Island AI Dashboard Demo

Brian Moynihan
Chair of the Board and Chief Executive Officer at Bank of America
Thank you, and Happy New Year to everyone. Good morning. Thank you for joining us. I'm starting on Slide 2 of the earnings presentation.

Here at Bank of America, our teammates finished 2023 with a solid fourth quarter. Reported EPS was $0.35, but that included two notable items that Alastair will describe in more detail. Adjusted for those two items, net income was $5.9 billion after tax or $0.70 per share.

Before Alastair covers quarter four results, I want to take a moment and briefly review the 2023 full year results. Our team at Bank of America delivered strong profits for shareholders across a challenging year, navigating a slowing economy, geopolitical tensions, bank failures, and the impact of a rate hike of historic speed. We began the year with a pretentious aura, as economists predicted a mild recession within the year. Instead, 2023 showcased economic resilience led by U.S. consumers, despite higher interest rates.

We ended 2023 with economists projecting that Fed has successfully steered the U.S. economy to a soft landing. In regards to the economy, during 2023, we consistently made a few points regarding what we were seeing in our customer data here at Bank of America. First, the year-over-year growth rate in spending from the beginning of '23 started declining. And it went from, in the early part of '23 over the early part of '22, from a 9% to 10% growth rate to this quarter's 4% to 5% growth rate and that's where it stands here early in 2024. You can see that on page -- Slide 29 in the appendix. That growth rate 4% to 5% is more consistent with the 2% GDP environment and a lower inflation environment.

Second, the point we've made is that our consumer deposit balances at Bank of America remained 30% higher than pre-pandemic. We saw the deposit balance at similar accounts move lower this quarter, but are now seeing more differentiation in behavior. In the lower average balance size accounts, the balances in there still remain at multiples of pre-epidemic levels, nearly three years past the last stimulus. They are modestly declining. The deposit outflows you've seen in consumer have largely been driven by the higher balance accounts who moved their excess balances into the markets to seek higher yields. We capture those with our leading wealth platform.

Third, the consumers of Bank of America have had access to credit and are borrowing responsibly. The balance sheets are generally in good shape. And while impacted by higher rates, remember, many of them have fixed-rate mortgages and remain employed. So they've shown great resilience.

Let's move to discussion of full year 2023 earnings. We reported net income of $26.5 billion after tax, which includes $2.8 billion after tax for notable quarter four items. Adjusted for those items, adjusted net income was $29.3 billion after tax. Earnings per share were $3.42 and that grew 7% over 2022. On a net adjusted basis, we generated a 90 basis point return on assets and a 15% return on tangible common equity.

The year 2023 was characterized by a record organic customer activity, record digital customer engagement levels and satisfaction scores; strong but slowing NII during the course of the year; strong sales and trading up 7% year-over-year; operating leverage that reflect a good expense discipline; solid asset quality and a strong capital and liquidity position.

All of this was helped by the years of Bank of America's assiduous dedication to responsible growth. This helped us bring our headcount and expense down every quarter during 2023, in line with what we told you to expect early this year -- early last year. Adjusted full year revenue grew 5% on the back of 9% NII improvement and strong asset management fees and sales and trading results. We achieved 170 basis points of operating leverage in 2023 as heightened quarterly expense levels were driven lower throughout the year even as the investments in growth continued.

Net charge-offs moved higher through the year, off the historic lows, but they still compare very favorably against historic averages. One last point worth noting is the level of deposits. If you think back as we ended 2022 and entered 2023, the great debate was, how much the pandemic surge in deposits would dissipate? But looking today, we ended 2023 with $1.924 trillion of deposits, only $7 billion less than we had at year-end '22 and 4% higher than the trough in May of this year.

The total deposits -- the total average deposits in fourth quarter remain 35% higher than they did in the quarter four of 2019. This has been tremendous works by our teams to drive our industry-leading market share, actually outperforming the industry across the four year period, and again this year. While the economy appears to continue to normalize and rates continue to have some volatility, one thing that remains important is driving that organic growth. This client activity sticks to the ribs, is what we want to spend a moment as I wrap up.

