Bank Of America Corp /De/ Q1 FY2022 Earnings Call

Good day, everyone, and welcome to today's Bank of America Earnings Announcement. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question-and-answer session. Please note, this call may be recorded. It is now my pleasure to turn today's program over to Lee McEntire.

Good morning. Thank you, Katherine. Welcome. I hope everybody had a nice weekend, and thank you for joining the call to review the first quarter results. I trust everybody’s had a chance to review our earnings release documents. As always, they are available, including the earnings presentation that we'll be referring to during this call, on our Investor Relations section of the bankofamerica.com website. I'm going to first turn the call over to our CEO, Brian Moynihan, for some opening comments; and then ask Alastair Borthwick, our CFO, to cover the details of the quarter. Before I turn the call over to Brian, just let me remind you that we may make forward-looking statements and refer to non-GAAP financial measures during the call. These forward-looking statements are based on management's current expectations and the assumptions that are subject to risks and uncertainties. Factors that may cause actual results to materially differ from expectations are detailed in our earnings materials and our SEC filings that are available on the website. Information about non-GAAP financial measures, including reconciliations to US GAAP, can also be found in the earnings materials that are available on the website. So with that, take it away, Brian.

Thank you, Lee, and good morning to all of you, and thank you for joining us. As we open our earnings call this quarter, we want to acknowledge that the humanitarian crisis continues to take place in Ukraine and remain watchful and have provided assistance from our company to the Ukrainian citizens and are staying ready to help further where we can. Before we get into some discussion on the current outlook and activity, I want to step back and focus on the big picture about Bank of America this quarter. In a quarter that had a lot of variables show up, we delivered responsible growth again. We reported $7.1 billion in net income or $0.80 per diluted share. We grew revenue, we reduced costs, and we delivered our third straight quarter of operating leverage coming out of the pandemic. Net interest income grew 13% and is expected to grow significantly from here. We saw strong loan growth. We grew deposits. We saw strong investment flows. We made trading profits every day during the quarter. We grew pretax pre-provision income by 8%. We had a return on tangible common equity of 15.5%. All this came in a quarter that saw geopolitical conflict, rising interest rates, a pandemic, rising inflation concerns and much, much more. I want to thank our team for delivering on responsible growth once again. So if you look at the statistics on Slide 2, you can see some of those highlights. You can see the organic growth engine that our company is delivering once again. In our banking business, you can see the strong loan and deposit growth. We grew and expanded customer relationships across every business. In fact, we grew net new checking accounts by more than 220,000 this quarter alone. We opened new financial centers, and we renovated many others. We added more digital capabilities and crossed 50% in digital sales. In our Wealth Management businesses, you can see over $160 billion of client flows over the year and more than $4 trillion in client balances, including Merrill Edge. We saw both strong investment flow performance in addition to banking flows. Over the past year, we brought on a significant number of net new households, 24,000 in Merrill; and then 2,000 in the private bank. Across the combination of our Consumer and Wealth businesses, we saw more than $90 billion of investment flows. We now have managed client balances, including deposits, loans, and investments, of more than $5 trillion with us. In Global Markets, Jim DeMare and his team had a solid quarter of sales and trading results, which included a record quarter for equities. Despite the market turmoil, we had zero days of trading losses. And while the investment banking fee line was down from the record quarters of the past year, Matthew Koder and his team produced solid results with a strong forward pipeline, and we gained market share in several areas, including moving to number two in the mid-cap investment banking. From a broader enterprise perspective, part of managing costs comes from the drive we have in the company to provide enhanced digital capabilities to our customers, which in turn drives adoption for digital engagement and lower costs. If you look at Slide 23 and beyond, you can see we are now selling more digitally than we are in person. It takes both to be successful. What makes them even more impressive is all the financial centers are now open and back to operating at their usual great capacity. So adding the digital capacity clearly increases our total production capabilities. You can also see our digital sales are now twice the pre-pandemic level just three years ago. Even more impressive, look at Zelle and Erica volumes, up more than four times pre-pandemic levels. We're now processing more outgoing Zelle transactions than checks. In our CashPro mobile app with our commercial clients, we see many $5 billion usage days. There are a lot more stats on the slide showing strong digital growth. I commend you to see how a high-touch, hi-tech innovative company drives organic growth. This quarter, our resilience was tested. And once again, we maintained a focus on what we control and grew responsibly, earning our way through the turmoil. So as we talked to you during the quarter, many of you expressed questions about the impact of the macro environment and changes in our company: the lingering impact of the pandemic on supply chains and business opportunity, inflation and the Federal Reserve's reduction of monetary accommodation, the impacts of the Russia-Ukraine war, both first-order and second-order effects. We do remain mindful of all these. So could a slowdown in the economy happen? Perhaps. But right now, the size of the economy is bigger than pre-pandemic levels. Consumer spending remains strong, unemployment is low and wages are rising. Company earnings are also generally strong. Credit is widely available. And our customers' usage of their lines of credit is still low, i.e., they have capacity to borrow more. We are all focused on the ability of the Fed to use their tools to reduce inflation. We know that will take interest rate hikes and a reduction in the balance sheet. We expect it will slow the economy from roughly 3% growth in 2022 to a little below 2% in 2023 — that is back to trend. So the interest rate hikes come with better NII. Could the Fed have to push harder to slow inflation? Perhaps. That is why we run stress tests each quarter to look at scenarios to see what would happen in a highly inflationary environment. If rates move up fast, the implication could be greater capital usage for some period, as you saw some in this quarter. But in the context of our capital build, those impacts are manageable. The impact increases earnings also, and then over time, the bonds pull back to par. All that results in a rebuild of capital quite quickly. But for some short period of time, that capital usage, along with customer usage, might slow share repurchases a little bit, but it will be temporary. What if we're wrong and things do get tougher? We already know what that looks like in 2020. As we built significant reserves, we also built 90 basis points of capital during the economic shutdown period. When rates moved against us and earnings fell, we have already proven resilient. We continue to focus on responsible growth and things we control. If you go to Slide 3, I want to mention some of the strengths we see in our U.S. consumer base. Bank of America consumers spent at the highest-ever level in quarter one, which is a double-digit percentage increase over the 2021 level that you can see in the upper left. From our card spend to date, we have seen a strong recovery in travel, entertainment, and restaurant spending. By the way, even with fuel costs up 40% and more from last year, fuel represents about 6% of overall debit and credit card spending and a lot less of overall spending; cars represent about 21% of all spending. Importantly, despite March of last year, including stimulus and tax refunds, we saw spending in the month of March 2022 on a comparable basis to 2021 that was 13% higher by dollar volume and we saw a 7.4% increase in the number of transactions. So both dollar volumes and number of transactions rose nicely. As you would expect, the medium by which people spend continues to shift away from cash and checks and toward digital alternatives. Our data shows continued growth in the average deposit balance across all customer levels, which suggests capacity for strong spending continues. On an aggregated basis, average deposit balances were up 47% from pre-pandemic levels and 15% higher than 2021. And the momentum continued through quarter one, particularly in