Q2 2019 Earnings Call

Well.

Standby your program is about to begin if you need assistance during your conference today. Please press Star zero.

Good day, everyone and welcome to today's Bank of America second quarter earnings announcement conference call. At this time all participants are in a listen only mode. Later, you will have the opportunity to ask questions. During the question and answer session. Please note. This call may be recorded I will be standing by should you need any assistance. It is now my pleasure to turn today's conference over to Lee Mcentire. Please go ahead.

Good morning.

Thanks for joining this morning's call for a discussion of our two Q2 thousand 19 results I Trust everybody's had a chance to review the earnings release documents, which are available on the Investor Relations section of the Bank of America Dotcom website.

Before I turn the call over to our CEO , Brian Moynihan, Let me remind you that we may make forward looking statements. During this call. After Brian's comments, our CFO Paul didn't offer you will review the details of our second quarter results.

Well then open up for questions for further information on any forward looking statements. Please refer to either our earnings release documents our website.

Or our SEC filings with that I'll turn it over to you, Brian Thankfully and good morning, everyone and thank you for joining us to review our second quarter results.

Many of you discussed written about and.

Engage in debate about the perceived change in the Ford environment that we all saw this quarter.

However, what we saw in our client base during the second quarter 2019 with solid consumer activity.

Pointing to a continued growing economy in the United States. This year, albeit at a slower pace in that environment. Our company reported the best earnings quarter in the company's history.

That is made possible through the hard work of my 209000 teammates who are driving responsible growth reported.

$7.3 billion in after tax net income and 74 cents per share.

Both of these items increased on a linked quarter and a year over year basis.

Revenue on an empty basis was $23.2 billion and grew 2%.

We increased our return on assets to 123 basis points, a return on tangible common equity was 16.2%.

In India and responsible growth continued to produce strong earnings returns and shareholder value.

As we look at fly free.

We start to highlight how we achieved these results.

Revenue grew 2% and expenses were basically flat year over year.

We generated operating leverage more than 200 basis points, our credit costs remain low and stable. So that resulted in year over year net income growing 8%.

And during the past year, we bought back 7% of our shares.

This reflects a model of combining solid operations with strong capital returns and then thereby driving strong core TPS growth.

This quarter diluted EPS grew 17% from the second quarter of 2018.

All the way along our capital liquidity positions are very strong and continue to strengthen.

Book value per share grew 10%.

We also had important client growth and market share gains and in our businesses client activity showed $75 billion of deposit growth a growth rate of 6% year over year.

We also had $37 billion of that deposit growth came from people consumers at the same time, we strong strong investment flows from those customers.

Loans in our businesses grew $34 billion or 4% importantly, we saw progress and other focus areas as well.

A year ago I told you we would continue to drive to regain our position investment banking as a nice start we saw market shares across many of the products and investment banking in the first half of this year.

One example is ipos, we are number one in volume for U.S. Ipos in the first half Matthew Coder and the team have done a good job an off to a good start driving this business.

All in we are pleased with the results. This quarter. We grew we did it the right way.

We stayed within our risk parameters and we continue to invest heavily in our franchise.

Franchise, adding salespeople.

More technology, increasing our marketing spend and improving expanding or physical plant and all dimensions.

This results also led to the highest first half earnings in the company's history.

So as you look at slide four we show you the last five years results for the first half.

For the first half at 19, we generated nearly $15 billion in after tax earnings compared to the first half of 18 EPS was up 16% and you can see that growth has continued for the last five years.

And those years, we have driven operating leverage you can see that in the lower right. This year, we saw that operating leverage continue in the first half this led to 57% efficiency ratio.

We used the excess capital beyond the need for growth in investments in our in our company to buy back shares a trend, which has accelerated and you can see on the lower left here.

Now primary goal of driving responsible growth has been done to produce sustainable results. Even if the environment changes. This requires us to drive operational excellence and all we do so that we can drive operating leverage and we did it again this quarter as you move to slide five you can see our ext, we've extended our positive operating leverage streak to 18 consecutive quarters.

In those.

18 quarters Youve seen many different market environments changes in interest rates economic growth that sped up or slow down, but we still managed to drive operating leverage for Ford a half years and successively.

Generating operating leverage doesn't get any easier after four plus years, however, with the strong expense discipline, we remain focused upon it.

No one of the things that you don't see hears and you've seen our results is the improvement we're starting to see in some of the categories, especially consumer fees as you go through the quarters the last four quarters.

Over the last decade, we faced service charge headwinds and consumer from reductions in accounts.

And Penn and other fees related accounts for many years. This was base of our consumer strategy to strive to have the best in class franchise, where lower fees because of changes in overdraft policies, but also most importantly, the drive we've had towards being the core relationship bank for from the American consumer.

Now in the recent past offsetting those rate a fee reductions by increasing the growth in the actual count the number of accounts. We have that are primary household relationships. The past last few years.

We have much higher retention than we've ever had and we're improving client satisfaction to levels that it hasn't been seen before but most importantly that focus on relationship depth has resulted in 92% of our households with primary it with an average balance of $7000 plus.

And card income, we're seeing the consumer debit and credit card spending at a 5% plus level.

Year over year.

This seems consistent with us to a 2% plus growth U.S. GDP environment.

Well, we're still refining fighting the headwinds of the reward impacts that go on in that business and you see that number than our competitors.

But in the end today, we are providing great value for consumers and the end of day. When you look at the total relationship and those consumers, it's great economics to our shareholders.

Now next couple of slides, we're going to do something we've done in each of the earnings reports for some time.

But we're going to add a piece to it we always have talk to you about our consumer business banking digital usage, which you can see on slide six but importantly on slide seven we'll talk about how that impact is now being driven across our corporate and global transaction services business. So first lets start on slide six with our consumers.

Each quarter, we shown in these charts in the second quarter, we in a broadest context.

We had 2.4 billion interactions in the second quarter alone with our consumers across all our channels.

To be to show you how dominated by digital 2.3 billion of those interactions were digitally or automated base.

Fixed this explains why we have to be in our excellent both high touch in high Tech. If you looked at our digital only clients, meaning customers have not use a financial center in the past year.

We have 30 million consumer customers across our platform.

Two of our primary digital who have more than $400 billion in balances with us today. Their entire relationship is managed digitally in a balance in activity continue to grow strongly but that's not our business our because our customers want both physical and digital access. This is why we continue to invest heavily enhancing our number one ranked digital platform while at the same time enhancing our best in class financial centers.

And again this quarter you see the interaction of those two in the lower left hand side of the slide with a record number of appointments or set up 580000 times a person took their mobile digital device setup, an appointment to come into a branch in the quarter and you can see that on the lower left.

To better serve the three quarters a million customers that come into our centers every day.

This quarter, we added another 17 financial centers to help drive the growth in our consumer business revenge renovated 45 more bring over 1200 that we've renovated in the last few years and we remain on track to not only hit the three year targets. We established 18 months ago of adding 500, new financial centers and the targets, we established to renovate over 3000.

We also are adding many more relationship managers in these new centers and refresh a lot of centers to bring them up to our modern high touch environment.

Now one of the things that we hear a lot about is the millennial customer an agenda the customer our digital capabilities are one of the things that attract millennials to our platform today in our customer base, we estimate that we have 16 million millennial customer.

Those are customers between the age of 25 and 41. These millennials are very important for our growth and I hold nearly $200 billion in deposits investments with us it's a powerful platform to all segments of the U.S. consumer population.

Now turning to slide seven.

Well many of US focused on the consumer digital trends I think it's also important to recognize a significant activity of the digital transformation our commercial space.

Over the past decade, we've been investing continuously and our global transaction services platform.

And on slide seven we start to show the digital capabilities as part of that investment.

We focus on making the business easier faster cheaper and more secure for clients and make it more convenient access and be in business 24 by seven.

We now have nearly 500000 cash pro online users with double digit growth in mobile usage attached to that.

Moment payment approvals by these users were 123 billion in the past year doubling year over year and growing very fast obviously.

What's the latest enhancements that type of thing that shows the innovation. We have is to have mobile tokens delivered through an Apple watch to help corporate treasurers process payments and then today the people who work with our companies in our companies want the same convenience our consumers want to be able to deliver the services.

So let me up.

And up here by addressing a few questions withdrawn or mine number one many of you asked what what we see at the expected forward yield curve comes true I either reduction in interest rates is in the curve I ask Paul to lay out our thoughts on that and he'll do that shortly.

The second question is can you strong asset quality continue last.

Assuming the economic conditions continue to move along we think the net charge offs should remain low for some time and we've told you that for many quarters in a row.

