Bank Of America Corp /De/ Q3 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. Please note, this call may be recorded, and I'll be standing by if you should need any assistance. It is now my pleasure to turn today's program over to Lee McEntire. Please go ahead.

Thank you, Kathrin. Good morning. Welcome, I hope everyone had a good weekend. Thank you for joining the call to review our third quarter results. I hope everyone also had a chance to review our earnings documents released earlier this morning. As always, they're available, including the earnings presentation that Brian and Alastair will refer to during the call, on the 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 I'll ask Alastair Borthwick, our CFO, to cover the details of the quarter. Before I turn the call over to Brian, I'll just remind you that we may make some forward-looking statements, and refer to non-GAAP financial measures during the call. Forward-looking statements are based on management's current expectations and assumptions, and they are subject to risks and uncertainties. Factors that may cause actual results to materially differ from expectations are detailed in our earnings materials and the SEC filings that are available on the website. Information about non-GAAP financial measures, including reconciliations to U.S. GAAP, can also be found in our earnings materials that are available on the website and in the docs. So with that, I'll turn it over to you, Brian. Thank you.

Good morning, and thank you for joining us. I want to start by sending our thoughts to the impacted areas from the devastation of the recent storms, especially our impacted teammates and their families. Our teams remain busy assisting those clients and associates in the impacted areas. So we're going to start on Slide 2 of the earnings materials. This quarter, Bank of America reported $7.1 billion in net income or $0.81 per diluted share. We grew revenue 8% year-over-year. We delivered our fifth straight quarter of operating leverage. Every business segment delivered operating leverage. This takes us back to our five-year run before the pandemic. The highlights this quarter were also once again marked by good organic customer activity. This was coupled with a significant increase in net interest income. In addition, the teams adapted well to our new capital requirements. And as a result, our common equity tier 1 ratio or CET1 ratio improved by nearly 50 basis points to 11%, moving 60 basis points above its current minimums. The decline from prior year reported net income and EPS comparisons reflect a reserve build versus a reserve release last year. At the same time, however, our asset quality remains strong as net charge-offs and several other metrics, in fact, improved from the second quarter 2022. Pretax pre-provision income grew 10% year-over-year. From a return perspective, we produced a 15% ROTCE and a 90 basis point ROA. Our efficiency ratio this quarter dropped to 62%. Taking out the litigation, it would have been 61%. So even while investing in marketing and people and technology and physical plant, the team continues to drive operational excellence. An easy way to think about this is we currently operate Bank of America with fewer people than we had in 2015, seven years ago. Let's go to Slide 3. Those continued investments over the past several years in our people, tools and resources for our customers and teammates, as well as our new and renovated financial centers have allowed us to continually enhance the customer experience and fuel organic growth as we drive responsible growth. In the third quarter alone, we added more than 400,000 net new consumer checking accounts. We added 1.3 million new credit card accounts. We added 100,000 new funded investment accounts in our Consumer business. Customers are finding increasingly convenient access to us. Digital users grew to 56 million. Logins by those users cleared 3 billion in the past quarter, 1 billion per month. Erica surpassed 1 billion interactions since it was introduced four years ago this quarter. It has become a primary interaction method for our clients with more than 130 million interactions this quarter alone. When you look at our sales, 48% of third quarter sales were digital, a 36% year-over-year increase. This occurred even as we fully reopened our financial centers and had our teammates also selling. Now once again, you can find all these digital statistics and more in the appendix of our earnings material as usual. I encourage you to look at those statistics for every one of our lines of business, not just Consumer. They compare favorably to the competitive measures that we see because when we see people actually publish their numbers. At the same time, 27 million customers visit our financial centers in the quarter. This highlights the importance of having both high-touch and high-tech approaches. In the wealth management business, we added 400 advisors this quarter. Our advisors added nearly 6,000 new households in the Merrill and Private Bank areas. We saw solid net flows despite the turbulence of markets. 80% of our GWIM customers are digitally active. 30% of the new Merrill accounts are opened digitally. That combined with our consumer investments business has seen more than $100 billion of net client flows year-to-date. We continue to see increased activity both in investments as well as the banking products in this area. This quarter, GWIM opened a record number of bank accounts. GWIM also saw its 50th consecutive quarter of average loan growth. The banking capabilities and success differentiates our platform. The business grew revenue, delivered operating leverage and saw a record pretax pre-provision growth, even in choppy markets. As we turn to Global Banking, ending loan balances were down linked quarter. However, we did see solid production in this area, and that was offset by client paydowns, decreasing the value of foreign denominated loans and loans sold to manage our risk-weighted assets, which helped us build the capital levels I talked about earlier. As we look at Global Markets, the team had a strong third quarter in sales and trading performance. In fact, the third quarter of 2022 was the strongest since the third quarter of 2010. It grew 13% from last year. It was led by strong performance in our macro FICC business, which has benefited by investments made over the past year. We had no trading loss days this quarter. Let me also make a few points using the customer activity highlighted on the continued resilience of Bank of America's broad customer base. So if you look at Slide 4, you can see some points about the overall health that demonstrate what's going on in the customer base. Let me make a couple of key points. First, consumers continue to spend at strong levels. Second, Consumer customer average deposit levels for September 2022 remain at multiples of the pre-pandemic levels. You can see that in the lower right. Third, there's plenty of capacity for borrowing as credit and card balances of BAC are still 12% below pre-pandemic levels, and the payment rates on those credit cards are 1,000 basis points over pre-pandemic levels. So in spending, a couple of thoughts. A perspicacious analyst might wonder whether talk of inflation, recession and other factors would lead to slower spending growth. We just don't see that here at Bank of America. Year-to-date spending of $3.1 trillion through September is up 12% compared to last year. Second, as you look across the period, you can see in the trend of year-over-year spending. As we entered the pandemic, we saw spending decline and then recover and grow across the quarters. And while still strong in September at 10%, spending growth has slowed just a bit from the 12% year-to-date pace, which shows you that early in the year was a faster year-over-year growth rate, but still strong. And the first two weeks of October show that strength is still growing at 10%. It’s notable that it isn't just inflation that is driving spending as transactions are up single digits year-over-year pretty consistently. You'll also note on the bottom left, the continued growth in goods and services, particularly retail toward experiences of travel and entertainment. While fuel price volatility continues, it is not currently impacting the spend levels in this quarter as prices stabilize. On the level of customer liquidity, the level of customer liquidity remains strong. Average deposit balances of our Consumer customer remained at high levels relative to a year ago. These balances are still multiples of the pre-pandemic periods, and they were largely unchanged at these elevated amounts for the month of September. These deposit levels suggest continued capacity to strengthen at healthy levels. On Slide 5, we show you as we did last quarter, some other stats about resiliency. As you can see, whether you look at early or late-stage card delinquencies, they all remain well below our pre-pandemic levels. These are decades-old lows, and we're just now seeing a gradual move off these lows in early-stage delinquencies. Late-stage delinquencies are still 40% below pre-pandemic levels. Keep in mind, asset quality metrics were strong even before the pandemic. On this page, what you see is 30- to 90-day card delinquencies. If you compare them against the average for the past five years leading up to the pandemic, a period of growth and unemployment falling, those averages were 183 basis points and 91 basis points, respectively. So the current ratio of delinquencies would have to be worse by 30% or more to even approach that five-year pre-pandemic average at a time of economic growth and falling unemployment. So consumers remain resilient. Let me take a couple of minutes to talk to you quickly about the balance sheet, and I'll turn it over to Alastair. As you think about loan and deposit base balances in general, we're seeing what we expected, as monetary policy tightens. On deposits, we see clients with excess liquidity looking for yield without being global banking movements you can see from moving from noninterest-bearing to interest-bearing accounts. Or in our Wealth Management business, where we saw clients shift out of brokerage sweeps into preferred deposits or other investment products like treasuries that we offer. But if you look at our core customer base, where the transactional balances drive the outcome, we are seeing steady balances driven by new account activity and a good value proposition we have for our customers. When you think about loans, consumer loan balance growth was led by card and reflects increased market activity and continued reopening of financial centers, building high levels of new customer relationships. On commercial, the average loans rose $16 billion linked quarter or 12% annualized. We did see a modest and balanced decline as good loan production was offset by the sale or syndication of $3 billion of loans and also by $4 billion in negative foreign currency impacts. We obviously took activity on balance sheet optimization, which helped our RWAs and led to the capital levels I talked about earlier. We have provided an update in the appendix as to the credit transformation of our loan portfolio and a few other consumer credit slides to help illustrate the quality of our portfolio under years of responsible growth. We updated those slides again this quarter and you can find them in the appendix, and I recommend them to you. So in summary, client activity remains good. NII has improved quickly and the customers' resilience and health remains strong. We've also managed our expenses very well. We drove our operating leverage. The team managed the balance sheet well and improved capital, increased our dividend and bought back a modest amount of shares. We call that responsible growth. With that, I'll turn it over to Alastair.

