much appreciate it.
Just remember that we're talking about office.
Yeah. It was very high quality underwriting characteristics, all a class etcetera, and so we just have a conservative rating process frankly and it's.
Well.
Well viewed out there and well looked at by many people but.
You remember office is $14 billion to $15 billion.
Total portfolio. So we feel very comfortable we are.
And then obviously, we built reserves.
Against the portfolios across the board that are strong and reflect the yeah. As I said earlier basically a mild recession in the base case and a worst recession in the adverse case.
We wait 40%.
We'll go next to Gerard Cassidy with RBC. Your line is open.
Thank you Alan.
Alistair on the loan loss reserving and Brian just talked about the adverse case being about 40% can you share with us how much of the reserve building is what might be referred to as management overlay relative to what the models are specifically dictating on reserve building.
We don't disclose that but you might assume that theres a fair amount to three components. One is what the model say two is basically uncertain and precision and other things we overlay and then a judgmental and you might think that there's a fair amount of that right now with the uncertainty, but so we the model piece out.
The would be a portion of it.
Very good Brian and then when you look at your the bot deposit behavior of the consumer to past cycles is there is there any material differences in the way, they're moving money around or not moving money around from their checking accounts or low yielding savings accounts.
I think.
Yep.
When you look at that.
Higher end consumer.
Not really you know their move to the blended rate in the market. He owes money market funds, we move them to it and it's part of what we do and that sort of investment cash draw as we call. It moves the checking accounts don't move the difference frankly is that yeah. There was a lot of stimulus that was in addition to the earnings power of our consumer So we've never had that and history, but.
So and then in the general consumer business. You know give you example that cohort that was.
Two to $5000 in average balances pre pandemic had 3400 theres still sitting at 12800, but they peaked early in 'twenty. Two at 13 point 13004 hundred or so drifting down, but it's still multiples of the big question was where they end up spending that down if theyre employed probably not.
But if there if the unemployment rate changes in our models assume the unemployment rate changes. So you know I think we're at six basis points now in total consumer rate paid the rate structure is very high at the end.
And we have 11 basis points that was where we got to we have very low C. D volumes in and things have a fair amount of money markets, but most of its checking and that's why we showed you that differential in checking so is it different yeah. It probably in a mass consumer business just because they are sitting on more cash and they use that cash.
In certain scenarios, but the rest of the behaviors largely the same including in our corporate business where people.
No.
And have less balances and the effect of credit rate generates a bigger number to cover their fees. So they tend to pull of bounces out.
Just quickly Brian just.
When you look at the high net worth and corporate do did that move from zero to 3% Fed funds for example versus a 3% to where we are today at four 5% is most of that completed were the people that we're going to move the money have already moved it in those two categories.
Yeah, well I mean, I can't say definitively, but you've seen that's where he showed you on those pages, where we show the stable.
Account balances are relatively stable and wealth management in the fourth quarter 300 odd billion in 300, all day and basically they are flat and if you look across the last several weeks so.
You know theres always a little bit of migration to.
The preferred deposit, which is a market for a higher yielding sort of money market account, but the big shift and that was frankly in the second quarter of 'twenty two when I think we had.
50 billion odd numbers of tax payments, which was.
A lot higher than in past years due to if you think about the 'twenty one dynamic in capital gains and other things that went through so what we're seeing is you know the last four or five weeks, we're seeing relatively stability stable and deposit balances.
Order entry quota and for basically flat a little bit of movement, among the categories, but in that business frankly, a fairly sort of.
Table place right now and so I think this long answer.
It's sort of answer if they move the money they are kind of already moved it.
Right. Thank you very much.
Okay.
We'll take our next question from Mike Mayo with Wells Fargo. Please go ahead.
Hi, I guess Alistair.
I guess no. Good deed goes unpunished, I mean, NII did grow 21%.
Your 2022 it did grow 7% linked quarter and the fourth quarter up $900 million.
But six weeks after you gave guidance last quarter.
That guidance by 300 million and it just raised some questions about the quality of your modeling or if you had your arms completely around the asset liability management. So what happened to cause you to change that guidance, albeit in the context that still some of the best and I growth you guys have seen in many years.
Yeah, So Mike if I go back to six months ago.