This is not because something we're doing in the second quarter of 2019, it's because the work we've done over the last decade to continue to maintain our risk profile on a consistent basis and drive towards that.

We see no immediate credit concerns as evidenced by the volume or additions to nonperforming loans or delinquencies ray the statistics around credit that you can see that in the documents.

The third question is okay, given an environment, where you may see a slowdown economy do you have further expense levers to pull.

Well one of the questions. We get is because we managed expenses so well as Ken is there more things you can do.

We believe it's important to continue to invest in the future or franchise, Paul is going to talk to you about.

Near term expense guidance, a little later, but importantly, the reason why we're investing to produce these investments presume any result meaningful results.

There are 2019 expenses are but suppose are projected to be lower than 2018.

And that brings us to every year in the last decade, Weve had declining expenses except for one.

But.

We as managers you want us to be agree with you that if there's severe economic issues ahead, we have the flexibility continue to reshape this expense base, obviously, starting with revenue revenue related cost, which would adjust quickly and automatically and then changing our investment strategies.

I can sure these areas, we focus on and or on our mind. This is Ron your mine so with that let me turn over Paul for a few more details on the quarter.

Paul.

Good morning, everyone I'm going to start on slide eight since Brian already covered the piano.

Overall compared to the end of Q1.

The balance sheet grew 19 billion driven by loan growth, which ended the quarter more than 20 billion higher in our business segments.

Liquidity strengthened in the quarter global average global liquidity sources of $552 billion.

Remained well above requirements.

Shareholder equity increased 4.4 billion as we issued 2.4 billion in preferred stock.

Ahead of plan calls announced in July .

And common equity increased 2 billion.

Versus Q1.

The 2 billion dollar increase in common equity reflects an increase in AOCI as the value of our Fs debt Securities Rose given the decline in long and interest rates.

In total we returned 7.9 billion in Q2 through common dividends and share repurchases, 112% of net income available to common.

As a reminder, we recently announced plans for a 20% increase in our quarterly dividend as well as an increase in our share repurchases to more than 30 billion over the next four quarters.

With respect to regulatory metrics are T. Lac ratios remain comfortably above our minimum requirements. Our CTO, one standardized ratio increased to 11.7% remaining well above our minimum requirement of 9.5%.

Higher capital levels drove the increased AOCI high.

Excuse me higher capital levels were driven by the increased AOCI.

Im improved the C T one ratio, while higher loan balances and commitments mitigated some of that improvement.

Moving to client activity and starting with average deposits on slide nine average deposits grew nearly $75 billion or 6% year over year. This was the 15th consecutive quarter in which we grew deposits more than 40 billion.

Global banking alone brought in more than 39 billion.

Global banking continued to benefit from strong customer demand, reflecting the additional bankers we have deployed over the last few years in the middle market franchise.

We also continued to see to see a shift from noninterest bearing to interest bearing deposits in global banking.

Deposits with consumers grew 37 billion or 4% within that global wealth management was up 18 billion year over year, reflecting client growth with a preference to hold cash amid market uncertainty as well as inflows of about 8 billion from the conversion of some money market funds to deposits near the end of 2018.

Consumer banking deposits grew by 19 billion or 3% year over year.

More importantly, checking balances grew while more expensive balances declined modestly in fact checking balances grew 22 billion or 6% year over year.

Two 374 billion while rate paid remained low at nine basis points up only five basis points year over year.

Turning to average loans on slide 10 overall, our loans grew a little less than 2% year over year.

Our all other portfolio is down to $45 billion and has been running off at a pace of approximately 2 billion per quarter, excluding loan sales.

Looking at loans across our business segments core loans grew 34 billion or 4% year over year.

Consumer wealth management and global banking segment, each grew at a healthy year over year pace.

As you can see in the bottom right chart, we continue to demonstrate a fairly consistent pattern of responsible loan growth.

Growth of loans to consumers was led by an increase in mortgages as lower interest rates stimulated more originations and allowed many of our customers to lower the cost of owning their existing home or buying a new one.

Within global banking, we saw increased activity for middle market clients complementing the continued activity from large global corporate borrowers.

Turning to slide 11.

I will not only review the drivers of our net interest income this quarter, but also filed a few perspectives on the future given the expectation of lower rates embedded in the forward interest rate curves.

Net interest income on a GAAP basis on a not on a GAAP non ft basis was 12.2 billion 12.3 billion on an F.T. basis.

Compared to Q2, 18 gap and I.

Was up.

361 million or 3%.

The improvement was driven by the value of our deposits as interest rates rose in 2018, as well as loan and deposit growth.

On a linked quarter basis, GAAP Eni was down 186 million.

In Q2, we benefited from an initial day of interest as well as loan and deposit growth, which was more than offset by three factors first.

Lower long term rates resulted in higher prepayments of mortgage backed securities, which caused higher write offs of bond premiums.

Second.

Q2 included higher funding costs from growth in non earning trading assets and other global markets assets.

And then lastly.

Lower short term rates reduce yields on floating rate assets such as commercial loans.

As a result of these impacts net interest yield.

Of.

2.44% declined seven basis points linked quarter, but was up three basis points year over year.

With respect to deposit rates, we remain disciplined and saw minimal movement and total deposit rate paid.

At 57 basis points.

<unk> increased just three basis points from Q1.

With LIBOR rates lower than Q1.

And the forward curve predicting further declines we would expect client deposit rates to begin to move lower over the third quarter.

Turning to asset sensitivity of our banking book.

We remain asset sensitive given the nature and size of our deposit base and the type of loans, our customers have sought from us our asset sensitivity in a rising rate scenario increase compared to Q2.

This was driven by the decline in mortgage rates, which increases the likelihood.

Mortgages, a mortgage prepayments in the baseline.

The lower current forward curve also caused increased asset sensitivity and the falling rate scenario.

In the second half of the year, we expect eni to benefit from growth in loans and deposits as well as an additional day of interest in Q3.

However, lower rates are expected to have three primary negative effects first yields on floating rate assets should continue to decline from short term rate reductions.

Second lower long term rates may continue to stimulate mortgage refinancings, causing increased right off of bond premiums and third reinvestment rates on securities and mortgages will dilute current portfolio yield.

However.

Lower LIBOR rates should reduce the cost of our long term debt and other funding partially offsetting these headwinds.

Last quarter on our earnings call reviewed our expectations that net interest income could grow roughly 3% for the full year of 2019 over 2018.

That was based on a relatively flat forward curve at the time of our earnings call.

Since our earnings call on a spot basis. The 10 year rate has fallen more than 40 basis points and short term LIBOR rates are lower by 10 basis points or so.

From here.

If we were to assume stable rates.

We think our Eni for 2019 would now be up approximately 2% compared to 2018.

Additionally.

The forward curve anticipates, two fed fund rate cuts in 2019 and another in 2020.

If rates follow the forward curve and the fed funds rate were indeed to be cut twice this year starting this month.

We think it would likely shave another 1% off and I growth for 2019.

Turning to expenses on slide 12.

We have now been pacing at our targeted level of noninterest expense for several quarters and our efficiency ratio has improved 100 basis points year over year to 57%.

At 13.3 billion, we were basically flat compared to Q2 18 with expenses up less than 50 million.

While holding expenses roughly flat, we increased investment in our people our brand in technology and in office space.

And as you know, we are adding and renovating financial senators, which serve not only consumer clients, but also commercial and wealth management clients.

Investment in people included adding more sales professionals increased merit and benefit as well as the share success bonuses, which we have awarded for two consecutive years now.

Since a portion of shares effects bonuses best best overtime, we're now covering those programs and our ongoing expense base.

Also in the expense base is the increase.

In early Q2 of our minimum wage to $17 an hour.

And as you know, we announced our intention to continue to raise our hourly minimum wage until it reaches $20.

In 2021.

Compared to Q1 expenses expenses are also up modestly as Q2's decline from the seasonally elevated Q1 payroll tax expense was more than offset.

By the increase in investment in initiatives and marketing in Q2.

In the second half of 2019, we expect our expenses to roughly equal.

Our first half expense of 26 and a half billion.

We expect increased technology investment in the second half plus the cost of adding new client facing professionals to be roughly offset by the seasonally lower incentive costs.

We previously projected that we could hold 2019 flat with our 2018 expense of 53.2 billion inclusive of these planned investments. However, as you heard Brian say, we now estimate expense and 2019 will be modestly lower than that.

Turning to asset quality on slide 13.

Asset quality continued to perform well driven by our disciplined approach to underwriting and a solid U.S. economy.