Thank you, Brian. And I'll start by adding a little more detail on the income statement and refer you to Slide 6 highlights. You can see here revenue of $24.5 billion grew 8% and with NII improving 24% year-over-year, while our fees declined 8%. And I'll cover the NII improvement in just a moment. On noninterest income, the volatility and the levels of market activity drove a year-over-year decline in investment banking and asset management fees, while still some trading benefited from investments made in the business and the volatile market conditions. Additionally, service charges moved lower for two reasons. First, in Consumer, we completed the sweeping changes around insufficient funds and overdraft in June, marking a 90% reduction from June of 2021. Second, our corporate service charges declined as earned credit rates increased for clients and that overwhelmed organic growth in the gross fees associated with treasury management services performed for our clients. Expenses this quarter were $15.3 billion, and they included the settlement of our last large remaining legacy monoline insurance litigation. As you likely saw on October 7, we filed the 8-K announcing a settlement that resolved all of the outstanding litigation with Ambac and that dates all the way back to the 2008 financial crisis. We recorded $354 million in litigation expense this quarter above previous accruals for payment of the settlement. And without that litigation cost, our expense would have been just below the $15 billion mark. Okay. Let's move to the balance sheet and we'll look at Slide 7, where you can see during the quarter, the balance sheet declined $38 billion to $3.07 trillion. That was driven by a $46 billion decline in deposits and coupled with a $53 billion decline in securities. Our average liquidity portfolio declined in the quarter reflecting the decrease in deposits and security levels. At $941 billion, our liquidity still remains $365 billion above pre-pandemic levels, just to give you an idea of just how much our liquidity has increased. Shareholders' equity was stable with the second quarter at $270 billion as earnings were offset by capital distributed to shareholders and the change in AOCI from rate moves. We paid out $1.8 billion in common dividends. We bought back $450 million in gross share repurchases, and that covered our employee issuances in the quarter, leaving no dilutive impact for shareholders. AOCI declined $4.4 billion as a result of the increase in loan rates, and we saw the impact primarily in two ways. First, we had a reduction from a change in the value of our available-for-sale debt securities. That was $1.1 billion, and that impacted CET1. Second, rates also drove a $3.7 billion decline in AOCI from derivatives, and that does not impact CET1. That reflects cash flow hedges mostly put in place last year against some of our variable rate loans, and that protected us against CET1. With regard to regulatory capital, our supplemental leverage ratio increased to 5.8% versus our minimum requirement of 5%, which still leaves plenty of capacity for balance sheet growth and our TLAC ratio remains comfortably above our requirements. Okay. Let's go to the CET1 waterfall on Slide 8, and we can talk about that. As you'll recall back in last quarter, we talked about our June CCAR results, where our stress capital buffer increased from 2.5% to 3.4%. And that increased our overall CET1 ratio minimum requirement from 9.5% to 10.4% as of the beginning of the fourth quarter. Our capital levels today remain strong with $176 billion of CET1. And through the good work of our teams, we improved our CET1 ratio by 49 basis points compared to June 30, taking us to 11%. That leaves us well above our new 10.4% minimum requirement. So we'll walk through the drivers this quarter. First, it's $6.6 billion of earnings, net of preferred dividends and that generated 40 basis points of capital. And then also importantly, through optimization of the balance sheet, we managed our RWA balances down and that added 26 basis points more of capital ratio improvement. Dividends used 11 basis points of capital. And this quarter, the movement in treasury and mortgage-backed securities rates caused the fair value of our available-for-sale debt securities to decrease, and that lowered our CET1 ratio by 7 basis points. We remain well positioned for the rate movement because of the hedge of a large portion of this portfolio continuing to protect us from AOCI movements while benefiting NII since swaps were swapped to floating. So we feel like our teams rose to the challenge well this quarter in terms of increased capital requirements. On Slide 9, we've laid out average loans. And looking at those loans and providing a bit more detail on a year-over-year basis, you can see 12% average growth as commercial loans grew 17% and consumer loans grew 7%. Within Consumer, credit card grew 12%. Focusing on more near-term growth versus the second quarter of 2022, our average total loans grew 8% on an annualized basis, led by 12% annualized commercial loan growth and 21% annualized credit card growth, while other consumer loans were relatively flat linked quarter. This slower loan quarter growth included two notable impacts that Brian mentioned. We saw good commercial loan demand, and we also saw FX valuation adjustments as a result of the strong dollar and then some loan sales and syndications that lowered our RWAs. Partially offsetting some of the strong card growth in consumer loans, we sold about $1 billion of residential mortgage loans. Adjusting for the FX impact and loan sales, loan growth from Q2 was closer to the industry's growth rate. Let's focus now on deposit use on Slide 10. And you can see there that our average deposits year-over-year are up 1% at $1.96 trillion. The noninterest-bearing deposits are down 3%, while the interest-bearing are up 4%. So overall, we grew our deposits. And as you would expect in a rising rate environment, we've seen some shifts from noninterest-bearing into interest-bearing, and it's important to understand the makeup of these moves. In Consumer, our total deposits are up 7% year-over-year. These are core and foundational elements of the customers' financial activities. And we've seen growth in both noninterest-bearing and interest-bearing balances and we remain very disciplined on $1.1 trillion of total consumer deposits while Fed funds is now at 3.25%. So customers see the value in their total relationship with us through their personalized client engagement and our industry-leading digital capabilities and rewards. We expect that to continue. Do we expect deposit rates to increase? Yes, of course, and we will remain both disciplined and competitive, and that is built into our asset sensitivity. On a linked quarter basis, our consumer deposits moved lower by less than 1%. In Wealth Management, total deposits are flat year-over-year. And again, it's important to understand that as expected, these are the clients who generally have more excess liquidity and have historically taken higher rates, both in deposit accounts as well as movements outside of deposits where we offer alternatives for those clients. While flat year-over-year, within that, we saw a $12 billion decline in year-over-year average deposits on our brokerage platform with some shifts from sweeps to preferred deposits within the platform. Meanwhile, Merrill Bank deposits and deposits with Private Bank have grown $12 billion. The higher-tiered preferred deposit products represent a little more than 20% of the mix of deposits and they're moving largely in line with short-term rates, while the other 80% or so deposit products are paying much lower rates. On a linked quarter basis, we saw total GWIM deposits decline by 7%, further highlighting these trends. In Global Banking, we hold about $500 billion in customer deposits, and we saw a 7% year-over-year decline. In a rising rate environment, where excess balances can be more expensive, we typically see some runoff, particularly in high liquidity environments as clients both use cash for inventory