the low-balance accounts, which grew from February to March, continuing a streak since mid-last year. Now a couple of examples so you can see how this works. We looked at the pre-pandemic customers who had $1,000 to $2,000 of cleared balances at Bank of America. Pre-pandemic, that cohort had an average balance of about $1,400. Today, that same cohort has an average cleared balance of $7,400. So they increased from $1,400 to $7,400. If you go to the next cohort up, those with $2,000 to $5,000 of cleared balances pre-pandemic had an average of $3,250. Now those same customers today have an average cleared balance of $12,500. What does that tell us? Consumers are sitting on lots of cash. Why is this true? High wage growth and higher savings with limited enabled spending. But what it means is a long tail to consumer spend growth. In April through the first two weeks, spending was growing as fast as 18% over April 2021. Another economic sign pointed to a continuation of loan growth. A year ago, we highlighted the green shoots of our loan growth. We then delivered growth in quarter two, quarter three, and quarter four despite PPP runoff and changes in economic conditions. To convey where we are today, we focus on ending loans to give you a progression through the quarter. If you go to Slide 4, you can see the highlights of that growth in the upper left of the slide. I would remind you that in quarter four, we highlighted that of the $55 billion of growth in that single quarter, $16 billion was Global Markets. So we did not expect that to hold true for quarter one of 2022. As we thought, Global Markets did come down $5 billion this quarter. Despite that, overall commercial loans grew $13 billion from quarter four, excluding PPP. That means commercial loans, excluding Global Markets, grew $17 billion. Every single customer group — global banking, large corporate, middle market, business banking — as well as commercial loans in Wealth Management improved. That improvement came from both new loans as well as improving utilization rates from existing clients. You can see in the top chart loans have moved back above our pre-pandemic levels on the right-hand side of the slide, and you can see it being led by commercial. Consumer loans continued to grow late in the quarter as well. This is despite typical seasonality and despite the continued suppressed credit card balances. Mortgage loans grew $4 billion, originations remained at high levels, and paydowns declined. Card loans declined $2 billion from quarter four, driven by the transfer of a $1.6 billion affinity card loan portfolio to the held-for-sale category; absent that transfer, card loans would have declined very modestly, whereas the previous quarter they had declined several billion. On Slide 5, we provide data around consumer clients' leverage and asset quality as compared to pre-pandemic periods, which further supports our belief that consumers remain in good shape. On the upper left, we looked at our customers that have both a credit card and a deposit account with us. As you will note, the average card balance of our credit card customers that had deposit relationships are still 8% lower than they were pre-pandemic. They continue to pay down their balances on a monthly basis at a higher rate than pre-pandemic. And delinquency rates are significantly lower. Further, as you can see in my earlier point, these borrowing customers have built significant additional savings, and their average deposit balances were up 39%. So a lot of strength — lots of dry powder. If we look at the smaller subset of our base with more modest FICO scores, you can see a similar trend, even stronger on cash balances and lower debt levels. And industry data points around debt service levels are hovering near historic lows and household deposit and cash levels are about $3 trillion higher than we entered the crisis. Now a word on Russia. This is not an area of material direct exposure for Bank of America. More than a decade ago, we reduced our exposure in Russia, resulting in having 90% less exposure before the most recent crisis. Our current very limited activities in Russia are focused on compliance with all sanctions and other legal and regulatory requirements. Our lending and counterparty exposure to companies based in Russia totals approximately $700 million and is limited to nine Russian-based borrowers. It's largely comprised of top-tier commodity exporters with a history of strong cash flows who continue to make payments. Prior to the Ukrainian invasion, these exposures were mostly investment grade. We report all of them on our reservable criticized list. Our quarter one allowance includes increased reserves from this direct exposure. And I just note that even with the addition of these loans to reservable criticized, we still declined $1.7 billion in this category during the first quarter. We continue our daily monitoring of how sanctions and interest payments might impact these loans. We also evaluate our portfolios and continue to do so considering second-order impacts to this crisis. Currently, we believe this to be modest and it reflects our international strategy to focus on large multinational clients that have geographically diverse operations. Our quarter one allowance for credit losses reflects all of these things as well. On Russian counterparty risk, our teams have done a tremendous job of winding down our exposures. At the end of the quarter, we have de minimis, meaning less than $20 million, counterparty exposures with a single Russian-based counterparty, and very limited impacts from any of those exposures are in our trading results for this quarter. Responsible growth has served us well here. After the 2014 Crimea conflict, we intentionally reduced our exposure, and Russia has not been in our top 20 country risk exposure table since 2015. So a few comments on NII. Remember the rate increases came late in the quarter and had little first quarter 2022 NII impact. There were two fewer days of interest in the quarter and decreased PPP fees hurt NII growth, yet we still grew NII by $200 million in-line with our guidance we gave you last quarter. Given the forward curve expectation for higher interest rates and our expectations of further loan growth, we expect significant NII improvement through the next several quarters. Alastair will expand on this point for you. We have more than $2 trillion of deposits and $1.4 trillion of those are with our consumer and wealth management clients with more than 40% of those in low- to no-interest checking. That is a franchise that isn't rivaled. We will benefit as rates move off the zero floors, allowing us to earn more money on those checking deposits. Deposits — I know some of you are wondering if deposits can continue to grow as rates begin to rise. We went back and looked at the last rising cycle in the last decade. We pinpointed the peak rate paid to customers during the quarter that reflected the peak Fed tightening. We then went back and looked at the 12 months preceding that peak and looked at deposit growth. In fact, during that 12 months preceding that peak, deposits grew 5%, driven by our organic growth engine, our market share gains and overall economic growth. If we go to Slide 6, you can see our capital comment. Our capital remained strong with a 10.4% CET1 ratio, well above our 9.5% minimum requirement. As you can see, $7 billion of earnings, net of preferred dividends, generated 41 basis points of capital. If you look on the right-hand side of the page, you can see that 14 basis points of that capital was used to support our customers' growth, which is a good thing. We also returned $4 billion to shareholders in common dividends and share repurchase, which represented about 27 basis points of use. Despite the spike in Treasury and mortgage-backed securities rates causing the fair value of our AFS debt securities to decrease and lowering our CET1 by 21 basis points, we're well positioned for the spike. As you recall, we invested much of our securities book in held-to-maturity due to our huge excess and stable deposit base. We have $2 trillion of deposits and less than $1 trillion in loans. In addition to being cautious, we hedge a large portion of securities in the AFS portfolio, protecting it from a much larger hit to AOCI. As the securities mature, the AOCI reverses and higher rates result in higher NII over a relatively short period of time. That should result in higher earnings that will benefit CET1 ratios on an ongoing basis and more than offset the negative upfront AOCI impact. Last thing I would note is our balance sheet growth to support our customers means our GSIB buffer will probably move higher by 50 basis points beginning in 2024, i.e., our regulatory minimum will move. While this is nearly two years away, we continue to move towards it. Given this new higher minimum over the next couple of years, we'll look to gradually move to a target CET1 range of 10.75% toward 11%. Importantly, while we grow into this range, we'll be able to support our clients, we'll be able to continue to increase our dividend, and we'll be able to continue to buy back stock. With that, let me turn it over to Alastair.