On Slide 3, we highlight some of the successes in organic activity in our results for the year. Bank of America team is a powerful engine that's fueling results across all our businesses. I would note a couple of examples to try and connect the importance to our financials. It's easy to use the consumer business, as an example.

In consumer, we added 600,000 net new checking accounts during the year 2023. The fourth quarter of 2023 represents the 20th straight quarter of net addition of checking accounts. The quality is what drives the checking account balances. On average, 67% of the deposit balances had been with us -- for customers who've been with us for more than 10 years. 92% of the consumer checking accounts are primary, mean they're the core client household account.

60% of our checking accounts use their debit card. They average 400 transactions per account each year showing how engaged they are. They've traditionally opened savings accounts, 20% to 25% time within a few months of opening their checking accounts. Thinking about those new accounts, at opening those new checking accounts opened last year bring in about $4,000 of balances. Then they deepen over this next subsequent months to two times that amount. New saving accounts come with those accounts, starting with about $8,000 and doubling over time.

From the total new checking accounts we opened just in 2023, those customers have opened nearly 0.5 million credit card accounts with us so far in 2023. Historically, we've seen, on average, these customers more than double those card balances within a year. Those card accounts on average has spent about $7,000 per year, which -- of which a portion will carry a balance.

Now there's always additional opportunity to further serve our clients and to continue to meet them where they are. In addition to the industry-leading digital platforms that we have, we have opened 50 new financial centers in 2023. More than half of those were in our expansion markets. We've expanded our presence during 2023 to 10 more -- 10 markets including our latest opening in Omaha.

In our Global Wealth Management team, we added more than 40,000 net new relationships across Merrill and the Private Bank. Our advisors opened 150,000 new banking accounts for Wealth Management clients, showing their completeness of the relationship approach. The average Merrill account is over $1 million at opening. The average Private Bank account is multiples of that.

As you can see on this slide, we now manage $5.4 trillion of client balances across loans, deposits, investments of our consumer clients, both consumer and GWIM. We saw $84 billion of flows into those accounts last year.

As we switch to Global Banking on the lower-left hand side of the slide, we added clients that increased the number of products per relationship. Just like in consumer, we have seen good growth in customers seeking the benefits of our physical and digital capabilities, but most importantly our talent relationship managers who provide financing solutions, treasury services, strategic advice for clients, with local and global needs.

We added roughly 2,500 new commercial and business banking clients this year. That is more than twice what we added in 2022. We look forward to continue to drive with those -- grow with those clients in '24 and add even more. This capitalized on a multi-year build of our relationship management team in the Global Banking businesses, especially in product expansion also, especially in the global transaction services area and mid-market investment bank.

As we think about Global Markets, we continue to see strong performance from our team with 7% year-over-year revenue growth, the strongest we've had in many years. We see digital tools our customers have access to across the board, helping us enable this activity at lower costs. Our normal [Phonetic] digital banking slides are, once again, included for your reference on pages 21, 24 and 26.

In summary, this was a good quarter. We delivered our third quarter of expense declines. We saw NII outperform what we expected when we talked to you on the last earnings call. We continue to manage well through the transition and the rate structure. We saw deposits grow this quarter. And we look forward with a strong capital base, strong liquidity and growing loans and deposits to a great 2024.

I want to thank my teammates for what they did for us in 2023 and we all know we're off to a nice start for '24.

With that, I'll turn it over to Alastair.

Alastair Borthwick
Chief Financial Officer at Bank of America
Thank you, Brian. And I'm going to start on Slide 4 of the earnings presentation to provide just a little more context on the summary income statement and the highlights.

For the fourth quarter, as Brian noted, we reported $3.1 billion in net income or $0.35 per diluted share. That GAAP net income number included two notable items. First, we recorded $2.1 billion of pretax expense, that's $0.20 after tax earnings per share for the special assessment by the FDIC to recover losses from the failures of Silicon Valley and Signature Bank.

Second, on November 15th 2023, Bloomberg announced that they would discontinue publishing the Bloomberg Short-Term Bank Yield Index rate after November 15th, 2024 and many commercial loans in the industry had BSBY as a reference rate prior to SOFR becoming industry-standard.