build and begin to manage their cash for yield. And we've seen the mix of interest-bearing deposits move from 30% a year ago to nearly 35%, and we're paying an increased rate on those interest-bearing deposits. Pricing is largely customer-by-customer based on the depth of relationship and many other factors. And again, we're not really seeing anything unexpected here. Betas at this point are still favorable to the last cycle. And as we would just note, relative to the last cycle, the Fed increases have been pretty rapid, and we'd expect to pay higher rates as we continue to move through this rate cycle. It's probably too early to say right now if at the end of that cycle, the percentage of those rate pass-throughs will be similar to the last cycle. Turning to Slide 11 and net interest income. On a GAAP non-FTE basis, NII in Q3 was $13.8 billion, and the FTE NII number is $13.9 billion. Focusing on FTE, net interest income increased $2.7 billion from Q3 2021 or 24%, and that's driven by benefits from higher interest rates, including lower premium amortization and from loan growth. Versus the second quarter, NII is up $1.3 billion, driven largely by the same factors, plus an additional day of interest in the quarter. Year-over-year now, average short-term interest rates have increased 200-plus basis points, driving up the interest earned on our variable rate assets while we've maintained discipline on our deposit pricing, and that has driven nearly $1 billion of improvement. Long-term interest rates on mortgages have increased even more than short-term rates, and that's improving fixed rate asset replacement and driving down refinancing of mortgage assets, therefore, slowing the recognition of premium amortization recognized in our securities portfolio. Year-over-year, that premium amortization has improved $1 billion. And additionally, lower securities balances over the past six months modestly offset the benefits of year-over-year loan growth. The net interest yield was 2.06% and that improved 38 basis points from the third quarter of 2021. Twenty basis points of that improvement occurred in the most recent quarter. And as you will note, excluding Global Markets activities, our net interest yield was 2.51% this quarter. Looking forward, as it relates to NII guidance, I'd like to make a couple of comments. And first, I need to make a couple of caveats. Our guidance is going to assume interest rates in the most recent forward curve and that they materialize, that we see modest loan growth and modest deposit balance changes with market-based deposit pricing increasing baked in. With that said, we expect NII in Q4 to be at least $1.25 billion higher than Q3. So last quarter when we were together, we told you we expected to see consecutive NII increases of about $1 billion in Q3 and another $1 billion in Q4. And that would make a total of $2 billion in Q3 and Q4, given we just put up $1.3 billion in Q3 and that outperformance, and refreshing our expectation for Q4 at $1.25 billion. We're now saying that aggregate quarterly improvement won't be the $2 billion we initially thought, it's increased to around $2.6 billion or more. Turning to asset sensitivity and focusing on a forward yield basis. At September 30, expected NII over the next 12 months declined $0.7 billion to $4.2 billion, with now roughly 95% of the sensitivity driven by short rates. And on a spot basis, our sensitivity to a 100 basis point instantaneous rate hike would be $5.3 billion. Okay. Let's turn to expense, and we'll use Slide 12 for the discussion. Third quarter expenses were $15.3 billion and were flat with the second quarter as litigation costs for our settlement in Q3 nearly offset the fines agreed to last quarter on a comparative basis. And it's nice to bring resolution to these matters. Without the costs associated with the resolutions in both periods, expenses would have been just less than $15 billion. We continue to make steady investments in our people, technology, marketing and financial centers. And what allows us to help pay for these investments are the operational process improvements we've talked about and the increased digital adoption rates by our customers and by our bankers. Our headcount this quarter increased by 3,500. And if we adjust for the release of our summer interns, our headcount is actually up by closer to 5,500. We welcomed 1,800 new full-time associates from college campuses around the world into our company this quarter and we hired another 3,800 net new people on top of that. That included just less than 3,000 across our various lines of business and another 1,000 in staff and support and technology positions to support those lines of business. And with all the great benefits and talented people already at this company and with our great brand, it highlights that Bank of America is a great place to work. As we look forward, we'd expect our fourth quarter expenses will land our full year reported expense at approximately $61 billion. That obviously includes the cost noted for resolving the second quarter and third quarter regulatory and litigation matters. So without that, our expenses are expected to be a little more than the $60 billion level we talked about earlier in the year. And we're proud of our team's discipline around expense particularly in this inflationary environment, while at the same time, we're modestly increasing our level of investment in the company's future and our growth. Turning to asset quality on Slide 13, and I want to start by saying just as Brian did that asset quality of our customers remains very healthy. The net charge-offs of $520 million declined $51 million from the second quarter. That decline was driven by prior period charge-offs associated with the sale of some noncore mortgage loans we discussed last quarter. Absent those losses, net charge-offs were relatively stable with the prior period. Provision expense was $898 million in the third quarter, and that was $375 million higher than the second quarter. And we built $378 million of reserve in the period compared to a modest release in Q2. The reserve build in the quarter primarily reflects good credit card loan growth and a dampened macroeconomic outlook. Even as we build our reserves for the future, this quarter, we saw many of our asset quality metrics continue to show modest improvement as NPLs and reservable criticized both declined from Q2, and you can see that in the supplement. On Slide 14, we highlight the credit quality metrics for both our Consumer and Commercial portfolios. And there's only one point I want to make, looking at this slide and that is delinquencies because our consumer delinquencies remain well below pre-pandemic levels. And as Brian noted earlier, we're watching closely the early-stage card delinquencies as they begin to increase modestly. Lastly, the recent Hurricane Ian impacted some areas where we have strong market shares for many of our businesses, and our teams have spent the past days assessing the damages and insurance coverage down to the loan level. And we've already incorporated that analysis into our reserves for the quarter. We compared our analysis to other large storms in recent years like Sandy, Harvey and Irma where we incurred just a small amount of financial losses. Turning to the business segments, let's start with Consumer Banking on Slide 15. And Brian shared earlier, we've got organic growth across the checking accounts, the card accounts and investments picking up this quarter, not necessarily because of anything we're doing differently in the past 90 days, but as a result of many years of retooling and continuously investing in the business. We have the leading retail deposit market share. We have leadership positions among all of the important products. We're the leading digital bank with tremendous convenience capabilities for consumer and small business clients. We've got a leading online consumer investment platform and the best small business platform offering for our clients. So as a result, customer satisfaction is now at all-time highs, and that is helping