Quarter two earnings.
Well, we said at the time was we thought over the course of the next six months.
I might go up by 1.8 1.85 billion.
In actual fact, it's gone up 2.25, so that's the actual remember where we're forecasting as best we can at any given time up to two five Q3 was more favorable than.
And then I think we had thought.
In Q4 was less favorable.
And in Q4 was less favorable in large part because the balances behave just a little bit differently.
And the rate paid here, just a little bit differently.
And the mix or rotation, if you like that'd be that'd behaved a little differently. It kind of makes sense, because Q4 is where.
Q T kind of kicked in so.
Look we don't we don't have a great deal of precedent. It's obviously a historic period, it's it's difficult to forecast.
Quarter to quarter.
And it's our modules are just a lot more sensitive right now so.
I think we're going to try and share with you what we know when we know it but it's just a more difficult environment at this point to predict looking forward.
So that's like the that's the first the.
First half of your out of golf you played well he should've just stopped after that then I guess, but.
Yeah, I guess as we look at so in other words that $400 million extra that you got your kind of giving back here from the fourth the first quarter. So 14.4.
NII guide, if you annualize that and that would be still 9% NII growth in 2020 three.
Is is that a fair starting point can you give us yeah.
Not big confidence, but a little confidence given that the positive stabilize the day count cards are seasonally lower so again, you analyze that that's 9% NII growth and then.
I am still on expenses any change there or are you going to keep it to just like one 5% growth.
So on the first thing Mike.
It was something I was going to pick up on earlier to the first question you you've picked up it go into the point.
Yeah, we will have growth in NII year over year in the range you talked about if you take the 14th floor as Alistair said, we expect it to sort of be less variability.
Variability and annualize that and compare that to 22 years of 9% as you said, so you're exactly right. So that's good growth.
And I think you'll you'll see as you move through the year of 23 leave aside the economic scenario.
Playing out, but you'll see you'll move from where we are today, which is uncertainty about where the balances will finally settle in in the plateauing of those balances to where you get back to normalized growth of normalized loan growth et cetera. So you've got it right they'll be nice NII growth year over year unexpected yeah.
If you look at your Guys' estimates force 62, and a half which is what we've sort of said earlier. This it in the fourth quarter you know, we're comfortable with that and that's what the average of the street analysts star.
But that takes a lot of good management to get there and you know.
We'll continue to work on it letting ahead cat drift back down and continuing to invest in things that provide efficiency. So you've got it and and key to that is the six quarters of operating leverage in the idea of continuing that going.
And then the last part of the income state or the EPS simply your excess capital, which you highlighted it seems like you're well above your CET one ratio. So what does that mean for the pace of buybacks in your and your desire to buy back stock at this price.
So we've always said that.
You know the first desire is always to support business growth and that's what we've been doing.
We then were well above our minimum is run a path to close out the requirement for next year and so you know we bought back a chunk of shares this quarter. If you expect that to start to increase neutralizing employee issuances and then go.
Going above that each quarter now because we are at 11 20 up 11 point to something we were close to 11.4 targets. So we're back in the game.
Alright, thank you.
Our next question comes from John Mcdonald with Autonomous Research Your line is open.
Good morning, Alastair I know, we're asking you to predict a lot of things here I'm, just thinking about the credit and the pace of normalization do you have any sense of where charge offs kind of might start out the year and what kind of pace of normalization. If we look at the charge off ratio that moved up a little bit this quarter what might that.
Look like for 2023.
Yeah, So we're not going to look too far into the future John but if you look at our 90 days past due and the credit card data that we show you every quarter.
<unk> tends to give you a pretty good leading indicator of what's coming down next quarter. So you can see that the 90 days past due have picked up just a little bit.
30 days past due are picked up just a little bit we're still well below where we were pre pandemic.
But that would tell you on the consumer side it looks like it's drifting just a little higher so that's number one number two with respect to commercial this quarter was a little unusual we had three deals that the we ended up having to charge off.
Not correlates it in any way they are in totally different businesses.
And they've been hanging around for a while but it was.
Two of them are fully reserved so it didnt come as a surprise, but I think that because of the commercial stuff was so close to zero. It immediately looks like a you know a pop in any given number that's part of the reason why we showed those graphs of what charge offs have looked like over time in the earnings materials, but the commercial portfolio continues.