As noted in an 8-K we filed earlier this week, we came to the conclusion in early January that BSBY cessation would not get the same accounting treatment allowed under LIBOR cessation, and therefore cash-flow hedges of BSBY indexed, products related to BSBY cash flows forecast to occur after November 15th 2024 would need to be moved out of OCI and into earnings in the fourth quarter '23 financials.

So, as a result of the accounting interpretation, we recorded a negative pretax impact to our market making revenue of approximately $1.6 billion. I just want to reinforce that's an accounting impact. It's not an economic change to the contracts and we'll see an offset to this over time through higher NII, mostly occurring in 2025 and 2026 after BSBY ceases in November of 2024.

The accounting lowered CET1 by 8 basis points during the quarter and we will recapture that in the next two or three years. Adjusted for the FDIC assessment and the BSBY cessation related impact, Q4 net income was $5.9 billion or $0.70 per share.

On Slide 5, we show the highlights of the quarter and we reported revenue of $22.1 billion on an FTE basis. And excluding the BSBY cessation impact, adjusted revenue was $23.7 billion and declined 4%, driven by net interest income.

Fourth quarter revenue is a tough year-over-year comparison as NII peaked in the fourth quarter of '22 at $14.8 billion, before slowly moving lower over 2023. Outside of NII, we saw good growth in treasury service fees and Wealth Management fees and those were offset by higher tax-advantaged investment deal activity, creating higher operating losses and the more tax credits associated with them and recognized across periods.

Expense for the quarter of $17.7 billion included the $2.1 billion FDIC charge. So excluding that charge, adjusted expense was $15.6 billion and consistent with our prior guidance. That allowed us to invest for growth as well as use good expense discipline to eliminate work and reduce headcount. And, on an adjusted basis, this then is the third quarter of sequential expense decline this year.

Provision expense for the quarter was $1.1 billion, that consisted of $1.2 billion in net charge-offs and a modest reserve release, reflecting the improved macroeconomic outlook. Net charge-offs reflect the continued trend in consumer and commercial charge-offs towards more normalized levels as well as higher commercial real-estate office losses.

Lastly, our income tax expense this quarter was a modest benefit as credits from tax-advantaged investment deals offset the tax expense on the lower earnings in Q4, driven by the notable charges.

So, let's review the balance sheet on Slide 6, and you'll see we ended the quarter at $3.2 trillion of total assets, up $27 billion from the third quarter. I'd highlight here, both the $39 billion growth in deposits and a decline in cash on balance sheet of $19 billion. Overall, you'll note that debt securities increased $92 billion, and that included a $9 billion decline in hold-to-maturity securities and $100 billion increase in available-for-sale securities reflecting short-term investment of liquidity from all of these activities.

We continue to put money into very short-term T-bills and hedged treasury notes this quarter, and those are essentially earning the same rate as cash. And you can see our absolute cash levels remain quite high. As Brian noted, liquidity remained strong with $897 billion of global excess liquidity sources. That was up $38 billion from the third quarter of '23 and it remained $321 billion above our pre-pandemic level in the fourth quarter of '19.

Shareholders' equity increased $5 billion from the third quarter as earnings and AOCI improvement were only partially offset by capital distributed to shareholders. The AOCI improved $4 billion, reflecting both the previously mentioned BSBY-related reclassification into fourth quarter earnings and other AOCI improvements. This included some improvements in other cash-flow hedges, which don't impact regulatory capital, driven by a decline in long-end rates.

During the quarter, we paid out $1.9 billion in common dividends and we bought back $800 million in shares, which more than offset our employee awards. Tangible book value per share is up 3% linked-quarter and 12% year-over-year.

Turning to the regulatory capital, our CET1 level improved to $195 billion from September 30th, while the CET1 ratio declined 9 basis points to 11.8% and remains well above our current 10% requirement as of January 1st '24. We also remain well-positioned against the proposed capital rules, as our current CET1 level matches our 10% minimum against anticipated RWA inflation from the proposed rules.

Risk-weighted assets increased $19 billion on loan growth and growth in Global Markets' RWA, and our supplemental leverage ratio was 6.1% versus the minimum requirement of 5%, which leaves plenty of capacity for balance sheet growth and our TLAC ratio remains comfortably above requirements.