us to drive strong financial results. The Consumer Bank earned $3.1 billion on good organic growth and delivered its sixth consecutive quarter of operating leverage while we continued heavy investments for the future. The impact of strong year-over-year revenue growth of 12% was partially offset by an increase in provision expense. And the provision increase reflected reserve builds this period, mostly for card growth versus a reserve release in the third quarter of 2021. Our net charge-offs remain low and stable. While our reported earnings were only modestly up year-over-year, pretax pre-provision income grew 12% year-over-year which highlights the earnings improvement coming through without the impact of the reserve actions. Card revenue was solid and increased modestly year-over-year as spending benefits were mostly offset by higher rewards costs. Service charges were down $338 million year-over-year as our insufficient funds and overdraft policy changes were in full effect now by the end of Q2. And because of the scale of the business and the diverse revenue, we fully absorbed that revenue impact and are now benefiting from the advantages of overall customer satisfaction, lower attrition in our client base and lower cost associated with fewer customer complaint calls related to nuisance fees. Expense increased 11% from business investments for growth, including people, digital and marketing along with costs related to opening the business to fuller capacity. Much of the company's increased salary and wage moves in the quarter impact Consumer Banking the most. We also continued our investment in financial centers, opening another 16 in the quarter while we renovated nearly 200 more. Both digital banking and operational process improvements are helping to pay for those investments. And as revenue grew, we've improved the efficiency ratio to 51%. Moving to Slide 16. Wealth Management produced strong results, earning $1.2 billion, and that's a particularly strong result given both equity and bond market levels. If they remain unchanged for the rest of the year, this would be only the first time since 1976 that both equity and bond markets were down for the year. Now the volatility and generally lower market levels have put pressure on revenue in this business. And what's helping to differentiate Merrill and Private Bank right now is a strong banking business; in this case, to the tune of $339 billion of deposits and $224 billion of loans. So while many of our brokerage peers faced declines in revenue and margin, we've seen year-over-year revenue growth of 2% and a margin of 29%, driving the sixth straight quarter of operating leverage. And we saw enough revenue growth from banking products in Q3 that more than offset declines in assets under management and brokerage fees. Our talented group of financial advisors, coupled with our powerful digital capabilities, allowed modern Merrill to gain 5,200 net new households and the Private Bank gained 550 more in the quarter, both up nicely from net household generation in 2021. We added $24 billion of loans since Q3 of 2021, growing 12% and this marked our 50th consecutive quarter of average loans growth in the business, consistent and sustained performance. Assets under management flows were $4 billion in the quarter and $42 billion since this time last year. Expenses increased 2%, driven by continued client-facing hiring and higher other employee-related costs as our advisors are increasing their in-person engagement with clients, and that's partially offset by lower revenue-related incentives. On Slide 17, you'll see our Global Banking results, where we earned $2 billion in Q3 on strong revenue growth as higher NII more than offset lower noninterest income. Earnings were down year-over-year, driven in large part by the absence of a prior period reserve release. Our 7% revenue growth is quite healthy given the more than 40% decline in investment banking fees, coupled with lower leasing revenue. While the company's overall investment banking fees declined $1 billion year-over-year in a continued tough market, investment banking fees did improve modestly from Q2 and the teams did a nice job of holding on to our number three ranking in overall fees in a tough environment. Otherwise, in fees, we saw a decline in corporate service charges as enterprise credit rates rose with increased rates, and that outpaced the growth in gross treasury service fees generated from new and existing clients. I'd also remind you that GTS benefits greatly from the NII off of deposits that more than offsets this. So our year-over-year total GTS revenue was up 44%. We also had lower leasing related revenue comparatively. The provision expense increase reflected a reserve build of $144 million in Q3 2022 compared to a $789 million release in the year ago period. And with regard to expenses, they increased 5% year-over-year, driven by continued investments in the business. For example, in Commercial Banking, our strategic hiring over the years has just continued to increase our quality and prospect calling efforts. Switching to Global Markets on Slide 18. And as we usually do, we'll talk about segment results, excluding DVA. Inflation, continued geopolitical tensions and the changing monetary policies of central banks around the world continue to drive volatility in both the bond and equity markets. As a result, it's another quarter that favored macro trading while credit trading businesses faced the continued challenging market environment with wider spreads and recession concerns. So the third quarter net income of $1.1 billion reflects a good quarter of sales and trading revenue. Focusing on year-over-year, sales and trading contributed $4.1 billion to revenue, improving 13%. FICC improved 27% while equities declined 4%. The FICC improvement was primarily driven by growth in our macro products, while our credit traded products were down. And we've been investing heavily over the past year in several macro businesses that we identified as opportunities for us, and we were rewarded this quarter. The decline in equities was driven by lower client activity in Asia and a weaker performance in cash, partially offset by good performance in derivatives where we saw increased client activity. Year-over-year expense declined, reflecting the absence of costs associated with the realignment of liquidating business activity that we took in the fourth quarter of 2021, and the business generated a 10% return in the third quarter. Finally, on Slide 19, we show All Other, which reported a loss of $281 million, declining from the year ago period, driven by the litigation settlement that I noted earlier and higher tax expense. On income tax expense, I just want to mention one thing that made our tax rate a little higher this quarter, and that is with the recent passage of the Inflation Reduction Act of 2022. Among other things it incorporated, there is a change that allowed solar energy investments to elect production tax credits versus upfront investment tax credits. And those production tax credits have the potential to earn more credits over the expected life of the production facility. So as a result, our third quarter tax expense is approximately $150 million higher due to the net reversal of tax credits accrued for 2022 solar deals taken in the first half of 2022 that were recognized under initial investment tax credits at the time and were later placed with production tax credits. So a little impact this quarter but net benefit to the shareholder over time. This drove the effective tax rate a little higher this quarter to more than 14%, still obviously benefiting from our ESG investment tax credits. And excluding the impact of ESG tax credits, tax rate would have been approximately 24%. Given the change noted for solar investments, we expect the fourth quarter tax rate to be similar to the third quarter tax rate and we’ll examine the further effects of these changes and how they impact full year 2023 and report on that next quarter. And with that, I'm going to stop there and open it for Q&A.