Thank you, Brian, and I'll start with the summary income statement on Slide 7, where you can see our comparisons illustrating 3% year-over-year operating leverage produced by growing revenue and managing our costs well. That was nearly enough to overcome the change in provision expense, driven by the $2.7 billion reserve release in the year-ago period compared to a $400 million release this quarter. On asset quality, more broadly, we continue to see very strong metrics. Net charge-offs remained low, and in fact they're down more than 50% in just the past year. Consumer early- and late-stage delinquencies are still below 2019 levels, and reservable criticized moved lower again in Q1. Looking ahead, we continue to feel good about the asset quality results of our consumer and commercial businesses near term, given our customers' high liquidity, low unemployment, and rising wages. We produced good returns again this quarter with an ROTCE of nearly 16%, and we delivered $4.4 billion of capital back to shareholders, driving average shares lower by 6% year-over-year. Looking forward and with continued expectations of growing NII, combined with strong expense control, we expect to drive operating leverage and see our efficiency ratio work back towards 60%. So let's turn to Slide 8 and the balance sheet. You can see during the quarter our balance sheet grew $69 billion to a little more than $3.2 trillion. This reflected $14 billion of growth in loans and the expansion of our Global Markets balance sheet, as customers increased their activity with us. Our decline in cash this quarter was associated with growth in Global Markets. Our liquidity portfolio was stable compared to year-end, and at $1.1 trillion it represents roughly a third of the balance sheet. Shareholders' equity declined $3.4 billion from Q4 with a few different components of note. Shareholders' equity benefited from net income after preferred dividends of $6.6 billion, as well as issuance of $2.4 billion in preferred stock. So that's $9 billion that flowed into equity in Q1. We paid out $4.4 billion in common dividends and share repurchases. AOCI declined as a result of the spike in rates that Brian referenced, and we saw the impact in two waves. First, we had a reduction from a change in the value of our AFS debt securities of $3.4 billion. That's the piece that impacts CET1, as Brian noted. Second, rates also drove a $5.2 billion decline in AOCI from derivatives, which does not impact CET1. That reflects cash flow hedges against our variable-rate loans, which provides some NII growth and protected CET1 at the same time. With regard to regulatory capital, since Brian already talked about CET1, I'd simply note that our supplemental leverage ratio was stable at 5.4% versus the minimum requirement of 5%, and still leaves us plenty of capacity for balance sheet growth. Our TLAC ratio remains comfortably above our requirements. Turning to Slide 9, we included the schedule on average loan balances. In the interest of time, the only thing I would add to Brian's earlier comments, and for your perspective, is simply a reminder that PPP loans are down $19 billion year-over-year. There's just a few billion of those left. Excluding PPP, our total loans grew $89 billion or 10% compared to last year. Moving to deposits on Slide 10. Across the past 12 months, we saw solid growth across the client base as we deepened relationships and added net new accounts. Our year-over-year average deposits are up $240 billion or 13%. Retail deposits with our Consumer and Wealth Management businesses grew $190 billion, and our retail deposits have now grown to more than $1.4 trillion, where we lead all competitors. Looking at linked-quarter growth from Q4 and combining Consumer and Wealth Management customer balances, our retail deposits grew $53 billion in just the past 90 days. With our commercial clients, they're up nicely year-over-year, and we simply note the Q1 decline, which is entirely consistent with previous years' seasonal trends. Turning to Slide 11 and net interest income. On a GAAP non-FTE basis, NII in Q1 was $11.6 billion, and the FTE NII number was $11.7 billion. So I'll focus on FTE, where net interest income has now increased $1.4 billion from the first quarter last year. As Brian noted, that's a 13% increase driven by deposit growth and our related investment of liquidity. NII was up $200 million versus the fourth quarter as the benefits of lower premium amortization and loan growth more than offset the headwinds of two fewer days of interest accruals and lower PPP fees. So let's pause for a moment to discuss asset sensitivity because I want to make a couple of points as we begin what the Fed has said will be a significant rate hike period. Remember, asset sensitivity is our measure of expected NII for the next 12 months above an expected baseline of NII, given changes in interest rates and other assumptions. In an environment of sharply rising rates each quarter, the baseline of NII increases and therefore the future sensitivity declines. We typically disclose our asset sensitivity based on a 100 basis point instantaneous parallel shock in rates above the forward curve. On that basis, asset sensitivity at March 31 was $5.4 billion of expected NII over the next 12 months, and 90% of that sensitivity is driven by short rates. That $5.4 billion is down from $6.5 billion at year-end, largely because higher rates are now factored into and running through our actual baseline NII. You asked last quarter about the same sensitivity on a spot basis relative to our current curve. Given that the yield curve is projecting 125 basis points of rate hikes over the next three meetings, we thought it was appropriate to provide that disclosure. So in a 100 basis point shock to the current curve using spot rates, our sensitivity to that kind of move would be $6.8 billion, or $1.4 billion higher than on a forward basis. So assuming rising rates as reflected in today's forward curve and if we see continued loan growth, I would reiterate what we said last quarter: we expect to see robust NII growth in 2022 compared to 2021. We're not going to provide numerical guidance for the full year because the changes in interest rates have proven quite volatile in just the last 90 days, let alone a year. We do provide that asset sensitivity so that you can use it as guardrails to think about changes as you modify your own assumptions. I do, however, want to provide a near-term expectation and say that if loans grow and rates in the forward curve materialize, we would expect to see NII in Q2 increase by more than $650 million over the Q1 level and then grow again significantly on a sequential basis in each of the following two quarters. Okay. Let's turn to expenses, and we'll use Slide 12 for that discussion. Our Q1 expenses were $15.3 billion, down a couple hundred million from the year-ago period. I'll focus my remarks on the more recent comparison versus Q4 where we're up $600 million. As expected, and as we conveyed to you last quarter, the Q1 increase was driven mostly by seasonality of payroll tax expense of roughly $400 million. We also experienced modestly higher wage and benefit costs. As we look forward, we continue to invest heavily in technology, people, and marketing across our lines of business, and we've continued to add new financial centers in expansion and growth markets. We modestly increased our new tech initiative budget for the year to $3.6 billion. That's on top of more than $35 billion that we put to work over the past 12 years to help us build powerful, more secure, and scalable technology platforms. This is the investment that allowed us to maintain a leadership position in patents among our peers. We had 512 of them granted in 2021 and we're maintaining a similar pace this year. We think this is one of the things that's helped protect our moat around leadership positions in places that matter most to customers. In addition to modestly higher marketing costs this year, our investments also include adding up to 100 new financial centers, and we also plan to renovate more than 800 more during the year. We will also continue our upward march on minimum hourly wage toward $25 by 2025. How do we pay for all that? Through continued work on operational excellence and digital engagement. As we look to Q2, we expect our expenses to be down modestly from Q1, as much of the seasonal payroll tax expense abates and is somewhat offset by investment timing, inflation, and the cost of opening up more fully for