As you know the industry received annual stress test results this quarter and once again, our loss rates in stress scenarios were lower than our major peers.

Total net charge offs in Q2 were 887 million, a little more than 100 million lower than Q1, and the year ago quarter.

The decline was driven by the sale of 700 million of home equity loans, which resulted in a 118 million of recoveries from previously charged off loans.

Absent this recovery net charge offs were just over a billion or 43 basis points of average loans and consistent with the net loss off rate ratio in Q1, and the prior year quarter.

Outside of the normal expected Q2 seasonality in our credit card portfolio, we had a modest increase in commercial driven by a couple of single name losses.

Provision expense of 857 million.

Oh excuse me provision expense was 800 entity 7 million and included a modest 30 million dollar net reserve release.

Our guidance on net charge offs for many quarters now has been roughly $1 billion per quarter and that remains unchanged.

This guidance assumes current economic conditions continue.

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Okay.

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

With respect to consumer metrics delinquencies trended lower which we believe is a good indicator of future losses.

Additionally, nonperforming loans continued to improve even after taking into consideration the loan sales this quarter and in commercial we also saw a modest decline in nonperforming loans, while Reservable criticized ratios remained near historic lows.

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

Consumer banking produced another strong quarter earnings grew 13% year over year to 3.3 billion revenue grew 5% and we created operating leverage of more than 400 basis points.

The efficiency ratio also improved year over year to 45%.

Even as we invest in new markets and renovate financial centers. The all in 162 basis point cost of running the deposit franchise was relatively flat compared to Q2 18 as the decline in the cost of deposits component.

Offset the increase in rates paid.

Client activity remained strong with loans and deposits showing solid growth mortgage originations.

Clearly benefited from lower rates customer satisfaction improved asset quality remains strong as the net charge off ratio was 124 basis points decreasing four basis points year over year.

And I would note that much of the loan growth that we have added to our balance sheet is high quality consumer real estate loans.

We continue to add salespeople.

For a consumer lending.

Investment advice and small business lending.

And we also increased our spend in marketing via campaign, where our 91 local market teams around the country as their customers what they would like the power to do.

Turning to slide 16.

Note that the 5% year over year improvement in revenue was driven by Eni.

While card income was down modestly year over year card spending grew 5% more than the prior year, which on its own was a strong quarter given elevated spending driven by tax reform last year.

Versus Q1, we saw improvement in card income driven by solid purchase volumes.

We continue to expect high rewards dampened card income, but would also remind you that we use awards to deepen relationships with a focus on total customer revenue not just fees.

Enrollment in preferred rewards increased to $5.7 million and now represents 65% of the eligible opportunity and our retention rate of these customers is now 99%.

Balances with these customers grew 11% versus Q2 18.

With respect to service charges.

They were also down modestly year over year again this quarter, we faced the headwinds from actions, we took in previous quarters that reduced.

Customer penalty fees.

However, as with card versus Q1.

We saw a modest improvement in service charges.

Turning to global wealth and investment management on Slide 17 strong results were driven by new investment accounts and more traditional banking products as well as the market's rebound in the quarter.

Referrals from across the company also gained momentum net income, which approached a record level was just over $1 billion and grew 11% from Q2 18 pre tax margin was a record 29%.

The business created 240 basis points of operating leverage year over year as revenue increased more than 3% and expenses grew 1% within revenue.

Positive impacts from banking activities and higher rates Grove, and a higher while fee improvements from 81 flows and market valuations more than offset general pricing pressures with respect to expenses higher revenue related incentives as well as continued investment in new advisors technology and brand.

Were modestly offset by lower intangible amortization and deposit insurance costs.

Digital use by affluent clients continues to gain momentum as mobile usage once again grew double digits year over year.

For example.

Gee when clients used E signature twice as much as they did only a year ago.

Moving to slide 18.

Oh Gee one results reflect continued solid client engagement and both merrell and the private bank.

Strong household growth in both businesses contributed to the 2.9 trillion in client balances.

Hey, you inflows were 5 billion in Q2 or 24 billion over the past four quarters contributing to record are you on balance balances, which rose 6% year over year to 1.2 trillion.

On the banking side deposits of 254 billion were up 18 billion or 7% year over year, driven by client growth and the desire by some clients to hold more cash amid the market uncertainty.

Linked quarter deposit outflows reflected.

Seasonal tax payments by our customers.

Loans were 3% higher year over year, reflecting strong mortgage growth given the decline in rates.

We also saw good growth in custom lending with respect to client activity. One thing worth noting is the increase in client referrals, both to and from Maryland, The private bank advisors.

This quarter, we had nearly 15000 referrals.

Two advisors from other parts of the company.

And advisors made more than 58000 referrals back to our other lsbs in Q2. These introductions added 7 billion to client balances in GBM and help us grow households.

As you turn to slide 19, I know many of you look at global banking and capital markets on a combined basis.

So to help you with your comparisons I notice it did last quarter that on a combined basis. These two segments generated revenue of 9.1 billion interim 3 billion in Q2, which is nearly a 16% return on their combined allocated capital.

Looking at them on a separate basis and beginning with global banking on slide 19, the business earned 1.9 billion and generated a 19% return on allocated capital in the quarter.

Earnings were strong, but down 9% from Q2 18, driven by the absence of reserve releases for energy exposure in the prior year.

Revenue was down modestly year over year as loan spread compression and LM activities offset the benefit of loan and deposit growth.

Strong deposit and loan growth reflects the hundreds of bankers, we have added as well as continued investment in how we deliver our loan product and Treasury services.

With respect to expenses lower deposit insurance costs, mostly offset continued investment in technology and bankers.

Looking at trends on slide 20, and comparing to Q2 last year as you heard Brian mentioned earlier, we have made steady progress in investment banking over the last few quarters.

We saw a nice finish this quarter with IB fees of 1.4 billion for the overall from down 4% year over year, but up 9% from Q1.

This performance has to be put in the context of overall industry fees, which according to Dealogic were down roughly 20% year over year in fact, using dealogic data our market share has improved across most major products.

Comparing the first half of 19 to the first half of 2018.

Switching to global markets on slide 21, as I, usually do I will talk about results excluding DVA.

Global markets produced 1.1 billion of earnings and generate a return on capital of 12% overall revenue declined 6%, while expenses declined 2% year over year.

Within revenue a year over year or client and sales and trading was partially offset by a gain on the sale of an equity investment sales and trading declined 10% year over year FIC was down 8%, while equity fell 3% decline in equities to one to 1.1 billion reflects weaker performance in EMEA and derivatives compared to a stronger year ago period.

Fixed lower revenue was due to a weaker trading environment with lower overall client activity across most products.

The 2% year over year expense decline was a reflection of lower revenue related compensation.

On slide 22, you can see that our mix of sales and trading revenue remains heavily weighted to domestic activity, where global fee pools are centered within FICC revenue mix remained weighted towards credit products and we had no days with trading losses in the quarter.

Finally on slide 23.

We show all other which reported a small net profit.

350 million better than Q2 18, there are two primary reasons for the improvement first provision benefit increased 136 million from Q2 18, driven by the non core loan sale, which as previously known resulted in a recovery of 118 million.

Second we had an improvement in our tax rate compared to Q2 18, the tax rate for the company was 18% in the quarter, a little lower than our expectations. We expect the tax rate in the back half of the year to be approximately 19% absent any on usual items.

Okay, I think with that we're ready for some tonight.

At this time, if you would like to ask a question. Please press the star and one on your Touchtone telephone you may withdraw your question at any time by pressing the pound key once again to ask a question. Please press star and one on your Touchtone telephone and we'll take our first question from Jim Mitchell with Buckingham Research. Please go ahead.

Hi, good morning, guys.

Wow, you just might as well ask a question on and I. Appreciate the guidance for this year, how do we think about I guess number one the impact of it.

I was just wondering how does that sort of half is is it linear and I guess number two as we think about next year. If the forward curve is realized over the course of the next 12 months.

How do we think about that impact into next year.

And given the strong loan growth you guys are seeing accelerated into Q is there enough asset growth that you can still grow in this in this environment next year. Thanks.

Okay. So in terms of.

Just isolating and on a 24 basis point cut on the short end.

I guess a crude approximation.

Is.

You know the 3 billion impact over the 12 months of a 100 basis points down rate shock on the short end.

The quarterly impact of that is a little more than 175 million.

But it'll be even less than that because that $3 billion is measured relative to the forward curve.

Which already includes rate cuts.

Plus that analysis is just on our banking book. If you include our markets book.

Which is modestly liability sensitive.

You get to the approximately $100 million levels that I discussed in the prepared remarks.