To look very strong.
Okay, and you touched on this a little bit in Brian's comments, but just on loan growth. What are you guys thinking about for this year and what's the perspective of where you closed the spigots a little bit in the third quarter as you manage our W. Are you kind of said those were opening up in the fourth but we didn't really see it translate to robust loan growth just kind of that dynamic between what youre looking to do in <unk>.
What you're seeing on demand for loan growth outlook. Thank you.
Yeah. So we said we're wide open for business in the fourth quarter and that remains the case, Brian covered the capital point, we got to do what we had to do in the third quarter. We did it we've added 75 basis points of capital in the last two quarters puts us in a great place so mainly what you're seeing in Q4. It's just it was a slower environment for loan growth.
A year ago, you know we were talking about the fact, we anticipated that loan growth might be high single digits and grew 10.
This year, we feel like it's gonna be you know mid single digits is gonna be slower and it's gonna be led by commercial it'll be led by card, but things like securities based lending.
That's that's just quieter now we've got the balance is being paid down their mortgages quieter. This year and then in our base case, you know you look at the economic Blue Chip consensus you can see the forecast is for recession. So it'll be a quieter loan growth year. This year I suspect, but we're open for business to support our clients.
Okay. That's helpful. Thank you.
We will go next to Erika Najarian with UBS. Please go ahead.
Yes, hi.
Good morning, I just had one clarifying question.
First is Bryan.
In response to Mike's question on NII.
Yes, $57 6 billion in NII for 23 right.
0.4 times, four 9% NII growth you seem to be going with it I just wanted to confirm that I think there's a bit of confusion.
Given that you were you guys were saying you don't want to go beyond the first quarter and the second question is also for you Brian .
An unbelievable job of transforming the company.
I think the one thing that remains.
Is that the.
Thanks.
Our bank.
When rates are going up.
And clearly there is a lot of uncertainty over the NII outlook.
Could you sort of give US you know what.
B you know potentially.
Potentially excited about that.
With regards to the revenue trajectory from here and also you spent so much time on deposits.
I'm just kind of confused on the message in terms of you know.
Deposit declines from here because you laid out this case that you have this very resilient deposit base and it seems like a lot of attrition has already happened.
Sorry that was actually three questions in one I apologize but.
That's it I think.
I'll put all those questions together in one answer if you go to the because.
So their page.
In the report, where we sort of say look at the difference between the consumer.
Consumer business Yep.
Yep and 19 in now and it's just it's something to be excited about because we have during a period of time, where we were.
Please shut down in branches to like 2000 open back up we actually went down from 4300 branches of 3900 branches. We built out a lot of new cities. We did all this work we have 10% more checking accounts the customer favorability is an all time high our small business.
Part of that business is the biggest in the country and growing and you look at that and that provides a great anchor which provides a great stable deposit base. We show you on the slide where we show that base. It also provides a lot of very low cost deposits and as rate rises materialize that and then if you think what happened last cycle for a year when rates did not move up we continue to.
To grow deposits in the consumer business in the mid single digits, which just is infinite leverage and so that's something to be excited about not on the customer side, where we're digitizing yep Yep Zelf usage is going up Eric your usage is going up it Eric and meeting our Erika not you Erica but.
Any you know the balance of the consumer investments open up 7% more accounts in a year with investment World is choppy and then you pair that into the wealth management business same thing one of the biggest deposit franchise in the country biggest three point something to trade in high three trillion dollars of assets growing net households at the fastest rate it's grown in a long long.
Time, maybe history growing advisers those are things that get excited that the organic growth engine of the company.
To put that against the backdrop of a plateauing of NII, which is basically what else are said sort of think about it less variability around the 14th floor, starting number which Mike annualize and did match and so he.
You did the math and it made it out but that that provides us a good base of which to drive forward and so you really got to get through the economic uncertainty and all those things are starting to bear and Meanwhile, the trading business, which we invested in a couple of years ago. Now is at its best fourth quarter ever and the team are doing a good shape and so we you know we just feel good about the overall franchise more customer.