Operator instructions. Our first question today is from Jim Mitchell with Seaport Global.

Maybe just on NII. I think there's a lot of uncertainty around deposit behavior, betas, what the catch-up rate could be with deposit pricing. But you guys indicated that you are still pretty asset sensitive. So how do you think about the trajectory of NII next year? Can it kind of keep growing from the Q4 level through next year, assuming the forward curve is realized?

Thanks. Yes. So the short answer is yes, we believe so. And we believe that really for three reasons. The first one is, we still expect future rate hikes and there's going to be some lag to their impact. So you'll start to feel some of that in Q1, for example, from the later hikes in this quarter. Second, we're anticipating loans growth is still pretty good at this stage. So we're anticipating that we'll keep growing on the loan side. And then third, we've got an opportunity to restrike our balance sheet at higher rates with every opportunity now as things come off of our existing securities portfolio. So look, we've got our assumptions in there to be competitive on deposit pricing in each of the various segments. But yes, we believe we'll grow NII next year. Yes. Correct.

Okay. And then maybe as a follow-up, you guys have done a pretty great job on hedging AOCI risk and the AFS book. My understanding is that those are sort of delayed-start swaps. Is there a material benefit coming from those swaps in the fourth quarter and beyond? How should we think about that?

Just the way our own ALM projected over the course of the next couple of years, we had some forward-starting swaps. Those are going to pay us floating in the fourth quarter, and that's a contributor to the NII growth in the fourth quarter. I think most of it shows up in the fourth quarter; assume a little bit in third quarter but mostly in the fourth quarter, and that's probably it.