In terms of 2020.

I look I would say, it's a little early to be talking about 2020, we don't know what rate cuts. We're gonna get we don't know why we're going to get them, which is important.

So I think as we get a little closer will be will be you know more likely to be able to talk about that.

Okay. Thanks.

Jim I'd add one thing you remember that.

If you think about it for the industry.

Thought process over the last.

Yeah.

Three years basically as rates rose that was one thought process and how people price deposits and other things and as that changes you will see a different thought process take hold at least to our company and I think if you look at some of the statistics in the materials on age, especially on the corporate GTS type business to.

The you know necessary increase for the highs bounced customers and et cetera.

That's occurred will slow down and come back the other way and you know that that frankly, it's just the nature of a change and and the rate environment, which the pricing is still catching up to.

And so I think yeah. So as you think about it as you get out to longer term 20, you have to think about that situation sort of reversing back to a different framework than framework, we had literally 200 plus basis points of short term rate increases.

Great. Thanks.

We'll take our next question from Glenn Schorr with Evercore. Please go ahead.

Hi, good morning, Brian .

Morning, one quick one on follow up on cards.

You mentioned spending up margin compressed and and the reward costs continuing to to be there, but obviously producing some growth can you can you talk a little bit more about the reward dynamic how long.

The current environment, you think less and how you know that it's going to continue to fuel that growth, maybe something a little bit more of.

Growth coming from current customer base first no one's things like that thanks.

So just starting to add to your question working backwards, we generate another million plus cards. This quarter, we've been fairly consistent doing that.

What is really happening our card business over the last few years has been the continued repositioning it's really over now and now you're starting to see it start to work its way up and grow I'm just in terms of balances and numbers of cars and things like that.

If you think about on the reward.

Question generally remember that and you mentioned it Glenn that it's it's a relationship pricing.

Pete So our cards come.

With the relation pricing across the whole relationship, including the pause. It. So you know you could have $20000 deposits from these customers and so your ward and where the car because that's the way you can do it but you're actually getting the deposit. So yeah, we'll keep working that but if you look at that.

More recent quarterly trend, you're going to see that you've seen the.

The impact decline, although it's still.

I'm going to hit, but you're seeing that help fuel our deposit growth in checking deposits, especially at 6% year over year in consumer and that is a huge payback for the reward price. So you'll see that dynamic continue.

We haven't seen big break in trees, and it's not so volatile it's kind of a steady but the industry dynamics and how people are using words not only for the card activity, but also more broadly as the I don't expect a change but in the bank of America context, we've been using it for the broadest part of the franchise and that's that's why you see the growth in the other parts of the business.

I appreciate that one other one follow up on wealth management.

You mentioned.

[noise] new household growth up 45% year to date are are you doing anything specific on incentives to two to spur that growth. It seems like a big number.

For such an already big business and the related question is do you think of there being a ceiling to margins because they're already huge at 29%.

A couple of things one on just on the the way the incentive system works, Andy and team.

Going back two years ago, now basically added to.

A modifier for lack of better term and in the incentive compensation construct a four requirement yet a bonus. If you grew your household for you on the numbers and obviously <unk> inverse that if he did not and that's just led to the activity that you've seen in the pickup and his team have done a good job on the private banking side.

We've been adding sales teammates and Katy and the team have been driving that it's been a it's up dramatically year over year, and that's critically important as that business profitability them extremely much or even higher and so it does come from modifying the system and also comes from the way we operate in the markets on a referral business that that is up in Paul's comments, you heard that there's a huge flow between the f. essays that operate in the Merrill edge platform at the branch to the financial advisors. So somebody comes in is is.

As a matter of assets and desires.

You have a financial adviser, we move them to the platform that happens a lot and then off the business banking and small business banking commercial franchise. The entrepreneurs behind those businesses referred over and you saw I think 15000, I think it was Paul's number towards Merrell and we track that every market, we make sure they get execute on the cap the success rate in that in that energy creates a it's gold and every market every year and this year, we'll do 7 million referrals across all the businesses in the markets that we're doing and so and then on the margin. We moved to 29 as you see the <unk> type activities loans deposits continue to grow that margin will continue to grow we're fighting the fee compression on the pure asset management business you've seen go on for years in this industry.

But we have lots of advantage of scale and capabilities on the digitization of the operational side that business and platforms and statements and things like that are you know we're getting to.

50, 60% digital statements in consumer we're not anywhere near that and wealth management and all that there's not some snap your fingers and overnight it happens, but all of us the grind to make.

Make the business more efficient so our industry leading margin, we think we can create keep pushing it up.

Thanks I appreciate it.

Well now go to Mike Mayo with Wells Fargo Securities. Please go ahead.

Hi, I was intrigued by your comments about 16 million millennial customers.

$200 billion of deposits and I think that's the first time that you've disclosed that information so.

Yes, what's the growth rate profitability those customers and as you look at the millennial customer sat what's your assumption for how long they'll be customers with you since they are younger and you have more digital banking you now assume that they'll be what you say 20 years 10 years and if so how do you change the pricing of products for that millennial customer set.

You know one of the things I don't want to sound for publications in terms of People's views that big banks don't do business with millennials. It's just to set the tone, we put the 60 million to give you one cents $400 billion of it yeah client balances with us, but if you look at our checking sales Mike.

And you look at the population representations millennials and the population and generally a in a population. They look about 18 years old and millennials about 24% and.

People between 18 to 24 is a 11%, but if you look at the rate we sell to that class a class of our sales to millennials is 40% of our sales. So it's basically one and a half times the the rate and the population were selling to and if you look at their holdings imbalances today, just pure checking nothing not into savings or investment the millennials hold about $70 billion of checking balances with us and it's growing.

Quickly and so we are gaining share in that class, it's because of the digital capabilities and all the things we talked about.

You know are they profitable all our consumers basically are profitable yeah. They represent a big part of our business today or the representation that currently outstanding checking accounts is about 40% or just for millennials. So we're gaining share in that segment, we got to be on that on our toes at all times and it's very valuable. If you think your bike youve been around this business a long time, you think about just suppose checking balances alone provide tremendous value.

Will they stay with US the answer is they have in the past and we expect in the future as long as we keep driving the great experiences, we have and going back to the comments on the page six like it is in the slide deck on consumer strategies or just look at the activity levels.

And those are generally would.

Have a stronger cohort to younger below 40 year old people, but on the other hand across the platform were wouldn't work, but if you look at it you know it was it was L. The activity volumes, if you look at it with Erika.

In a year 50 million plus customer interactions and if you look at it in terms of digital interactions at 2.3 billion in the quarter.

Mobile log on stability and a half.

This this is advanced stages anybody and so we are very pleased with.

The teams work in this area and then if you go to Merrill edge. If you look at the millennial balances again. They represent you know twice the rate of the population and we're accumulating those balances, which when we compare it to other competitors, 64% of our new clients or in a millennial categories from Merrill edge and our preferred clients and things. So it's it's it's it's very good we're driving it but its a competency the team's capabilities in those categories that drive it.

And the other question that I had how long do you assume these customers will stay with you and how does that compare to the past. The reason I ask that you look at some of the offers out there I guess.

400, 500, $600 simply for opening accounts and certain banks.

The assumption is that once you get customers. They will stay with you longer than they would have say 10 years ago.

Well that's that goes back to your colleagues question about the rewards and things like that are preferred base of customers and the consumer business.

Is a 99% plus retention rate.

And so.

They really all stay with us and so I.

And that's that's.

Extremely powerful dynamic so the assumption I don't have a top my head at the team puts in their models and stuff like that but you've ever retaining 99% I'm, it's a pretty long duration.

All right. Thank you.

Well take our next question from John Mcdonald with Autonomous Research. Please go ahead.

Good morning.

Core loan book.

Remained solid at 4%.

Paul.

Are you seeing some improved momentum in middle market and small business.

And also the 2% reported as close some of the gap to that core number I guess as you think about the rundown pace could we continue to see a downturn. So that your overall balance sheet growth looks closer to that core.

I guess I'll hit the second one first.

The answer is yes, I mean, we have we have 45 billion.

In the noncore portfolio.

Oh that 45 billion half I would say is sort of legacy.

Home equity and residential mortgages that you know will run off and or and or depending on market conditions. We may see some more sales the other half is.

You know mortgages that a previous treasurer or CFO bought many years ago and it's they're good mortgages, they're going to run off as well together, they're running off at about.

2 billion a quarter. So yes, I mean, you can just do the math.

It's becoming a smaller and smaller component.

Of the overall picture.