travel and client entertainment. It feels like we've got a lot of pent-up demand for face-to-face meetings by our clients and our people. So let's turn to asset quality on Slide 13. Asset quality of our customers remains very healthy. Net charge-offs this quarter were better than our expectations once again and remained below $400 million, down 52% compared to Q1 2021. Provision expense was $30 million in Q1 as a reserve release of $362 million closely matched net charge-offs in the quarter. That reserve release was primarily in our consumer portfolios. On Slide 14, we highlight the credit quality metrics for both our consumer and commercial portfolios. A couple of things are worth repeating: consumer delinquencies remain well below pre-pandemic levels. And despite reporting our commercial Russian lending exposure in reservable criticized, those levels still declined $1.7 billion from Q4. NPI saw a modest increase and that simply reflects a small amount of consumer real estate deferrals expiring with the expiration of the CARES Act. Turning to the business segments, one thing we'd ask you to keep in mind for each of the businesses is Q1 expense includes the seasonal payroll tax expense, which has negatively impacted efficiency ratios or profit margins in Q1. Also, Q1 of every year includes segment capital level evaluation. We put additional capital against each of the businesses due to their growth. As usual, we've tried to include business trends and digital stats for each segment. Starting with Consumer Banking on Slide 15, the Consumer Bank earned nearly $3 billion, that's 11% up over Q1 2021 as revenue growth more than offset the larger prior period reserve release. It's probably most easily identified by looking at pre-tax pre-provision earnings, which grew 32% year-over-year. Revenue grew 9% on NII improvement, and expense declined 4%, creating 13% operating leverage and the fourth consecutive quarter of operating leverage for our Consumer team. Notable customer activity highlights included our 228,000 net new checking accounts opened in Q1, which represents our 13th consecutive quarter of net new consumer checking account growth. This occurred as we began to implement our previously announced insufficient funds and overdraft policy changes, which lowered our service charges by about $80 million. During this time, we saw accounts grow and we saw expenses decline. We also grew investment accounts 7%, and those balances grew 10% from Q1 '21 to $350 billion, and that included $20 billion of client flows. Once again, we opened nearly one million credit cards in the quarter and grew average active card accounts and saw growth in combined credit and debit spend of 15%. Our continued investment in digital capabilities drove activity with our customers as we crossed 50% in digital sales this quarter and we continued investment in our financial centers, opening another eight in the quarter. It's also worth noting that small business saw continued growth in loans, in deposits and in spending. Small business card spend was up 28% year-over-year. That gives you an idea of how small businesses are reopening for business. I'd also draw your attention to Slide 22 in the appendix, which highlights the origination strength and quality of our consumer underwriting. Throughout everything, our underwriting standards have remained consistent. Moving to Slide 16, Wealth Management produced strong results earning $1.1 billion, representing 28% year-over-year growth, driven by strong revenue improvement, good expense management and low credit costs. Bank of America continues to deliver Wealth Management at scale across a full range of client segments and with top advisers in the industry according to peer rankings. That, coupled with our digital leadership, is delivering a modern Merrill and a modern Private Bank for clients through enterprise relationships. Our clients and advisors have recognized the value in a holistic financial relationship that extends across investments, planning and banking. That's what helped drive the $150 billion of client balance flows over the past 12 months. Not only did we see strong investment flows of more than $70 billion, but deposits grew $59 billion, up 18%, and we added $22 billion in loans over the same period, marking our 48th consecutive quarter of average loans growth in the business — consistent and sustained performance from the team. Revenues grew 10% to a new record and were led by 25% growth in NII on the back of those solid deposit and loan increases, as well as a 9% improvement in asset management fees. Expenses increased 4%, driven by higher revenue-related costs and resulted in over 600 basis points of operating leverage. We generated nearly 7,000 net new households in Merrill and more than 800 in the private bank this quarter. Moving to Global Banking on Slide 17. The business momentum with our commercial clients remained strong in the first quarter. The business earned $1.7 billion in Q1, down $450 million year-over-year, driven by the absence of a large prior period reserve release and lower investment banking revenue. Revenue improvement of 12% year-over-year reflected higher leasing-related revenue and NII growth, partially offset by those lower investment banking fees. Net interest income grew on the back of strong loans and deposits growth. The leasing revenue improvement included more ESG-related investments, particularly in solar, as well as the absence of weather-related losses recorded last year. While the company's overall investment banking fees of $1.5 billion declined 35% year-over-year, we gained market share in some important areas and recorded a number three ranking in overall fees. Importantly, our investment banking pipeline remains quite healthy. Provision expense reflected a reserve build of $177 million compared to a $1.2 billion release in the year-ago period, and this quarter's provision includes reserves taken for Russia exposure and other considerations for loan growth, offset by continued improvement in asset quality metrics. Finally, we saw expense decline by 4%, driving strong operating leverage. Switching to Global Markets on Slide 18 — and as we usually do, I will talk about the segment results excluding DVA — Q1 net income of $1.5 billion reflects a solid quarter of sales and trading revenue and includes a new record for equities. The business generated a 15% return in Q1 even with a 12% increase in the capital allocated to the business. Our investments in this business saw good results as our financing clients continue to increase their activities with our company. Focusing on year-over-year, sales and trading contributed $4.7 billion to revenue versus Q4, that was a 58% improvement, a little higher than typical seasonality. Versus Q1 '21, we saw a decline of 8% as the prior year included higher commodities results due to weather-related events. FICC declined 19% while equities improved 9%. That FICC decline reflects the higher prior period commodities and a weaker credit trading environment, partially offset by improved performance across our macro products, especially rates and foreign exchange. The strength in equities was driven by strong performance in derivatives. Year-over-year expense declined, reflecting the absence of costs associated with the realignment of a liquidating business activity to the All Other unit, as well as some Q1 2021 accelerated cost for incentive changes. Absent those impacts, expenses were up modestly. Finally, on Slide 19, All Other reported a loss of $364 million, declining $620 million from the year-ago period. Revenue declined as a result of a higher volume of deals, particularly solar, and therefore higher partnership losses on ESG investments; this was partially offset by the tax impact in this reporting unit. Expense increased as a result of costs now recorded here in this segment, following the Q4 realignment of that liquidating business out of Global Markets. As a reminder, for the financial statement presentation in this release, the business segments are all taxed on a standard fully taxable equivalent basis. So in All Other, we incorporate the impact of our ESG tax credits and any other unusual items. For the quarter for the company, our effective tax rate was 10%, benefiting from ESG investment tax credits. Excluding the tax credits, the tax rate would have been roughly 24%. We expect our effective tax rate in 2022 to be between 10% to 12%, absent any tax law changes or unusual items. And with that, let's open it up for Q&A.