We'll go next to Erika Najarian with UBS.

I just wanted to ask a question about expenses. I think part of various theses on the stock is that various investors expect some sort of expense catch up relative to how your closest peer is budgeting expenses for not just this year but next year. Heard you loud and clear on the $61 billion, plus the litigation settlement for full year 2022. But as we think about coming years and think about the investments that you've made, you've highlighted the headcount additions in the third quarter. Will the expectation of 1% to 2% expense growth still hold as we look forward? Or do these inflation and investments change that range upward? And my second question is on more significant buyback activity. I think the CET1 build is certainly coming faster than I think the Street expected. And I'm wondering, do we need to see Bank of America get to that 11.4% before heavier buyback activity? Or do you think you could manage the heavier buyback activity as you build to that 11.4% CET1 by January 1, 2024?

So Erika, we continue to invest heavily along multiple dimensions: people, technology, restructuring all the physical plant, marketing. And so, but yes, through the core operational excellence and discipline this company has shown, as I said earlier, seven years later, we have the same number of people. The company is a lot bigger than it was in 2015. And so we continue to reposition money from things we can eliminate by the engineering work and the technology investments that we make enabling the customer uses of that technology and pile back into the production side of the company. I think if you think about just this year's third quarter 2022 versus third quarter 2021, if you take out the litigation, there's about $600 million increase in expenses year-over-year; $100 million of that is marketing. Another couple of hundred million are technology. These are quarterly numbers. And then on top of that, the amount of physical plant change in that time is huge, not only in our branches, but all over our company. So we feel strong. We continue to increase investments. Technology will go up 15% this year versus 2022 versus 2020 in those expense numbers we're giving you, but we pay for it by not investing and hoping something happens. We expect the things to fructify in the near term and bring forward the fruit and drive the expense efficiencies and effectiveness. And that's how we can take the managers in that time period; the managers came down 10,000 people in that period of time. We invested all in frontline people to help serve our clients.

Got it. And on the buyback question, could you comment further on timing and whether you need to reach 11.4% CET1 before heavier buybacks?

So we bought back shares this quarter and still grew the capital. Our job is to drive our company to serve our customers; that is the first order of business. Our capital has always helped growth in the balance sheet, especially on the lending and market side. So you should expect that buybacks will continue to increase. But remember, we are now sitting above what we are supposed to be sitting at on January 1, 2024. And so next year is already here. So obviously, the trade between building the buffer up a little bit more from where we are now to 50 basis points over the requirement is a little bit different. We already exceeded the requirements. So we'll put a bit towards the buffer. We'll support the organic growth a little bit and use the rest to send back to shareholders.

We'll go next to Glenn Schorr with Evercore ISI.

I'm curious, as your capital build was aided by RWA mitigation, you mentioned no loss days in the quarter despite all this market volatility. I think you mentioned some loan sales. I don't know if that has to do with some leveraged loans working off book. So I wonder if you could talk about RWA mitigation going forward and including that, what's left in the deliverable loan book to distribute?

So there's a couple of things going on there. I don't want to confuse them. Let me first talk about the leveraged financing. We mark those through our numbers. It's in the numbers. We do that every week. So that's included. When you look at Global Markets or investment banking results, they include anything we are doing in investment banking. What Brian was referring to is the RWA optimization that we're doing as a company to make sure that we're in a great place to serve our customers and to be in a position to have the flexibility for buybacks in the future. So a couple of things that we did there. We did sell some loans. You saw that in prior quarters in All Other. You can see some of the legacy loans we were able to sell in prior quarters. This quarter, we sold $1 billion of loans in consumer and wealth and maybe $1 billion in Global Banking. So it's not big, but it's important for us just to make progress in different areas. And then most of the RWA optimization plan that we've been doing is pretty quiet. It's taking the securities that are 20% risk-weighted assets. As they roll off—there's about $15 billion of them that roll off every quarter—we can replace those with treasuries at a higher yield. So we're getting more yield and we're reducing the RWAs with that. And then the other thing I'd just say on RWA optimization is we probably tapped the brakes a little bit on loan production this quarter in a couple of places. And we did a little bit of CDS hedging here and there. If you look at our numbers, you'll also see in Global Markets, just the way that the customers are demanding balance sheet, the balance sheet is still growing, but the RWAs are a little bit lower. So there's a lot that goes into RWAs, but it's a $1 billion here, $1 billion there. You add it all up, and it makes a difference.

I appreciate that. Relatedly, on the commercial side, given what we're all facing in this potential slowdown of the economy, how do you approach risk and what business to take on? Could you include in that thought what kind of maturity wall you're looking at on the commercial side of the book?

Glenn, look, we always say responsible growth across the last decade plus leads us to where we are. You're not going to change the portfolio overnight. So then the question is how do you manage it? We have limits across all the different categories. You can see the spread of risk in the supplemental book. No single borrower is a big part of it. We then look customer-by-customer and anticipate who will need money in terms of refinancing and in terms of operating. We work the construct of the book: underwriting, client selection, the structures of the deals, and the diversity among industries and U.S. versus non-U.S. But on top of that, we continuously test the book with our credit review team because that, at the end of the day, makes sure we're not fooling ourselves. This quarter, we still had upgrades exceeding downgrades. If you look at NPLs and reservable criticized, they both went down this quarter again. So we're seeing improvement in the credit book even though there are concerns in the economy. What we did over the last 12 to 15 years of responsible growth holds us in good stead as we head into this period.

The next question is from John McDonald with Autonomous Research.

I wanted to ask about the NII assumptions and maybe just your outlook around loan growth and what you're seeing in the economy, what you expect for loan growth. You mentioned modest. And then also, Alastair, what pace of deposit mix shift and betas are you kind of building into your outlook?