I was more with each customer and then that provides a big stable base, which is rate increases slow down the marginal impact of it will slow down until we see the good core loan and deposit growth, which you saw after rate loss rate rising increased stopped and produce the you know the 20 quarters of operating leverage here and and and and things like that so.
That's pretty good to be excited about the biggest bank growing its franchise.
And a growing solid economy in the world at a faster rate than anybody else is pretty interesting.
Just to clarify Brian you mentioned, you know the plateauing of NII and then hopefully.
Investments in the business to drive growth from there.
Possible.
We have.
Cut through 2010.
Four.
Yep.
The scenario of rate cuts in rate rises, we basically use blue chip so.
Not sure.
Yep.
Depends on what's causing that you know if it's up it's the normalization of the rate curve back to yep.
You know, what let's say, 3% of front end in Florida or in the backend or something like that that's different than what you saw when they had to cut rates to the pandemic or after the financial crisis and left in there for years to get the engine of the United States economy. You started what's different this time frankly, and that's what we're talking about consumer data is even with yep.
Strong rise in interest rates.
Tight labor market.
And you.
Inflation and what people are being told to worry about youre actually seeing consumer spending consistent with yup up good yep, 2% growth environment, a low inflation environment, which is good because of consumers being you know being appropriately.
Appropriately conservative right now.
Erika the other thing I'd, just say is.
Do you think about why we've got a slowdown in some of our fee based businesses right now, it's because rates have risen so quickly and that's created a lot of volatility.
And it's created and you know the asset management business, that's had a big sell off in bonds and stocks. So we're poised to having a lower base, where we can grow from here same thing. If you look at our net income we've we've really run.
Pretty historic decline in investment banking fees. So we've got a diversified set of businesses, whereas some normalcy returns we can see some pick up in those.
Lines as well.
Thank you very much.
We'll go next to Ken <unk> with Jefferies. Your line is open.
Thank you good morning.
Wanted to follow up Alistair you had about $800 million of incremental interest income from the Securities book and I'm. Just wondering if you can help us understand how much of that was attributed to the continued benefit from the swap portfolio and also then how would you expect that to impact your outlook for the 14 four in the first.
Warner Guide Thank you.
Yeah. So most of the increase in the securities portfolio, we're not really reinvesting in there at this point as the securities portfolio is sort of declining where we're using the the money that's throwing off to put it into loans, that's always our first preferred place.
So you're picking up on the right thing, it's mainly the treasuries that are in there there's swapped to floating that way, we don't have any capital impact from rising rates and so you're going to see the securities yield just continue to pick up number one based off of the treasury's swapped to floating and floating rates go higher.
Two as the securities come due there'll be fewer and fewer of them at lower rates and so the you're going to see that pick up over time.
And just as a follow up what's our best benchmark rate to kind of watch that trajectory for how we can understand that help her from that swap portfolio.
Normally its sofa.
Secured overnight financing rate.
Okay, Great second quick one just on capital, Yes, 20 basis points increase in your CET. One you did a $1 billion or so of the buyback just wondering how youre thinking about capital return with the bar package of rule still ahead of us going forward. Thanks.
Well I think you know Brian said, the right things the strategy hasn't changed we've got a number one support our clients. We're gonna number two invest in our growth.
Then we plan to just sustain and grow our dividend and overtime, we will well balanced building capital and buying back shares I think they did did the difficult part with Basel three end game right. Now is we don't have the rules.
So we got to wait I think until we see those they'll go through a comment period at that point, we will offer much more perspective, but I'll say the obvious banks have got plenty of capital.
We were asked to take 90 basis points more in June there's a lot of pro cyclicality already in things like the stress test and stress capital buffer and in Cecil and I think look we've shown our ability to perform and build capital in this case 75 basis points from two quarters. So.
We'll deal with whatever whatever the ultimate rules come out with.
Great. Thank you Yasir.
Yeah.
Our next question comes from Matt O'connor with Deutsche Bank. Your line is open.
Yeah.
Good morning.
Have you guys thought about how to better insulate yourself against potentially lower rates and not just kind of a little bit of a decline, but if I forget something unusual and rates dropped a lot I know it's easier for some of the smaller banks.
We have seen some regional banks.
Essentially trying to lock in a corridor of the NIM so that.