And as you point out look when you look at our El <unk> they were up 4%.

You know year over year this quarter and we are seeing I think you know good growth in small business in fact, I think where the largest lender to small business companies in the U.S. now surpassing a competitor recently.

We were seeing and middle market. This quarter, we saw a pickup in growth that I really compliment to the consistent growth that we've been seeing for many quarters now from.

Large global corporations.

I mean, we don't see anything on the horizon to suggest that we can continue to grow.

Kind of what we've been telling you which is kinda. The you know the low mid single digits.

Uh huh.

For the company from the from the business segments.

I just had two thoughts there one is.

Yeah, sure and mill in our small business runs our small business for us in the consumer business and Alister Borthwick runs middle market that you know that they've got their team sort of moving along and as you said.

You know growing at a consistent you know 567% depending on the product set any type of you know, what's real estates lower versus core middle market and so we feel very good about that.

You remember that the run off pace in the all other book has been accelerated by the sales over the last few years and that was to reduce our.

Our potential credit risk and stress and you've seen that be reflected including last you're asking for the extra.

Capital return based on selling a bunch of loans during the year, which had higher charge offs in the sea CCAR process as you might expect and then secondly, operating risk of the company comes way down because those loans.

It would have a tendency and we sell them servicing release, so we're getting to the bottom of the barrel. It's now 4% of the <unk>, 5% of the portfolio used to be eight 9% of the total portfolio, maybe 10%. So we feel good about that impact really narrowing now and the sales are largely <unk>.

We always chipping away this quarter was a relatively modest balance, but the sales are largely through the money and the stuff. We have now is actually 12 years current pay you know it and thought that none of these loans were made since the crisis. So we feel good about that and the last thing is think about and.

In the metal side in terms of in the private bank inside terms alone the growth, we're seeing solid performance, there and the integration and middle market investment banking, we feel good.

Great Brian Clark on Us a little bit, but could you talk about your.

Feelings about your ability to maintain the strong checking account growth that you had given a stance on rates and you know whats your outlook for that checking account growth to continue on maybe relative to GDP or the industry.

If you look at it we have maintained that pace. If you look at retail deposit growth.

Since the beginning 16, I think our gross <unk> balances have grown about 20% the peer groups growing about 12, and so that's significant difference we've been pretty consistent you know.

Growing.

$28 billion in checking.

That that is the core transaction accounts. So if you look at the.

What we're seeing now is the average balance in our checking accounts I think are 7.57 billion <unk> 7.5 thousand 75007, 0.7, something like that 90% current yet we're still sort of in the last couple of years, sorry, Internet accumulate and so we feel good as we can keep that checking accounts grew up it's not dependent rate paid because the core transactional count so even though there's some yep.

Payment toward the interest bearing checking you know the dominant part of noninterest bearing and it's just the core transaction count if you look in the money markets and stuff and see the rates, that's where the people get paid for the excess balances. But this is the money is flowing through the household on it on a daily weekly monthly basis, and we feel very good about it and feel that we can continue it because we have and all the environments and all the rate changes.

Okay. Thank you.

Well now go to Saul Martinez with you be asked please go ahead.

Hey, good morning, guys.

Couple of questions first I wanted to key in on something you said Paul on on the rate sensitivity you mentioned I know, it's a crude approximation, but 25 basis point cut on the short end, it's about 175 million a quarter, but that's just the banking book and your liability sensitive in your trading book and I think you mentioned, it's 100 million. If you kind of net that out so should we.

It is my math, right and suggesting that you get something in the neighborhood of a $75 million benefit.

Per quarter for every 25 basis point cut in your trading book, because you know obviously in the past, sometimes we've kind of looked at your NII growth in your NIM expansion in a rising rate environment and maybe it hasn't grown as much as we thought because of the headwinds in the trading portfolio, but yeah. It is short term rates move down should we see the opposite of that also occur in some of those headwinds get mitigated by expanding margins in your trading book.

Well I think you're you're.

You are close but the one piece you're missing is.

That.

You know in addition to being modestly.

Liability sensitive in the trading book.

When you look at those disclosures about the impact of 100 basis points shock on the on the downgrade scenario on the short end.

Remember that below the forward curve.

Right, So you're looking you're literally talking about a scenario where.

You know short end rates would be shocked that down to 75 basis points.

And long and would be had one.

Percentage points, so rightly so that 3 billion obviously it gets.

You have more and more impact the lower and lower rates go that first 20 basis points is not going to be.

Threebillion divided by you know sick right.

So you've got to factor in both of those things.

No understood there, but is the logic right. I guess is my question that you'll get an offsetting that offset is sort of in that magnitude of.

You know for every 25 basis points something in the neighborhood of 75 million on the trading book.

Yeah, I don't think we're prepared to they got too much guidance on the how liability sensitive the trading book is but when you put that the all the factors together you kind of get to roughly 100 basis points I mean 100 million on that first.

A rate cut.

And you know remember when I went through the script and talk about.

How you know, we still end up growing year over year 2019 versus.

2018.

You got to factor in loan and deposit growth, we got great day coming in the quarter. So all those things you know impacted.

<unk> and you're also baking in.

A little bit of a benefit a little bit of an offset then from expanding margins and the trading book on the rate cut.

In that guidance.

Yeah and that guidance, we were we're putting in a little bit yeah. Okay.

Changing gears in you know apologize if I missed it but did you disclose the size of the gain on the sale of the equity investment.

[noise], we didn't disclose this <unk> the equity investment a trailer yeah no. It was a 200 million 200 million okay.

Awesome. Thanks, so much.

Thank you.

Well now go to Steven Chubak with Wolfe Research. Please go ahead.

Hey, good morning.

So I wanted to start off with a question on the investment banking business. It was pretty nice to see share increasing in the corner or we had seen some share loss in some of the more recent quarters I was hoping you could speak to some of the factors that may be driving some improved business momentum whether its leadership changes or anything else that you could attribute it to.

Sure. So just a quick review year over year the market. These according to Dealogic were down I think 21.

Percent.

Our reported fees were down only 4% and if you looked at dealogic fees for us they'd be 11%. So clearly you know we picked up at least in this quarter, you know meaningful I would say market share.

You know I think this is a result of.

All the things that we said we were going to do I'm not that we ever had a problem in investment banking, but we think we should be you know top three and there was a little bit of slippage there and so we just reinvigorated the focus we decided to add more bankers, particularly to cover.

The middle market remember we have.

An army of corporate our commercial bankers out there they have great relationships, they've been making loans to clients for years.

And.

There's certainly an opportunity when those companies need to do something need to use investment banking product for us to be there. We just needed that probably out a few more bankers dedicated to that segment.

We've done that we've got regional bankers now all around the U.S., we're going to be adding more there in you know in the market with the commercial bankers.

And.

That and I think just a reinvigoration from the leadership team across.

You know global corporate investment Bank, and commercial bank and business banking I'm I, just think is having an effect.

Hi, I'm helpful color and then Paul just one more for me and it's on the topic of that I mean, I think a slightly different attack.

No. There is obviously pretty heavy reliance across the industry on the 10-Q disclosures, which I know are inherently flawed. It's a very static snapshot I was hoping you could just speak to some of the factors that are driving a more benign impact in terms of the rate sensitivity that you cited versus whats explicitly disclose in the 10-Q, whether its volume growth some issues relating to your comparing it versus the forward curve deposit offsets or anything else you can speak to.

But just one thing to be precise what Paul said, a couple of times, but it gets lost sometimes in I'll, let Paul get into the broader statement.

When we disclose the 900 basis points shock or you know down 100 basis points across the curve that is on top of what the forward curve has in it.

And so sometimes people get confused by that because they think it's from the current rate invite and stable rate environment volume, we see today minus 100, it's actually in the case of Fourk or having a rest of the year to cuts in it. It's 50 off and then another hundred off and so that that dynamic Pauls mentioned twice to sort of make sure people don't get ahead of us, but let but Paul can take you through the broader factors, but just just be careful that you're not making that.

Miscalculation, which we've seen other people do not saying you have it other people.

Understood I'm sure it look I'm not sure what else I can add I mean, if you think about.

Our clients right you've got.

Gee, one client and global banking clients, where.

You know if rates change.

The pass through rate on those clients are going to be.

Rough roughly the same up or down.

Right and you've got consumer clients, where.

Because of.

The great job, we've done on rate paid in the cycle. There just isn't a lot of room on the downside, but if rates go up there probably be a little bit more.

You know pass through so that's that's the dynamic we're living with on top of that you know you've got to factor in.

When long term interest rates go down.

The quarter later or the month later, you're going to see an impact that doesn't.