So, let's focus on loans by looking at the average balances on Slide 7. And you can see loan growth improved this quarter as we saw improvement in both credit card and commercial borrowing, offset by declines in commercial real estate and securities-based lending. The commercial growth reflects good demand overall and was muted only at quarter-end by companies paying down commercial balances as they finalized their year-end financial positions.

Lastly, on a positive note, we've seen loan spreads continue to widen, given some of the capital pressures from proposed rules on the banking industry, and this combined with investments in relationship managers we've added over the past few years, has positioned us to take market-share and improve spreads.

Moving to deposits, I'll stay focused on averages on Slide 8, and the trends of ending balances saw a growth in Global Banking and Wealth Management and declines in consumer. Relative to the pre-pandemic fourth quarter '19 period, average deposits are still up 35%. Every line of business remains well above their pre-pandemic levels. Consumer is up 33% with checking up 40%, driven by the net-new checking accounts added that Brian noted earlier.

On a more recent performance basis, deposits grew $29 billion or 6% from Q3 on an annualized basis. The only business that saw a decline in deposits linked-quarter was consumer, and here we saw a decline of $21 billion. This linked-quarter decline slowed from the third quarter change. And in total, we have $959 billion in high-quality consumer deposits, which remains $239 billion above pre-pandemic levels.

The total rate paid on consumer deposits in the quarter was 47 basis points and this remains very low, driven by the high mix of quality transactional accounts. Most of this quarter's rate increase remained concentrated in CDs and consumer investment deposits, which together only represent 15% of the consumer deposits.

Turning to Wealth Management, balances on an end-of-period basis improved modestly, and we continued to experience a slowing in the trend of clients moving money from lower-yielding sweep accounts into higher-yielding preferred deposits and off-balance sheet. Our sweep balances were down $4 billion and were replaced by new account generation and deepening.

Global Banking deposits grew $23 billion, moving nicely above the $500 billion level that we've experienced over the course of the past six quarters. These deposits are generally transactional deposits of our commercial customers. They're the ones that used to manage their cash flows. And non-interest-bearing deposits were about 33% of deposits at the end of the quarter.

Now when we turn to excess deposit levels on Slide 9, you can see deposit growth exceeded loan growth this quarter. And that expanded our excess of deposits above loans, from Q3 to about $0.9 trillion, which is well above the $0.5 trillion we had pre-pandemic. You can see that in the upper-left of slide 9, which is where we've used and shown you how we think about managing excess liquidity.

We continue to have a balanced mix of cash, available-for-sale securities and held-to-maturity securities. And this quarter, the combination of the cash and the AFS securities now represent 51% of the total $1.2 trillion noted on this page. You'll also notice the change in mix of the shorter-term portfolio as we began to lower cash and increase available-for-sale securities buying mostly short-dated T-bills with similar yields.

You can know also the hold-to-maturity book continued to decline from paydowns and maturities pulling to par. In total, the hold-to-maturity book moved below $600 billion this quarter. It's now down $89 billion from its peak and it consists of about $122 billion in treasuries and about $465 billion in mortgage-backed securities along with a few billion others.

Also note that the blended cash and securities yield continued to rise and remained about 170 basis points above the rate we pay for deposits. The replacement of these lower-earning assets into higher-yielding assets continues to provide an ongoing benefit and support to NII. From a valuation perspective, given the reduced balance and the longer-term interest-rate reductions we've seen in the fourth quarter, we experienced an improvement of more than $30 billion in the valuation of the hold-to-maturity securities.

So, let's turn our focus to NII performance using Slide 10. And a strong finish to the year helped us report $57.5 billion in NII on a fully tax-equivalent basis for the full year of 2023. That's up 9% compared to 2022. On an FTE basis, we reported $14.1 billion in NII, which was modestly better than we told you to expect last quarter, driven by modestly better deposit growth. The $14.1 billion was a decline of $400 million from the third quarter, driven by the unfavorable impacts of deposits and related pricing and lower Global Markets NII, partially offset by higher rates benefiting asset yields.