We'll go first to Glenn Schorr with Evercore. Your line is open.

Hi. Thanks very much. And forgive me if this is a long one. I listen to all your comments about the consumer, about spending, about no real stresses in credit — net charge-offs, nonperforming, debt service levels — all that sounds great. In the past, higher rates were designed to pull leverage from the system and call some recessions. The market is trying to assign some percentage chance towards a recession, yet every comment I hear from you doesn't sound like we're going toward a recession. So I wanted to see if I could, A, get you to comment on your thoughts around today's environment versus history? And then, also, specifically ask what you did with the ins and outs in reserves? And if you changed any macro scenarios as you bake in CECL results? Thanks for that. Thanks for bearing with me.

Thanks, Glenn. You're right to pick up on the commentary, because Brian highlighted the strength of the consumer, which remains extraordinary. At the same time, what we see on the asset quality side of commercial is just continued steady improvement as the economy reopens. That's what we're seeing. That's contemporaneous. Now, you're asking a question about what it looks like in the future. As we do every quarter, we think about how we look at our reserves. This quarter, we took some of the upside out of our reserve weighting. We've got a little more weighting towards baseline and a little more towards downside. That's one thing we've done. Second, we've increased our forecast for inflation and see that playing through. Those scenarios are a little more weighted towards inflationary outcomes. Third, we have adjusted GDP growth down, largely based on blue-chip consensus. So we look at what we're seeing in the actual results and balance that going forward with our scenarios.

Glenn, I think just generally the Fed has a task to bring inflation down. Our GDP assumptions center the economy returning to trend; the question of soft landing versus hard landing is the debate. What's unusual this time is how much cash is sitting in consumers' accounts. If you compare to the prior rate rising cycle, you wouldn't have seen consumer balances at the multiples I gave you earlier, and consumers have tremendous borrowing capacity left in terms of unused credit lines; the same applies on the commercial side. Lines are bouncing along just above the low point. We continue to adjust our reserve levels to, as Alastair said, factor in our base case which includes higher inflation through the rest of the year. Our base case uses a set of scenarios; the adverse scenario has a significant weight. We are very strong in reserve. It's very different compared to previous cycles because unemployment is low and consumers are sitting with substantial cash. That puts more attention on the Fed to how they engineer a successful normalization, and they know that. But on the other hand, it's a better place to start.

I appreciate all that. One little tiny follow-up is in Global Banking, I noticed $2 billion more allocated capital. Deal activity is down, but you mentioned pipelines are good. Maybe you could just talk about what's going on there. Thank you.

We don't have a great deal to add there. We're coming off record quarters last year. We're operating in the market conditions that were given. The volatility has obviously been hardest felt in equity capital markets and in high yield. Across the board, our pipelines look very strong. When I asked the investment banking team, they said somewhere between strong and very strong. So the pipelines are healthy, but we need market conditions to cooperate.