You know continue forever, it's only an impact when the rates go down and you get a lag effect on some.

You know increase and.

A write off of premium.

And just that that's what is going on Paul just on that this quarter you know a couple of basis points of the compression.

Due to the amortization of the premium which goes away next quarter if rates. If the tenure doesn't fall by 50 basis points again during the quarter. So, though it another basis points sort of seasonality. So when Paul talk about somebody's sort of spot issues earlier on.

Of the seven basis 0.3 of it is really just literally a quarterly effect that goes away and so that's where you think.

Yeah, you know as you think about it and they go back to all the factors listed loan growth deposit growth deposit pricing loan pricing.

But then the twist in the in the market when things change instantaneously can have a quarter effect and go away next quarter as long as rates don't move at the same and the velocity. They move this quarter and you know those are that's why that we are always careful about these estimates to make sure people understand the underlying basis no. One of your colleagues said earlier the coal clue. This is we've got to grow loans and deposits. We grew $70 billion in deposits you ever go you ever go $38 billion in loans.

The rest of the pauses go into securities that is the core business and that will drive the earnings power of this.

Company, an average earning assets are growing.

And that's that's what we're up to that will ultimately make and I grow. It. The question is the twists and turns along the way can be a little different.

That's very helpful color, Brian Thanks for taking my questions.

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

Good morning, Matt Good morning.

Oh, you mentioned earlier about some of the puts and takes on the expenses and gave guidance for this year to be a little bit below what you had thought.

A few months ago, but.

What are your thoughts kind of beyond this year I think at one point you had said try to keep costs relatively flat at 53 billion and then you did mention you know if I think you're alluding to call. It a capital markets related or volume related areas. If those were weak or there are some levers to pull on costs, but if it's just a lower rate environment is there are other area a on the cost side that you can pull and so I guess question is like a stable rate environment. In your base case, you know what are you thinking on costs and then if the revenue shortfall is just rate driven or are there. Some areas that you can tighten thanks.

So I think if you think about it over the last two.

Years plus.

I think we run around 13, 113 to 13 3 billion a quarter expenses, except for one quarter. We had 13, eight which is sort of the seasonality of other strong markets quarter plus it was the first quarter with it.

If I can and stuff like that so you basically we got this thing at a run rate and so but you got to remember in 19 that run rate is picked up if you go back to when tax reform came through we said we'd put.

500 million more in the ER technology investment platform.

A chuckle ran through last year and about two or 300 up its running through this year. So that was increased expense. We said, we'd do the share for success, we did over $1 billion in the two programs. There was a near term cost to it and then there's an amortization of the deferred parts of their stock. That's all in the P. and L. today, and then you have incentives increased rent and all the other stuff at the benefits and with all that we thought we'd be 53 to 53, three but this year in Paul's told you basically assume that will be closer to 53 with all that going on and all that extra investment. So if you go back to.

16, when we said we were running at 57 or six or whatever where we told you. We had 53 Nobel low 53 is no. He believed this we got here we've invested a lot more and we still are running at 53 that is the inherent ability of the newbie AC Sim operational excellence, Oregon health, which not doesn't mean a lot to all you, but the team mates with listening will understand all that that allows us to keep driving that relative efficiency the company and he even in an environment where bit where the world just kind. So it goes on you have 2% growth. We know there's more we can do well we don't like to do is to get ahead of us because frankly, the investment year over year and marketing.

It was $150 million last years second quarter this quarter additional in the quarter that wants to stay in it that kind of level, but it's part of driving that customer satisfaction delight score through the roof, which then means those you know that millennial accumulation accounts at twice the rate of the population, which then turns into customers to Mike's point of the future that the digital comp C. allows us to serve more efficiency, which then drives down the efficiency ratio that is the operating model and so you know those investments pay back and they'll run down to our benefit but that said, we're saying. We gave you is flattish from 18 or 18 to 19 to 20, and we're basically saying you don't push 20 down yet in your models, because we will see what happens but right. Now we think 19 is going to come in a couple of hundred million under what we said, which is just you know by the teammates here is good management, we didn't do anything we didn't put any lever. We just kept driving a basic efficiency. This platform through and we'll continue to do that and if that comes.

And to be lower than the number we're talking about for 20, when we get there it's going to go to you, but importantly, as we shouldn't change our investment strategy, our belief at our boards belief and our shareholders believe frankly, it's don't change your investment strategy because right now you're seeing the market share accumulations comp.

That you wouldn't change to pick up expenses by 100 million in the quarter, a penny you wouldn't make good that the investments are long term strategic drives that are that are happening and just on the investment banking, adding you know 50 middle market investment bankers in adding doubling that to get over the next couple of years, those who are paying us back.

Okay. That's helpful. And then just separately the a c. CCAR ask a an approval impressive 30 billion as he mentioned earlier do you plan to use all of that and should we assume the timing. If you do plan to use all that is spread even or do you have flexibility there.

The front end and if you wanted to.

Ah, Yes, we plan to use all of it and it's spread equally over the quarters and the way the method works up and that sort of the guidance I gave you. So it's a spread evenly over the four quarters and yes, we plan to use 100% of it.

Okay. Thank you.

Well now go to Ken Usdin with Jefferies. Your line is open.

Thanks, Good morning, guys.

Brian You mentioned in your opening remarks, just how strong credit is expected to continue and you guys have had talked about charge offs kind of living in the $900 billion to $1 billion range a quarter. We tough we went under that even this quarter. So can you just talk about any reason why we should see any change in this kind of nine hundredish run rate, even with card losses are barely even moving as is just an update on what you're expecting would be great. Thank you.

Ill, let Paul hit that one just because he talked about it.

So.

Youre right net charge offs were.

Lower than a billion this quarter, but thats, because we wrote back up.

Charge offs, we took earlier associated with the loans, we sold this quarter. So if you back that out it's approximately a billion dollars of net charge off.

And that number if we think is a good number.

You know approximately that number it'll bounce around because we're bouncing around the bottom on commercial for one commercial client or another can always move things, but it's been a billion now or you know up to a billion now for many many many quarters and.

If we see the and if we think its environment stays the way. It is that's where we think it's going to be and then provision will fall well follow that when you think about it.

Cards, the number right and if you look at our like charge off rate because sometimes growth you know, we're basically consistent with our current charge off rates to the stable portfolio stay stable credit it candidate.

80, 90% of all the activity in and you've seen that basically be fairly consistent and this year is the lowest increase in card you every year since 2013, so that prime focus book that primary customer account basis through the combined rewards probably lead to a very very strong customer base. There. So we feel good about credit in our view of the economy. As you know continues to move along in the low to mid twos or what the research team has and then next year round, two and given that we would not see a change.

Okay got it my second question is just on the preferred stock you guys did some.

Issuance and I think some some either pending or calls.

Can you talk about just east where you expect the preferred dividend to land going forward and there is there are more opportunities to refinance that part of the capital stack.

Well, we never really like to talk about plan stuff, but do <unk>.

In terms of the.

Preferred stock were going to end up roughly the same place where we started because we're just.

Reducing the cost of that preferred stock by calling some higher yielding preferred to replacing lower yielding preferred so in terms of the you know the dividends in the first quarter and the third quarter, what kind of approximately in the 440 range and in the.

Second quarter, and the fourth quarter were kind of in the.

The 240 range.

That could fluctuate a little bit because its based upon you know some of them are based upon floating.

Rates, but on the other hand, you know some of those get Florida after a while as well.

Got it okay. Thank you.

Thanks, Thank you.

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

Morning drug <unk>. Good morning, guys how are you.

Paul I'm I may have missed this I apologize if you addressed it already can you share with us.

<unk>.

You're managing the CE tier one ratio with the stress capital buffer that may now be included in next year's C car.

Have you guys run the numbers and where does your see your tier one ratio come come out comes out under that SCB.

Well our feet to one ratio in the <unk> nine and a half.

And.

We don't know what the final rules going to be yet, but you know that if you look at.

The past four years and you run.

Using those scenarios he CCAR scenarios.

Our STB would be below the 2.5% floor in three of the last four years.

And that's just a reflection of you know responsible growth and how we run the company. We got we got loans to consumers that are prime and Super Prime.

We got very prudent.

Trading.

And we've got a legacy portfolio is running off.

So you know it.

We're below we've been below for three out of the last four years.

Yes, the <unk> RCT, one was 11.7% and our minimum requirement, which is what he was referring to is the knot and a half or so.

Very good.