On the loan side, we talked at the beginning of the year that we thought loans would be high single digits, and we've slightly outperformed that. This quarter was a bit of a 90-day reset for us in some ways. You didn't see that so much in consumer because the card growth just came through. In commercial, we probably held back just a touch. So we think we'll resume that sort of high single-digit, maybe mid-single-digit if things begin to slow a little bit. So we've got that in our forecast. With respect to deposits and betas, obviously we're increasing those because we've got to be competitive in this environment. Around balances, I think there's a sense that the industry will be flattish, maybe down. We think we're going to outperform the industry ever so slightly. So that's largely baked into our assumptions at this stage.

In terms of funding the gap between the loan growth and flattish deposits, securities came down a fair amount this quarter. Can you continue to run down the securities portfolio? And what kind of volume do you get from cash flows off the book there?

The securities portfolio runs off at about $15 billion a quarter. It was a little more this quarter because we had an opportunity to sell some securities that offset some gains and losses and freed up some RWAs. So we took advantage of that this quarter. On an ongoing basis, assume about $15 billion that just comes in. Broadly, we've also got $175 billion of cash at the Central Bank and another couple hundred billion of stuff that's mostly treasury swapped to floating. So we've got lots of ways to fund loan growth in the future.

If I could just clarify the discussion with Erika around expenses. The $61 billion this year includes the litigation. Did you say next year you're kind of targeting low single-digit expense growth, would you say positive operating leverage?

Yes. It includes the litigation. Next year, we said we'd start growing in the 1% to 2% range. We'll just have to see how some of the ins and outs play in terms of things running off this year. Look at the 15.3% expense-to-revenue ratio for three quarters in a row. Each quarter has had a little bit of something in it. The first quarter had some items, the second quarter had regulatory items. So we're bouncing around low 15s. We expect that run rate to hold.

Next is Mike Mayo with Wells Fargo.

I'd like a bit more detail on how you add employees and resources for the additional revenues. From Q2 to Q3, your incremental revenue margin on new revenues looked very high: revenue up $2 billion, expenses up zero. Clearly, that's not sustainable. How does that tie into Slide 22, more digital users, Erica interactions, headcount not growing a lot? How long can you keep that going? And theoretically, all this digitization over the past few years equates to how many employees saved or how much in expenses or what's a terminal efficiency level relative to the past?

Mike, that's a lot of questions. Start with the last: there is no terminal efficiency ratio. When we work on expenses, we work on dollar spend and investments that drive future revenues. The digitization of operational processes is what you see on Slide 22 on the Consumer side and in other businesses. What's driving near-term headcount growth are financial advisor additions, investments in training and hiring into offices outside our footprint to grow, and investments in commercial bankers and the GCIB platform. Those are real investments. At the same time, we're investing in operational excellence to take work out of the branches and put more relationship management in. The branch network has fewer units, but more relationship personnel, which helps drive new checking households and other product take rates. Continued digitization allows us to be efficient and to redeploy savings into marketing, technology and people where needed. Operations and credit operations have more to do over time to migrate work out of manual processes, and that's an ongoing opportunity.

Mike, we don't necessarily translate it into a single number of people replaced by digital. But if you look by line of business, for consumer, if 50% of consumer sales now are digital, you can almost think about that being equivalent to thousands more financial centers in terms of reach. If you get 35 million people banking on mobile, it makes a big difference.

Do you expect the NII benefits to continue to be passed through to investors over the next year, as they were this quarter?

Yes. As we've said, the consumer deposit mix and lower costs of deposits relative to previous cycles provide substantial leverage. The overall cost of deposits is much lower than it was in the prior cycle, which is very leverageable. That differential helps margins and profitability and is part of why NII benefits can continue to flow through. We are managing deposit pricing and customer relationships to maintain that advantage.

Why are consumer deposit betas outperforming now, and do you think that will last?

The consumer deposit mix at our company is heavily weighted to core transactional balances. Those accounts are low or noninterest-bearing and come with a broad set of services—branches, call centers, digital platforms, payment capabilities—that make the relationship valuable to the client. That mix, and our preferred rewards structure and product relationships, result in more stable deposit balances and lower betas versus peers. The beta performance is largely a function of mix more than an individual pricing strategy.

Next is Matthew O'Connor with Deutsche Bank.

Capital build was faster than expected. Can you lean into certain businesses to gain share given some peers need to build capital? And separately, on tax credits being pushed out, driving the tax rate slightly higher, is there an offset in the All Other line that we should consider?

We're in a good position on capital even after the stress buffer increase. The capital improvement didn't take much revenue hit. The only place we were cautious was around some loan production in higher capital-consuming areas like GCIB. Markets businesses have allocated balance sheet and capital that allowed them to achieve results. Where we are now, we have flexibility and will continue to support growth and shareholder returns appropriately.

On the All Other tax timing, how should we model the fourth quarter impact?

For modeling, I'd use about a $700 million after-tax loss for the fourth quarter in All Other as the most likely. If you're looking at consolidated other income, use something similar to Q4 2021 where we had an $800 million pretax loss. The effective tax rate for Q3 and Q4 will likely be a little higher than the original guided 10% to 12%, but for the full year it should end up around that 12% mark. The fourth quarter All Other figure is seasonal due to timing of ESG deals.

Next is Ken Usdin with Jefferies.

Can you walk through the deltas in the service charges line? You mentioned overdraft and insufficient funds changes, deposit changes and earned credit rates. How much of that is embedded now, and what should we look for going forward?

On card revenue it's kind of flattish and you might see a little seasonal benefit in Q4. Service charges: on the consumer side the run rate for the NSF/OD changes is now steady-state and won't hurt us going forward. The commercial side saw a reduction in corporate service charges because as enterprise credit rates rose, that change in ECR overwhelmed gross treasury management fee growth; that was roughly a $150 million impact this quarter. Wealth and other fees will be driven by market levels. Investment banking is muted and trading is variable. Overall, you should expect some continued headwinds on corporate service charges as rates rise, but that is partially offset by NII on deposits and by growth in other fee areas.