Okay. Thanks so much.

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

Hi, good morning. I was wondering if you could talk a little bit about expenses and operating leverage. Are you still thinking that expenses will be flattish this year in the $60 billion ballpark, Brian? And you did mention expectations for the efficiency ratio as operating leverage improves — that it may march down from the mid-60s to the low 60s, I think you said?

Yes. John, we expect to be relatively flat for 2022 versus 2021. That's the guidance we gave you last quarter. We don't see any change this quarter.

Okay, that's helpful. And then, Alastair, maybe just a little more fleshing out about capital and how you're managing CET1. You're generating capital each quarter above what you're paying out in dividends. It seemed like 30 basis points this quarter, and that probably gets better. At the same time, it sounds like you may be managing up toward around 11% over the next year. Could you give some dynamics there and how that plays into the ability to do buybacks through the rest of the year? Thanks.

No change to our approach relative to prior years. The waterfall on Slide 6 is pretty constructive. First priority for us will remain to invest in growth and support our clients. Secondly, we'll make the dividend payments. Then we'll have capital left over for share buyback, as we have had in the past. We'll make those decisions in the context of future rate environments and future capital requirements. We're going to build capital over the course of the next couple of years by about 50 basis points; we've got seven quarters, so it's a small amount each quarter.

And John, on operating leverage, I'm proud of the team. We have three straight quarters of operating leverage. PPNR growth was strong. If you look historically, we had 20 straight quarters of operating leverage, and we're starting to see that come through again. The consumer businesses are highly sensitive to NII growth, and as NII improves, that flows strongly to the bottom line.

Got it. Thanks very much.

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

Hi. Brian and Alastair, I wonder if you can make a distinction among the economic, regulatory and accounting outlooks. From an economic standpoint, your mark-to-market on assets and securities moved AOCI, but you don't mark-to-market that $1.4 trillion of deposits. From a regulatory standpoint, AOCI causes you to slow buybacks, I believe you said. From an accounting or earnings standpoint, maybe you win in the end, maybe you don't. So at a basic level, is your earnings outlook better because of higher NII and payment rates and better efficiency, or worse because you have less buybacks and maybe more provisions due to the potential for a recession?

Mike, those are all the pieces. Simply put, NII picks up next quarter. We picked up $200 million this quarter, then we expect another $650 million-plus next quarter, and then it grows sequentially thereafter. That's tremendous operating leverage. Expenses are flat, so that flows through to the bottom line. The vagaries among regulatory calculation, GAAP accounting, and capital calculations are real, but the core point is we have very long-duration, very stable deposits on which we can earn more as rates rise. We invested much of our securities book in held-to-maturity and hedged the AFS portion to protect against larger AOCI hits, which is helping to limit the CET1 impact. The cash flows from our securities portfolio will roll back to par over time and be reinvested at higher rates. We feel very good about the net effect: higher sustained rates should increase earnings power substantially.

Mike, the other point I'd add is when Brian talks about operational deposits, it's one of the reasons we highlight that 92% to 93% of our consumer accounts are primary accounts and we've had 99%-plus retention on those accounts. These are sticky deposits, which reduces the risk of large outflows when rates rise.

Can you elaborate a little bit more on what you mean by operational deposits? I know you've talked about that and the linkages, and I guess that's why you expect deposits to be more sticky. Can you elaborate more? You mentioned Zelle and Erica volumes are up four times. Is that increasing stickiness?

On the consumer side, the $1.4 trillion includes a large share in checking accounts. That's money people have in motion in a given day. We have about 35 million checking holders, a record number, and our functionality and digital features help retention for our preferred customer base. These primary accounts have very high retention rates. On the commercial side, operational accounts are those where cash is in motion — payroll, collections, disbursements — and therefore tend to be stable deposit balances tied to client operations. Our Global Transaction Services revenue shows growth consistent with the stability of that deposit base. So we think these balances are sticky and not likely to flee simply because of higher rates.

The only thing I'd add is the consumer retention and primary-account statistics are important context to the deposit beta discussion.

All right. Thank you.

We'll go next to Betsy Graseck with Morgan Stanley. Your line is open.

Hey, thanks. Good morning. Two questions. One on expenses: I know you mentioned still anticipating relatively flat and that you would deal with inflation pressures from opportunities to get more efficient. Can you give us a sense as to how long you think you can stay flat for? Like is that into 2023 as well? And can you unpack some of the things you're doing to get more efficient? I know you did a ton of efficiency pre-COVID, so what's left? Thanks.

Betsy, coming into the pandemic we had brought expenses down and said we would be an operating-leverage company and allow modest expense growth as revenue grows faster. When we say flat year-over-year for 2022 versus 2021, that means within the $59 billion to $60 billion range. Our goal is to keep expense growth modest, if any, as we move into 2023 and beyond, while driving revenue growth faster. The key is that we expect revenue, particularly NII, to grow much faster, which improves efficiency ratios.

Got it. And then the other question: with further rate backups, obviously Treasury yields are already up since March 31. If rates go higher and you have the same kind of hit as this past quarter, how are you dealing with that? Would you move any AFS to HTM, or use the new accounting rule finalized late March that enables last-layer hedging on HTM? Does any of that matter to you? How would you change how you're dealing with it?

The piece that matters most is the AFS securities. We have about $200 billion of Treasuries that are swapped to floating to insulate us, which is one reason our AOCI hit is smaller than many others. Then there's about $50 billion or so of securities not swapped to floating, and that number has come down over months. We have the ability to hedge that if we choose. We'll manage our interest rate exposure as the environment develops.

Okay. Thanks.

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

Hi. I was hoping to get a little more detail on the net interest income trajectory in the back half of the year, if we follow the forward curve. I appreciate you don't want to give explicit guidance because the rate environment can change, but NII is the key driver for Bank of America's earnings from here. You said Q2 is up more than $600 million. If you follow the forward curve, it seems like quarter-on-quarter increases could accelerate in the back half of the year. Could you comment?