And as we look forward, given that we've got one less day of interest in the first quarter and that's worth about $125 million to $150 million, and given the rate curve shift, we believe the first quarter will be somewhere between $100 million [Phonetic] and $200 million [Phonetic] lower than the fourth quarter. It could move a touch lower in Q2 and then we believe it should begin to grow sequentially in the second half of 2024. So, very consistent with our prior guidance.

With regard to the forward view I just provided, let me note a few other caveats. It would include an assumption that interest rates in the forward curve materialize. And the forward curve today has six cuts compared to last quarter when we had three cuts in the 2024 curves. So, it's bouncing around a little and shifted in the past quarter.

Forward view also includes our expectation of low-to-mid-single-digit loan growth and some moderate growth in deposits as we move into the back half of 2024. Given our recent deposit and loan performance, we continue to feel good about these assumptions.

Before moving away, it's worth noting our net interest yield declined 14 basis points to 197 basis points, and that's driven by the decline in NII, as well as higher average earning assets, reflecting prior period builds of cash and cash-like securities.

Turning to asset sensitivity and focusing on a forward yield curve basis, the plus 100 basis point parallel shift at December 31st was $3.5 billion of expected NII over the next 12 months, coming from our banking book. And that assumes no expected change in balance sheet levels or mix relative to our baseline forecast, and 93% of that sensitivity is driven by short rates. The 100 basis point down scenario is $3.1 billion.

Let's turn to expense and we'll use Slide 11 for the discussion. And we reported $15.6 billion in adjusted expense this quarter, which excludes the FDIC assessment. This was in line with our projection from last quarter and down $199 million from the third quarter, driven by reductions in headcount earlier in the year and seasonally lower revenue-related expense. These reductions outpace the continued investments that we're making to drive growth.

Our average headcount was down from the third quarter to 213,000 people, and that's good work after peaking at 218,000 last January. We lowered our headcount through the year by 5,000 and did so without taking an outsized severance charge as we used attrition to lower our headcount along the way.

One more point to acknowledge the good work of our teams on expense, Q4 '23 adjusted expense of $15.6 billion is only $94 million higher than the fourth quarter of '22. And just remember, we began 2023 with a $125 million lift in quarterly FDIC expense. So, through some good operational excellence work and otherwise, we've managed through all of the additional costs of investments in new tech initiatives, and merit, and financial center openings, as well as some stronger revenue and higher marketing costs.

As we look forward to next quarter, we expect to see the more typical Q1 seasonal elevation in expense of $700 million to $800 million compared to Q4, so we believe expense will be around $16.4 billion in the first quarter. That includes elevated payroll tax expense and the expected costs of higher revenue in both sales and trading and Wealth Management, as well as merit cost increases.

And as we move through 2024, we expect the quarterly expense to decline from Q1, reflecting a drop in the elevated payroll tax expense and revenue changes, as well as some additional operational excellence initiative work. Continued digital transformation and adoption is also going to help us as we go through the year.

Now, turn to credit and I'll use Slide 12 for that. Provision expense was $1.1 billion in the fourth quarter and it included an $88 million reserve release due to a modestly improved macroeconomic environment. On a weighted basis, we're reserved for an unemployment rate of nearly 5% by the end of 2024 compared to the most recent 3.7% rate reported. Net charge-offs of $1.2 billion increased $261 million from the third quarter, and the net charge-off ratio was 45 basis points, a 10 basis point increase from the third quarter.

On Slide 13, we highlight the credit quality metrics for both our consumer and commercial portfolios, and the overall increase in net charge-offs was driven by three things. First, $104 million of the increase was driven by credit card losses, which continued to normalize as higher late-stage delinquencies flowed through to charge-offs. Second, $65 million of the increase was driven by a broad range of smaller commercial and industrial losses which were mostly previously reserved and monitored for the past couple of quarters. And lastly, $76 million of the increase was driven by commercial real estate losses, primarily due to office, also mostly reserved.

In the appendix, we've included a current view of our commercial real estate and office portfolio stats provided last quarter, and we've also included the historical perspective of our loan book derisking and long-term trend of our consumer and commercial net charge-offs, and you can see those on slides 30 to 33.