Medium term, it's more about growing the balance sheet versus the rate moves up and down it currently but their deposit rates low.
If we do get a fed cuts or just not as much libraries to bring down those rates.
Yeah. So I don't know that we've thought about it in terms of like a corridor of NIM, but we definitely think about balancing.
Earnings and capital and liquidity through the cycle. So.
I don't I don't see us, making significant changes to our core.
Where we're trying to make sure that we operate and deliver in all rate environments that can be high or two years ago. It can be zero rate environment.
So the the changes where you can start to see or changes at the margin you can see we're taking securities out and replacing them with loans.
And.
And you can see everything re striking higher so we've got a smaller more efficient balance sheet.
We are at the margin may consider fixing some rates here, depending on how things develop over the quarter, but.
It's you know, we've we've had a pretty.
I'd say good strategy, that's allowed us to drive net interest yield. So you can see those on page 16.
They're up 46% over the course of the past year.
And drive the NII, that's up 3.3 billion year over year. So we feel like we've struck that balance that's what responsible growth means to us and that the margin will probably still maintain a little bit of asset sensitivity.
Okay. Thank you that's it for me.
We will take our next question from Betsy <unk> with Morgan Stanley . Your line is open.
Hi, good morning.
Okay.
Can you hear me.
Yes, we can okay, great two questions one just a little more color on the loan growth outlook I heard you on expecting that loan growth will be slowing as you go through the year and I just wanted to get an understanding of it was that more you know just demand slowing base effects or is there.
There also anything in there from you on proactive credit Decisioning as normal normalization.
Come through the rest of the year.
So that's a couple of things if you're looking at fourth quarter.
If you could see the cards come up which you know seasonal and that's going to come down and that's one of the things that our.
People tend to pay those down the usage of those card frankly are still at low levels of pay rates. The other way what are you thinking about that still in the thirty's. So that's that's sort of one thing thats been kind of consistent through the pandemic.
Customers are paying down the card balances.
Expect at some point those will get back to more normalized pay down rate in the mid Twenty's second is line usage frankly has also come backed out at it it's not got never back to where it was paid to endemic and it moved up and it dropped by 100 or so basis points, which across a lot of lines is a fair amount of loans. So that that you saw and so yep.
Corporates managing.
Borrowing and cash in demand cycle.
Seems to be flattening out a little bit yeah, but then obviously acquisitions and things are way slow down. So it wasn't much activity. There. So I think you put it together than you have in the security space business customers. You know took down leverage paid off a fair amount of loans in the wealth management business, even though they've grown I think for 50, some quarters in a row now or something like that and loan balances.
It just happens mortgages, obviously are although so but what we think is a rate environment settles in you'll see that normalize and it will get better it will be back on the mid single digits. We just won't have the 10% loan growth year over year, because that is faster than economy and fast. We don't we have not changed credit underwriting standards and you can see that in the consistency of the.
Nation standards back in the in the in the.
And pages in the appendix, where we show sort of our cars and in home equity and things like that it's just the demand side's a little soft because people are reading the same headlines were all reading about a recession is coming in what should.
And they should be careful.
Okay got it and then on the expense side I know, we talked a lot about the NII and the puts and takes.
As you go through the year that Youre looking for.
What about.
Stability on the expense line to manage through any.
Worse than expected outcomes on the NII, what what kind of levers do you think you have to pull there Brian .
Well, we always.
I always have.
The variable compensation stuff will drop because like.
Assuming that the reason why rates are going are being cut is because economic activities, where some people thought and then you have the general just efficiency movements in the house that we are we've been pretty good at and then you have to remember we tried to get people to go off of nominal expense to operating leverage and so we have six quarters of operating leverage as growth.
Gross slows down we have to manage a company to produce operating leverage and so we would expect the fees might stabilize in and you know.
It absorbed $1 billion downdraft in quarterly investment banking fees and start to work up from there and other types of things. So I think we feel very good about the ability to find ways to manage expenses always have.
Slowed down hiring as we came into the fourth quarter not because.
Because frankly, we are hiring we've gotten our hiring to match the.
Great resignation earlier in the year and it was sort of over achieving so we slowed that down and that will let us get back in line and start to bring that head count back down to where we want it to be but those are frankly are positions that are relatively are relatively high.