Broadly speaking, we agree with you and expect to be levered to rates going up. We said Q2 should be up at least $650 million in NII. If you look at the forward curve, you would expect acceleration over the course of the year. We provided the $5.4 billion forward versus $6.8 billion spot sensitivity disclosures so you can model that. We're reluctant to give full-year numbers because rates are volatile, and Fed meetings in May and beyond will matter to the forward curve.

If we do get another 100 basis points of hikes, how does that look for your rate sensitivity? At some point rate hikes help NII less — where do you see diminishing incremental benefit?

The fact that $5.4 billion versus $6.8 billion demonstrates successive hikes become less valuable, but we're likely a long way from that point. We expect to capture a lot of value in the coming hikes because of our strategy anchored on operating and primary accounts.

The question is always if the Fed hikes because inflation is stubborn, what does that mean for the economy? That's why we have significant reserves for tougher scenarios. But generally, a higher sustained rate environment will help us earn a lot more money. You saw that in the 2016–2018 cycle, and you'll see it again.

Thank you very much.

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

Hi. Good morning. My first question is a follow-up to what Matt was asking about. Alastair, could you give us a sense of what the deposit repricing assumption is in the $6.8 billion sensitivity for the first 100 basis points? Given your focus on primary and operating accounts, contrast that with chunkier rate hikes; how should we expect deposit repricing to behave in the second 100 basis points?

We typically look at deposit betas over historical cycles. In the last tightening cycle from 2015 through 2019, on average, deposit betas were about 20% to 25% for Bank of America, though it's very different by account and client. We'd hope to perform better in this cycle based on the value we deliver to clients through digital and other services. It's difficult to project first 100 versus second 100 precisely, but for the early moves we'd expect deposit repricing to be relatively restrained; at some point deposit betas drift higher and we'll provide guidance based on what we observe.

Got it. I wanted to clarify something Brian said to Betsy. Did you say that you expect 2022 expenses to be between $59 billion and $60 billion and then modest growth to return in 2023?

No. We said 2022 is flat to 2021, and then modest growth returns thereafter.

Got it. And then the follow-up: you mentioned a trajectory to get back to 60% efficiency ratio. What kind of time frame are you thinking relative to the forward curve?

We made progress each quarter and are around the mid-60s now, down year-over-year. The timing will depend on NII normalization and business mix, including Wealth Management's share of revenue. We expect relentless progress toward the 60% target but can't give an exact quarter.

Got it. One last question on capital: today your current CET1 minimum is 9.5% and the higher GSIB surcharge takes effect January 1, 2024 increasing the minimum by 50 basis points. How are you thinking about buffers relative to the new minimums?

Our GSIB minimum increase would be effective January 1, 2024, giving us seven quarters to build toward it. We typically operate about 75 to 100 basis points above our regulatory minimum. Over the next seven quarters we'll build about 50 basis points of capital to meet that higher minimum.

Got it. Thank you.

We'll go now to Ken Usdin with Jefferies. Your line is open.

Hey, thanks. Good morning. Just wanted to look at the commercial side of loans. Fourth quarter loan growth ex-PPP was strong, and this quarter a little slower. I wanted to ask about end-demand, any supply chain impacts, changes in line utilization? What are you seeing on commercial demand?

Our clients are seeing supply chain challenges and we're seeing inflation and labor/wage pressure. At the same time, the economy is returning toward normal and line utilization is returning toward normal too. Revolver utilization in commercial banking is about 31.7%, pre-pandemic it was around 35%. That gap represents roughly $15 billion to $20 billion of loan potential as the economy heals and clients take utilization back, which supports expectations for continued loan growth.

Important in small business, originations are strong and above pre-pandemic levels. Home equity is coming back even though mortgage originations may fall. Pre-pandemic we had more room on consumer loan balances. There's room for further loan growth as people normalize behavior and activity. Inventory issues in auto dealers are a clear example of demand-supply mismatches supporting lending activity.

Got it. One follow-up on the fee side: I know investment banking and trading are hard to forecast. Any thoughts on consumer-related and broker-weighted fee areas — underlying moving parts and growth trajectory?

On the card side, we expect relatively flat to slight growth and we're managing to the total client relationship. That will show up more in balances and NII. Asset management fees will follow market levels with some help from net new flows and households. Also note the insufficient funds and overdraft changes implemented in February will reduce service charges by roughly $80 million in Q1 and about $750 million for the year, as a reminder.

Got it. Thank you, Brian and Alastair.

We'll go now to Steven Chubak with Wolfe Research. Your line is open.

Hi, good morning. Wanted to ask a follow-up on the earlier discussion on the 60% efficiency ratio. If we look at what you achieved last cycle, your terminal efficiency trajectory was closer to the upper 50s once the Fed funds rate eclipsed 200 basis points. I want to get a sense whether there's a credible case for delivering a better-than-60% efficiency ratio this cycle, or is there structural factors supporting a higher terminal efficiency in this coming cycle?

Steven, the dynamics will depend on business mix, particularly how large Wealth Management is as a percentage of total revenue, and how the other businesses perform. Historically, Consumer and Global Banking have delivered lower efficiencies in high-rate environments. Wealth Management's scale and margins affect the consolidated efficiency ratio. If Wealth Management revenues are strong, you could see continued improvement but mix will matter. In short, keep cheering for strong Wealth revenues even if it weighs on efficiency measures — the overall economics are good.

We'll certainly be cheering for that. Follow-up on capital: RWA growth has been the biggest source of capital consumption over the last couple of quarters — up about 9% year-on-year. Given the pace of continued strong loan growth that's anticipated, what level of organic RWA growth should we be underwriting as part of the capital outlook?

Some RWA growth has been driven by the loans rebound, particularly commercial, and some by Global Markets where balance sheet can be seasonal. We manage RWAs closely and have plenty of capital to support expected growth. The capital allocation priorities remain invest in growth, pay dividends, and return capital via buybacks in context of rate and regulatory environment. Slide 6's framework is a fair starting point.

Great color. Thanks for taking my questions.

Our next question comes from Vivek Juneja with JPMorgan. Your line is open.