Let's move on to the various lines of business and their results and I'll start on Slide 14 with Consumer Banking. For the quarter, consumer earned $2.8 billion on continued good organic growth. And despite their good client activity, it's difficult to outrun the earnings impact of higher rates on deposit costs while the credit is also normalizing. The reported earnings declined 23% year-over-year as top line revenue declined 4% while expense rose 3% and the credit costs rose.

Customer activity showed another strong quarter of net new checking growth, another strong period of card opening and investment balances for consumer clients which climbed $105 billion over the past year to a record $424 billion. Our full year flows were $49 billion as accounts grew 10% in the past 12 months.

Loan growth was led by credit card and that broke above $100 billion this quarter. Deposit decline slowed in the quarter with continued strong discipline around pricing. And our expense reflects continued business investments for growth. And as you can also see on the appendix page 21, digital engagement continued to improve and showed good year-over-year improvement as customers enjoy the continuation of enhanced capabilities.

Moving to Wealth Management on Slide 15, we produced good results earning a little more than $1 billion after adding 40,000 net new relationships in Merrill and the Private Bank this year. These results were down from last year as the decline in NII from higher deposit costs still catching up from the interest rate hikes, more than offset higher fees from asset management, driven by higher market levels and assets under management flows.

As Brian noted earlier, both Merrill and the Private Bank continued to see strong organic growth and produced solid assets under management flows of $52 billion since the fourth quarter of '22, which reflects a good mix of new client money as well as existing clients putting their money to the work. Expenses reflect continued investments in the business and revenue related costs.

On Slide 16, you see the Global Banking results. The business produced strong results with earnings of $2.5 billion as a decline from peak levels of NII was offset by lower provision expense, leaving earnings down 3% year-over-year. Revenue declined 8%, driven by the NII.

Our Global Treasury Services business remained robust with strong business from existing clients as well as good new client generation. In addition, we continued to see a steady volume of solar and wind investment projects this quarter and our investment banking business continued to perform well in a sluggish environment. Year-over-year revenue growth also benefited from lower marks on leveraged loan positions.

The company's overall investment banking fees were $1.1 billion in Q4. That grew 7% over the prior year despite a fee pool that was down 8%. And for the year we held on to the number three position overall, given that performance. In the component parts, we ended the year number one in investment grade, number two in leverage finance, number four in equity capital markets, and number four in mergers and acquisition.

The diversification of the revenue across products and regions reflects the growing strength of our platform. And a good example of that is our focus on the equity capital markets' Blocks business, where we finished number one in the United States for the first time since 1998, and in EMEA, we were also number one for Blocks.

Provision expense reflected a reserve release of $399 million and that comes from an improved macroeconomic outlook as well as realized charge-offs better, as noted before. Expense decreased 2% year-over-year as continued investments in the business were more than offset by reductions in other operating costs.

Switching to Global Markets on Slide 17, the team had another strong quarter, with earnings growing 13% year-over-year to $736 million, driven by revenue growth of 4% and we refer to results excluding DVA, as we normally do. Good results in sales and trading and comparatively low remarks on leveraged loan positions drove the year-over-year performance. And focusing on the sales and trading ex-DVA, revenue improved 1% year-over-year to $3.8 billion, which is a new fourth quarter record for the firm.

FICC was down 6% from a record quarter, while equities increased 12% compared to the fourth quarter of '22. And the FICC revenues were down versus that record fourth quarter level with higher revenues in mortgages and municipal trading. Equities was driven by improved trading performance in derivatives, and our expense was up 3% on continued investment in the business.

Finally, on Slide 18, all other shows a loss of $3.8 billion, as the two notable items highlighted earlier negatively impacted net income by $2.8 billion in that segment; revenue adjusted for the $1.6 billion, BSBY cessation was flat year-over-year and expense adjusted for the $2.1 billion FDIC assessment was down a couple of hundred million, driven by lower litigation and lower unemployment processing costs.

I noted earlier we reported a modest tax benefit this quarter. The tax credits from tax advantaged investment deals throughout the year, including their benefits in the fourth quarter, exceeded taxes on reported earnings because we had the two notable items that lowered results this quarter.

For the full year, our tax rate was a little more than 6%. And excluding the impacts of BSBY cessation and FDIC and the other discrete tax benefits, that rate was 10%. And further excluding our investment tax credits, our tax rate would have been 25%.