And then Brian I know you talked about the economy from what the research has said that you know at Merrill Lynch, but can you share with us what your business customers are saying to you about their outlooks, obviously, the consumer numbers speak for themselves. We all see the employment numbers, which are very strong, but what are you guys seeing both in small business and mid sized and larger businesses.

So the core loan growth is strong the usage aligns is good it's good it's a it's running near the high levels and stuff. So the activity is there you know I'd say that.

Depending on the type of.

Commercial customer the more they're in the global trade international supply chain, whatever words that you know the more they have China, but China slowed down if that's 20% of business, they're dealing with that but yeah. They're all sanguine. They all feel good they all would wish that discussions or trade would come to a resolution and reestablish the their relationships and the flows because they the fact of the current impact is one thing the fact that the.

Belief that there's future impacts I'd say, they're they're optimistic they're struggling to get people because that that's the thing we're lacking in the U.S., especially.

They see their business plans are not being as robust as they weren't 18, but still solid growth.

But they continue to watch the headlines daily trying to figure out. If this these situations are resolved and I think there's pent up enthusiasm about the situation start to fall in place that you'll hear more.

More more investment business and things like that.

On the other hand, there that you know that.

In addition, our surveys about their confidence are basically more consistent where they were as they're coming up to the peak say hitting 18 right. After tax reform I, you, where they weren't 17 said kind of come down a little bit but the levels are as high as anytime they been other than.

Yeah, there's tremendous business enthusiasm came out of the year and 17 under 18 between <unk>.

Regulatory reform attacks that has been mitigated by a the trade up discussions and uncertainty around them, but overall they are solid and I think they are sort of waiting for this to resolve and then I'll get back in the <unk> they'll push back on to accelerate again right now.

They are staying within the speed limits or say that.

Thank you.

And we'll now go to Brian Kleinhanzl with KBW. Your line is open.

Great. Thanks, Yeah, just a quick question on the sensitivity that you gave what would the deposit beta assumptions behind those are you being conservative just I guess to answer.

Sure so.

Again, I mean, the way to think about it and I'll give you a little bit more detail, but just to get the concept down we've got DRAM clients, we've got global banking clients.

The pass through rate in an up and down scenario a roughly similar.

Then we've got a consumer franchise, where we have not.

Pass through a lot of rate increase in the form of the rate paid.

That's obviously going to have a different sensitivity.

In the up scenario then and.

The down scenario, that's just the basics so.

If you look at the pass through rate and the down scenario on average we're talking.

Approximately 40% and again consumer would be a lot lower Gi women global banking, you know would be a lot higher kind of in a kinda 60, 65% range.

Okay, great. Thanks.

Thank you.

And we'll now go to Kevin St Pierre with K S. P Research. Please go ahead.

Oh, hi, good morning, Thanks, I'm going back to the mobile and digital trends, which are obviously really strong, but oh looking backwards over the last several quarters. Your tech spend has been pretty flat and then you mentioned that tech spend is likely to increase is that is that a reinvestment constant investment in the mobile and digital channels.

Yes, we've been consistent <unk>, it's been I think what I said as we elevate a tech spend after tax savings and then we've been relatively consistent one of the things I'd say.

That were receiving a benefit as they think about that number if you think about the combination of the of the money spent on Brexit I think the broker dealer separation for resolution planning and a bunch of other initiatives like that yeah. We can reposition that money more towards you know offense over time and that's it and that's been good and as we look for the next couple of years, a flat number actually provides more pop for lack of better term in our teammates always happy to hear that.

But you know these things are are.

Impacts it that compound and so <unk>.

I'll give you. An example, if you look at digital mortgage which did 3 billion of were digitally originally this quarter of the 18, so it's growing but it took us.

A year at a little over a year to the first billion. It took us eight weeks to do the second billion. It took us six weeks. It is there are billions so what happens with these.

Implementations is that you know the technology investments made and then then it ramps up and what's really happening there to mortgage remember is it's actually saving us a lot of money in the origination process as well as be a good client experience and so you take that or take Erica which is now you know.

Move to Ah Ah.

Several million a customer as you can see with 50 million interactions first year, but each month, it's growing businesses small businesses L. went out and in its going up that's a 50% a week type the numbers, even though we haven't told people its out there and and things like that and so they'll growing 100 billion year over year checks written are coming down more effectively all all this really points to the compounding effect of that Digitization set consistent investment you renders benefits 235 years out and that's what we're driving that so we'll be consistent on investment. There's only so much you can do we do about a million lines of code in every weekend and and the conversion so to speak and you know there is you got to be careful you don't have a problem and weve not gotten what kathee and the team have done a great job and we haven't seen any issues. If we've implemented tremendous new codes so to speak over the.

Over the course of years here and so we are bound more by what we can get done and getting the benefits out of it than we are by money.

Great and I noticed in the digital appointments continue to grow really strongly.

Are you at a point, where and I noticed that sort of year over year year and sequentially. Your your financial center numbers or are pretty stable can we assume that the the foot traffic that is being driven he makes you think that you're at the REIT critical mass of financial centers or can we expect over time.

A continued consolidation and rationalization there.

We will we'll see the numbers not be as dramatic from the 6100 to the 4300, obviously, but it's a it's a complete.

Distribution system so.

ATM has gone from 16000 up to I think 18000 or something that number now.

Braces have come down the track the branch a completely different they're bigger there have more people in them people go to them because of of more complex needs, a et cetera versus take the transaction side to take the checking deposits. So.

We're driving more of a co location, but if you think about the real interesting news is remember the other day, we had the number one retail deposit share in United States, we are growing faster than anybody else, but we're still not in several markets in the top 30 markets and that's what we're building out what its Indianapolis, whether it's the.

Minneapolis, whether its Denver, whether it's now Cincinnati Columbus, and we are in Pittsburgh and there's many other cities and the top 30 in top 50 that we have to figure out how we drive a configuration against them over the next piece of time here. So the actual branch count may have different elements and then than you would've thought going back to the constant down, but you see it drift down a little bit net net net because even in major cities. The consolidation of branches into bigger enterprises are co location with a male teammates or business banking teammates or small business teammates and private banking teammates is part of the drive so.

Don't get so focused on that what I would get focused on is actually the cost of operating the platform.

And if you look at that year over year. It it fell by four basis points as a percent of deposits that is phones that is everything and if you think about that.

If you add that in the cost of deposit rate paid you're basically flat year over year and totaled <unk> total cost of goods sold for lack of better term to produce just wonderful transaction franchise in consumer and then it's rather the loans franchise on top of it and the investment franchise on top of that it is a powerful engine, but it's a combination of everything that we that I just talked about not.

Five plus branches or four or less this.

Great. Thanks very much.

And we'll now go to live action in Asia with JP Morgan Your line is open.

Hi, Thanks for taking my questions a couple of questions Firstly.

So as soon as you pointed out Brian and Paul.

A couple of times about making sure that we.

Take account of the fact that he and I guidance is based on.

Over and above the forward curve.

So let's step back given that that may not be as realistic are likely to happen what is the outlook for eni.

If the forward curve is realized when you look out over a 12 month period I know, you'll give him a second half but since these things are not linear can you give us a sense of.

You know, what what would that be on and I wonder what and I do with the forward curve being realized well I'm not sure quite follow your question back but to be very clear.

Well yeah.

Yes, I don't have any of the company knows disclosures that you read in the queue.

That is in excess of the forward curve.

When we were talking about earlier in this call somebody asked about what was the next 25 basis points and we went through what we thought the impact that was.

Right and I think Paul statements earlier in the prepared remarks or exactly what you're saying which is.

Stable rates and follow the forward curve for best 19, He gave you the.

Right those are sent to go to 1% growth in 18 and 19.

Right right no you give that for 19 and I'm I guess asking for a full 12 month, rather than just simply the second half Brian .

Well he did we said that we you know as we watch what happens over the next few months, we can do better we'll have a better view of giving you 19 or 20 excuse me.

But you know you think of the run rate exiting a 19 at that level and you can add two more quarters to but loan growth deposit growth you know whether the cut comes when it comes those are all factors in there. So I think Paul said, well, we'll talk about that next quarter, when we know a little bit more.

Okay.

Okay. So let's move to another one residential mortgage loan growth accelerated sharply this quarter far more than we've seen in the last couple of years actually probably in dollar amount double of what you've seen in any quarter and that's despite lower rates and more refined. So are you holding on to some conforming or is there such a sharp increase in jumbos.

We have we have held all mortgages for six seven years now.

We may be able to even the conforming.

If we sell them. We basically so you have the do you have any JV a that that everything else that goes on a on a balance sheet because frankly, the risk in our mortgage portfolio isn't worth.