About 80-odd percent of interchange goes back to customers in rewards programs or affinity arrangements and that fosters strong customer relationships. Our preferred rewards structure encourages customers to keep a deeper relationship with us, which supports deposit stability and profitability. So many fee lines are part of a broader investment in customer lifetime value rather than just a standalone revenue line.

On CECL: you mentioned the baseline and downside scenarios. If the economy does materially worsen and you moved from the 60/40 split to the downside scenario fully, what type of quarterly provision would that push up to?

This quarter, similar to last quarter, we used Blue Chip consensus as our baseline—about 60% weight—and the other 40% is downside scenarios that we build. In the downside we increased inflation, increased unemployment and decreased GDP assumptions compared to prior quarters. We'll adjust these scenarios over time as the macroeconomic situation develops. We update those assumptions each quarter.

Be careful about modeling to extreme cases. The baseline now actually incorporates a fairly weak near-term path. Our reserve build reflects a conservative view including a substantially higher unemployment in the downside scenario. We run stress tests and the Fed's adverse-case results can give you a sense of how those scenarios would play out, but they're extreme and we use them to ensure resilience.

And just to add, the downside unemployment in our scenarios moves into the mid-5% range next year, just to give you a sense.

Next is Vivek Juneja with JPMorgan.

On loan marks, how much were those in the third quarter?

We didn't call out loan marks this quarter because they were smaller. We run those through P&L weekly, and the results you see in Global Markets and Investment Banking include them. Last quarter was larger and we called it out then; this quarter it was smaller and not material to single out.

Brian, you talked about tech spend being up about 15% in '23. Is that right? What's the dollar amount of tech spend you're expecting this year or next year?

This year, our new code and platform-related tech spend is about $3.3 billion. Next year we expect that to increase roughly 15%, to around $3.8 billion or so. Other people point to an overall number closer to $10 billion for total technology-related spending across various categories, but the new-code platform figure I gave you is the relevant incremental development number.

What do you expect the impact of quantitative tightening on deposits to be? What are you modeling in for betas?

We're modeling that we'll need to price competitively for deposits in an environment where market expectations change frequently. So we've assumed betas will increase over time and that's baked into our NII. Betas will differ by customer base—wealth versus noninterest-bearing versus operational commercial accounts—so they'll be in different places across segments. I won't provide exact beta numbers because that's competitively sensitive, but expect them to drift up.

Next is Betsy Graseck with Morgan Stanley.

On compensation going into next year, with inflation remaining higher for longer and social security increases, should we expect more compensation-related expense in next year's guide? You've been proactive on minimum wage and other benefits. Will that continue and change the expense range upward?

We've acted in recent months with our employee programs. We did our usual merit increases, a five-share success program, and targeted raises: 3%, 5% and 7% merited increases for those under $100,000 based on years of service. We accelerated a $22 starting rate, which equates to about $40,000 a year now. We also increased childcare benefits to $275 per month per child and increased tuition reimbursement. These moves are part of a complex package. Attrition had risen but has started to decline again. We've been able to absorb these changes while keeping expenses in the mid-15% range and we'll continue to manage benefits and compensation carefully.

So expectation is for expenses to persist at low growth, effectively flat to modest increase, into 2023?

Yes. We've said we expect to start growing in the 1% to 2% range. Most of that growth comes through compensation as markets and business dynamics shift, but we anticipate modest expense growth consistent with the guidance we've given.

On the securities roll-off and ASCI hits, what kind of timeline should we think about for the par being pulled forward and the duration on the treasury and mortgage runoff?

Broadly, think of the treasuries having durations between four and five years and mortgages between seven and eight years, so it takes some time to fully pull par through. There will also be derivatives associated with hedges. Any securities we pay down faster will accelerate the impact. Use those durations as a modeling guide.

Next is Gerard Cassidy with RBC.

You touched on early-stage delinquencies in the consumer book. Your numbers are obviously very strong, but can you give color on what you're seeing there? Is it coming from lower FICO score customers or another part of the book?

Be careful interpreting this. Delinquencies remain well below pre-pandemic levels despite a modest normalization from record lows. Origination quality remains strong. If someone shows up late, of course their FICO changes over time, but the origination statistics we publish remain very strong. In auto, repossessions are down, and overall the provision run rate is around $1 billion a quarter in normal times. We're building reserves modestly now and many asset quality metrics continue to improve. Remember, our baseline in CECL already incorporates a substantially higher unemployment path in the downside scenarios, so the reserve posture is conservative.

If you look back over the past 10 years in our supplement, the delinquency numbers are extraordinarily low historically. We are seeing small movements off those lows, but they remain very low compared to pre-pandemic averages.

If the downside scenario were to play out 100%, how much higher would quarterly provisions be?

I wouldn't speculate to give a single number here. Our stress testing and CECL provisioning reflect a range of outcomes. The Fed's adverse-case scenario gives a sense of magnitude in extreme cases. Our baseline incorporates a fairly weak path already, and the reserve build we recorded this quarter reflects a cautious view. We test across scenarios to ensure we are resilient.

Our final question is from Charles Peabody with Portales.

Do you have any thoughts about how the Basel III endgame might play out and the timing of implementation?

No particular updates at this point. We're waiting along with everyone else. Once rules are finalized, we'll sit down and work through our capital base. Given where we are, we've already put ourselves in a position where we're ahead of where we need to be for January 1, 2024, so we have flexibility for whatever the endgame produces.

Okay. Well, thank you for all your questions and your attention. Let me just summarize for the third quarter 2022. You saw responsible growth in action once again. We had organic growth in all businesses. We had top-line revenue growth driven by the NII increases. We had strong expense control, flat expenses for the third straight quarter, operating leverage for the fifth straight quarter and good work on that. We had good risk management. You can see that we're still running strong risk parameters, and we built the capital to the end-state January 1, 2024 levels that we need. So that's what we call responsible growth, and now you're seeing the interaction. Thank you.

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