Thanks for taking my question. A couple: you discussed that deposit balances remain very high in lower-end customers. However, more granularly and recently, are you starting to see any drawdown with higher spending because of inflation? Any color on that? Quarter-over-quarter they are up, but as we look forward, are we seeing drawdowns yet?

It's actually the opposite. Balances grew faster from February to March, likely influenced by tax returns. Beginning around May of last year, the lower-end balances grew roughly 1% per month consistently. November saw a slight down draft but it picked back up in December and grew in January, February, and March. March was the strongest month. We haven't seen April data yet, but balances are still growing strongly, even in customers who pre-pandemic had $10,000 to $20,000 — those balances are still growing.

Completely different question: securities growth didn't show much this quarter even excluding mark-to-market. What's your plan — do you plan to grow securities balances or how are you thinking about that?

It all comes down to deposits. We keep growing deposits, we have to put them to work. The size of the balance sheet is largely driven by deposits. If deposits grow, we will invest carefully and prudently.

This quarter we added $8 billion of deposits and $14 billion of loans. That's our first choice for investment. Securities balances came down a little, about $13 billion. Over the past couple of years in the pandemic we purchased securities to replace loans that were coming off. Now we're seeing loans grow again. If loan growth continues, securities may decline or stay flat — it depends on deposits and loan demand.

And about liquid assets — they came down a little quarter-over-quarter and year-over-year. Is there room for that to come down further, and what level should we think of as a run rate assuming modest deposit growth?

Liquidity was down in the quarter largely due to funding Global Markets activity seasonally. Year-over-year our liquidity sources are up slightly from Q1 of last year. HQLA surplus is up. We are probably more liquid now than we've ever been and have plenty of liquidity. As deposits grow we would expect liquidity to remain robust or go higher.

Thank you.

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

Hi. I was a little disappointed about the question related to terminal efficiency. With all the technology investments, shouldn't your incremental pretax margins be greater on your new revenues? If so, shouldn't your terminal efficiency, adjusted for business mix, be better than before? For example, your pretax margin in 2021 was 38%. Where should pretax margins be on new revenues generated ahead?

New revenues do generate higher margins and the efficiency ratio will keep improving. We're driving efficiency down every quarter. Headcount has come down and we're still investing in salespeople and branches where it makes sense. Expenses are flat this year while NII improves, which will have a strong impact on efficiency. We will keep driving operating leverage.

One other follow-up: I don't think there's a recession this year, but I've been wrong before and the market is pricing a chance. Brian and Alastair, what do you think the chance of a recession in 2022 is? You have more data and insight into the U.S. economy, and you need to account for that in provisioning. Is it 50%? 20%? What's your gut and the numbers?

We model many scenarios but don't give a single percentage. Our economists do not predict a recession this year; they project GDP around 3% this year and a little above 2% next year. In our reserve process, we weight the adverse scenario heavily — around 40% — and the formulaic component of our CECL reserve is roughly 40% of total reserves, with the remainder being judgmental overlays. We're braced for a wide range of outcomes and we've built substantial reserves already.

Understood. Thank you.

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

Hi, Brian. Hi, Alastair.

Gerard, how are you?

Alastair, you guys are very well positioned, as you pointed out, for your balance sheet for rising interest rates, which seems very likely this year. Obviously, you're not a patrol boat but a battleship turning the balance sheet to benefit. When the Fed finally succeeds in knocking down inflation and they stop raising rates and perhaps cut later, when do you start thinking about repositioning the balance sheet to be less asset sensitive?

We don't reposition the balance sheet haphazardly. The reason we hold securities is because we have $2 trillion of deposits and less than $1 trillion of loans; we need to invest the excess liquidity. Our deposits are stable and long duration, so we invest in Treasuries and mortgage-backed securities, and we hedge where appropriate. We're interest-rate managers over a cycle, not traders. We protect capital through hedging and prudent duration management, and we will redeploy cash flows as securities mature into higher-rate instruments. We won't let capital constraints drive us to deprive clients of needed services; we'll manage and build the capital gradually.

Very good. As a follow-up, regarding the GSIB buffer increase effective in 2024, is there any strategy you can employ to reduce that buffer before then, or is it really just retaining more earnings?

The GSIB buffer is calculated based on a number of factors not all tied directly to growth. We're not going to constrain customer growth to avoid the buffer. We'll build into it over the next seven quarters; you should expect us to operate closer to a 10.75% target over that timeframe. We'll retain a bit more capital while continuing to support clients and return capital prudently.

Very good. Thank you.

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

Yes. Good morning. Recognizing that the held-to-maturity portfolio doesn't get marked-to-market, economically it's not fun to have a large bond portfolio that's underwater. Looking at your disclosures, much of that held-to-maturity portfolio is agencies with more than 10-year maturity. How do you look at extension risk on that portfolio? Economically, is there any way to protect yourself in a tail environment where rates go up a couple hundred basis points?

We're not interest traders; we're interest-rate managers across cycles. The mortgage securities protected us in a low-rate environment; what protects us in a rising-rate environment is our asset sensitivity and the resulting NII pickup. As securities mature and coupons are reinvested at higher rates, that benefits NII. We manage the trade-off between yields, capital impacts, and liquidity, and we hedge where appropriate.

Just to add: even assuming very low prepayment rates, cash flows still come off the mortgage portfolio via principal repayments over time — people move, pay down principal, or otherwise change balances — so the cash flow can be redeployed at higher yields. The economic value of zero-cost deposits and the eventual redeployment of securities into higher rates generally outweighs the temporary mark-to-market hit in AOCI.

All right. Thank you.

I think that's all our questions. Thank you for joining us again this quarter. It's a strong quarter by the team and I want to thank the team for all the great work they've done. As we told you last quarter and a few quarters before that, the organic growth machine in Bank of America is driving hard — growing its market share, growing deposits, growing loans, and doing well in the market. We will accelerate the P&L from that growth with higher rates, as we told you. We'll continue to hold expenses in check, driving operating leverage, and that will always be a focus to get the most efficient growth we can. The strong customer activity, which we spoke about, continues into the first part of April. That will drive our earnings. Thank you. We look forward to talking to you next time.

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