Passing to someone to take the risk away from us and so.

The increase is just due to purely the origination platform basically went from $8 billion last year second quarter to two.

18, this quarter, maybe nine last quarter here so.

That all goes on it increases the growth rate and then were not also in the aggregate sense remember, we're not selling as much of the portfolio and the current environment, but but we have not sold mortgages to the secondary market for years other than the FHLB, but.

I remember, we're we're focused on prime and Super Prime These are our customers we feel good about the risk.

Okay got it one tiny detailed trade web game I know.

At 200 million was the amount you gave is that included in other income or is that actually trading.

That was not included in the external sales and trading numbers that we presented and discussed today and we presented the materials it's in.

Other income in global markets, it's worked into revenue, but not until underwriting.

Okay, great. Thank you.

Okay.

Well now go to Andrew Lim with Societe Generale. Please go ahead.

Hi, Thanks for taking my questions.

Hi, I'm, just looking for a bit more color on the.

The net interest so the the deposit side or in terms of mix and rates. So if this is related to slide nine.

So you know we see here.

Interest bearing deposits are struggling to grow a interest bearing deposits are growing quite nicely.

And that's very much emanating from what's going on in the global banking side. So just wondering if you can talk a bit more about competitive dynamics as to why is a bit more difficult to grow your non interest bearing deposits.

Especially on the global banking side.

And then my second question is.

Relating to the due to interest bearing deposit side. So if you look at <unk>. If we look at the supplement then the the interest rate paid that has gone up by four basis points or could you talk about what's driving that access and T.D. The beaches getting out there and then how would you expect that to develop an uptick in a declining rate environment.

And then my other question is that.

Are you all your interest rate guidance and on the yield is based on a static deposit mix well, what do you think into accounts and sometimes the mix shifts as we've seen the.

Okay, well, let's start with non interest bearing deposits and you don't have to help me remember your questions as we go through here.

Noninterest Joel.

We are growing noninterest bearing deposits in consumer growing low interest tracking and consumer.

Those are that's really where you find conceptually the non interest bearing deposits and the company goal banking we have.

Interest bearing deposits and non interest bearing deposits, but remember we paid SCR on the.

Non interest bearing deposits.

The as interest rates rise.

Corporations that we're very comfortable leaving excess funds in their non interest bearing account when rates were lowered their just get a little bit more careful and they they only leave what they and their noninterest bearing accounts, what they need to you know do their transactions think about is like.

You know the daily sort transactions it does quite easy to do and any excess liquidity there are probably pushing into noninterest bearing plant outside the U.S.

You know they don't really have the concept of noninterest bearing an interest bearing <unk>, it's all interest bearing so.

You know what you should focus on is the fact that we grew deposits in global banking, 12% year over year that reflects.

The sophistication and value, we're bringing clients from that Treasury services platform and it reflects.

The bankers, we've added and the relationship that they have in the U.S. and around the world 12% growth in our economy is growing at 2% you know feels good to us.

So that I thought would answer the first question what was the second question.

The the rates on your own money on your interest bearing deposit assess every look to your.

To your sort of Scotia, then I think where we're looking at some.

Say U.S. interest bearing deposits the rate that going up four basis points from 73 to 77.

Yeah, I mean that is probably just reflects the mix shift we've just been talking about and.

In global banking.

That's up there has there wasn't a lot of increased other than maybe a little bit of exception pricing in consumer.

Gee why am I think was relatively flat and and global banking when you have a mix shift you're going to see since more deposits are going in to the interest bearing you're going to see an increase in the overall deposit rate of the company.

And what do you what do you expect that mix shift to continue.

Good food Oh, I don't know, if we're going to continue but it depends on the rate environment does.

But remember it really is a question of looking at the different businesses because consumers had checking.

Gross or 41 consecutive quarters, so that you know it.

You should expect the trends there to continue.

Like we said earlier in the call with the with the institutional business or.

The global banking business.

As rates moved you saw movement and that movement will stabilize as rates are stabilized or if they come down you actually see that thing come back the other way a little bit and if you look in the wealth management sort of halfway between and you have to then think about the use of cash sum is transactional some as investment oriented I, either trying to get a yield on it and and and where people put money depends on that and that becomes more exacerbated it are more prevalent.

And the in in the wealth wealthier part of the consumer client base a bit and then obviously institutional client base. So yeah, we do use it when we make our investments I think it was the third part of your question me, we estimate mixes deposits deposit growth by categories deposit growth by business line, just by that and we think of all that and all that's factored in and enter the question Paul discussion Paul had with you.

I hate you know I don't want to be a stubborn here, but you got to remember that you back up.

And think about it.

$70 billion of deposit growth all at a hugely advantage cost of funds all with core customers.

It is what we drive in this in one part of our business here that is you know a tremendous impact and half of it from the consumer side, and then 20 billion in checking in our own consumer deposits or the segment.

You know these are massive growth engines that or exceed the size of many institutions.

That's great thanks very much.

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And our last question today is a follow up from Mike Mayo with Wells Fargo Securities. Please go ahead.

Hi.

Your AOCI I guess, you've got better by what two and a half billion dollars linked quarter. So that's good.

You guided for lower and I I broke a this year investors don't necessarily like that so I guess I'm asking you this environment with lower interest rates.

I know investors don't like you know guidance mower for spread revenues, but how do you think about it because while you have lowered guidance for spread revenues. You also have better values of those securities better AOCI, I'd, better capital and better book value.

So when you look at that trade off.

How do you think about it do you think of monetizing from the securities gains you get as worried as investors you say Hey, This is fine we look at the economic value of the firm, we're not paying attention to a few basis points here or there.

We look at the long term like as you are well aware and going back to your earlier question. So.

We always look at what the most efficient.

Use of all the dynamics you talked about it but we were not here to.

Yeah, Trey the balance sheet, we're here to let the customer activity come through it in and optimize that for the shareholder, but and so you know the AOCI I came up this quarter people always forget about that that's the offset to the.

Did I debate with low rates going forward as the current long term securities you have or are worth more and we but we invest every quarter about half treasuries and half mortgage backs and those treasuries you know.

Oh no advantage when from the last.

Whatever period of time and so yeah. So we don't try to say, let's let's try to get a penny here as he said because it the other day, we're driving that long term value of the franchise. So I think the spirit of your question is do you manage a company for the long term value. The answer is absolutely, yes, and do we are we mindful of you know trying to optimize things on a given day month week quarter, yes, but the reality is is that we always make decisions for long term value of the company and the real solve here that you that you referenced is.

Our capital keeps growing even though we're returning 100% of it and we have an excess for many the constraints in the C car that is it tens of billions of dollars and we're going to turn part of that that's good.

Driven by how we run the company for the last decade, not how we ran at this weekend and we'll get it we're getting a payback for them.

And then last follow just this whole discussion of low interest rates.

Assumes that.

Maybe we're going to head into recession, maybe activity slowing down you have better data than we had so what's your read on the economy. What's your overall Reed just on the conditions for you to do business.

We.

We don't see any condition.

If you think the U.S. economy is two thirds driven by the consumers.

And if you think about.

The employment lower employment levels the job count do you think about the wage growth. If you think about the wage growth in our firm, which exceeds the national averages by two and three times a lot of my.

Peers, I talked to and all your own industry outside at the wages are paying her teammates are at much higher the share in the benefits of their success. Yeah. We did not see anything that says you know the U.S. consumer and our business is spending 5% more that.

Plus than they did last year for the second quarter. It has grown first quarter second quarter is accelerating and you know in a borrowing in good shape, we don't see anything consistent with a recession. What we can see is consistent with a 2% plus growth rate versus a 3% growth rate largely due to the impacts of some of the benefits of tax reform another things running through the economy last year and so we feel very it's very solid and so yes, there was a slowdown but that slowdown was predicted by everybody and now you're seeing it evidenced that you're actually seeing a pick up a little bit in the consumer side from first quarter to second quarter, and we'll see how that plays out Mike.

Alright, thank you.

We have no further questions at this time. It is now my pleasure to turn our call back over to Brian Moynihan for closing remarks.

Thank you.

Very much for your time and your interest in our company.

We had a.

Strong quarter of record earnings we have continued to manage it the right way growing responsibly by driving customer growth, but managed risk well and by investing in a franchise on a sustainable basis. We'll continue to do that we're monitoring environment is a question for Mike just said in terms of focused on you know any into should we see what we have to change the operating model, but we continue to deliver good shareholder value and plan to push the capital back to that comes off this wonderful franchise that we have thank you.

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This does conclude todays program. Thank you for your participation you may disconnect at anytime.

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