Hi movement rate I'm, only because the nature of the job. So we feel good about between very rate compensation between continuing to reduce head count for efficiency and and frankly.
Activity levels in a down scenario will be able to pull the expenses down but Meanwhile, we're trying we're going to invest $3 $7 billion in technology development and 23 versus 3.4 in 'twenty. Two we continue to add bankers you got 800 wealth management.
Advisors in the second half of last year, where our training program for those across you know wealth management all of our wealth management businesses. Another training programs. We continue to hire young talented people. So we're trying to maintain that balance of continuing to invest in our growth opening in new cities. Yeah. We're averaging these branches were opening are extremely successful when you look at.
The size of them relative to anybody else's opening practice and so why would you stop that and yet the total number of branches comes down because we're managing expense side. So we're paying for this stuff as we go but in it and so there you could slow some of that down and get leverage out of it but the question would be as we're in that scenario is that the right decision for the long term value creation.
Alright, thank you.
We'll go next to Vivek <unk> with Jpmorgan. Your line is open.
Thank you.
A couple of clarifications on the same NII question.
I just want to understand in your assumption about the staying at 14 4 billion.
Through the air.
On a quarterly basis are you assuming deposits continue drawing are shrinking number one eye is expecting.
Further rotation out of non interest bearing to interest bearing.
And do you expect a 14.4 billion number even if there are rate cuts late either towards the end of the is that number sustain a doable even with what is it that you are assuming is it even with the rate cuts.
So vivek, we just said less there'd be less variability around that number due to the fact the market stuff has gone to zero at that yes.
Has no impact on it.
That you saw over the last few quarters have impact so.
Less variability all of the things you cited are the reasons why we tend to say you have to be careful about saying, what's going to happen in the fourth quarter of 'twenty three with great clarity. What we did say is it at this level with less variability you'll have nice growth over this year to next year.
I think everything you pointed out whether it's a weather.
Whether it's our rates going up faster than people think because inflation doesn't go up or come down because people think that they've done a good job and they want to get behind the economy, you know we base our.
Modeling on the Blue chip.
Economic assumptions out there in <unk>, and then looking at our balances and stuff and so I think that's that's the reluctance.
All your points are great points, and they're always why where you are reluctant to say I can tell you to three decimal places, but it's gonna be three quarters out because it can move around on you and to Mike's earlier point, we grew a billion two and 900 million linked quarter and somehow people thought that wasn't good enough because you know there's math it could've would've gotten you different so.
Stay tuned we'll tell you what we know when we know it and but it's good organic customer growth you know a million net new checking accounts, starting at 5000 balances growth in wealth management and loans deposits. These are things that stick with you won't be good no matter what the scenario.
[laughter].
Another a different question slightly you gave the 2000 to 5000 deposit a cohort Brian in terms of where they are in the deposit balances in the past you've also given a cohort below that there's like a thousand dollar type cohort. What is how is that doing can you give any numbers on that.
It's similar it's it's if they're all moving down very slightly that average balance that same group of customers taken out I'd say so it's it's it's in the same sort of different sizing, but it's the same thing.
I don't have it right in front of me, but we'll get it to you, but I don't know but.
But it's moving down slightly the interesting part that Vivek honestly isn't the highest average balances you actually have seen them down from pre pandemic, which means you saw them reposition out in the market. So the early question. We may have seen a lot of that already take place.
Think of it as being down slightly.
Quarter over quarter in that cohort.
Thank you.
You have no further questions in queue at this time I'd like to turn the program back over to Brian Moynihan for any additional or closing remarks.
Thank all of you a good quarter to finish 2022, and thank you to our teammates for producing it and we continue to grow earnings year over year.
We have good organic growth and operating leverage for the sixth straight quarter. Those will continue in 2023, the asset quality and the company continues remain at historic lows relative to any normalized time period in our company's history.
Including the strong credit performance, we had just before leading into the pandemic.
So our job is now to drive what we can control, which is the organic growth of the franchise. The investments that we make are bearing fruit and also to keep the expenses in good control and we plan to do that in 2023. Thank you and we look forward to talking to next quarter.
Yeah.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
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