Earnings Call Transcript
BANK OF AMERICA CORP /DE/ (BAC)
Earnings Call Transcript - BAC Q1 2020
Operator, Operator
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 the opportunity to ask questions during the question-and-answer session. Please note this call may be recorded. I will be standing by should you need any assistance. It is now my pleasure to turn today’s conference over to Lee McEntire, Investor Relations. Please go ahead.
Lee McEntire, Investor Relations
Good morning. Thank you, Katherine. Thanks for joining the call to review our first quarter results. By now, I hope everybody’s had a chance to review the earnings release documents that are available on the Investor Relations section of the bankofamerica.com website.
Brian Moynihan, CEO
Thank you, Lee, and good morning to all of you, and thank you for joining us to review our results. It has been an eventful quarter, but I hope all of you are safe and your families are well during this war on the COVID virus. As you think about our quarter, our decade plus long discipline of responsible growth has resulted in us strengthening our balance sheet and making investments in technology and people and talent over the decade has helped us prepare for this environment. Today, we are going to do three things with you. First, I am going to provide a couple of high level thoughts on the quarter. Second, I am going to make sure you know how we are supporting our teammates, our customers, our communities and delivering for you, our shareholders, during this crisis. And third, Paul will cover the results in more detail. I will start this discussion by covering the chart on slide two, along with the comments on slide three which go with the chart. Given the volatility in the last couple of months and the global slowdown, I am proud of Bank of America and our team’s results. I want to thank my 209,000 teammates across our company for all of their efforts this quarter both in the front-line roles and support functions. It’s been a company-wide effort to continue to serve our customers well during these times. As I said many times, we are in a war against COVID-19 and at Bank of America we are doing our part to help fight the effects of that war. We do that by living our purpose. We are helping people manage their financial lives through this crisis. My teammates know they are playing a critical role for their clients, whether they are individuals, companies of all different sizes, or institutional investors. Their role is to help keep the economy moving as best we can during this healthcare crisis. We have seen major disruptions in the financial markets that affected every line of business as customers moved to stay-at-home status through voluntary or involuntary measures.
Paul Donofrio, CFO
Thanks, Brian. Good morning, everyone. I am beginning on slide eight with the balance sheet. Overall, compared to the end of Q4, the balance sheet expanded $186 billion, driven by an increase in deposits of $149 billion. Deposit growth in excess of our loan growth was invested primarily in cash or cash equivalents. As Brian mentioned, the team did an incredible job of not only providing our Global Markets clients needed liquidity from a mid-March spike, but also reducing those levels by the end of the quarter. Shareholders’ equity of $265 billion was stable with year-end but included some offsetting factors. AOCI increased $6.5 billion, reflecting several factors, but was driven by a $4.8 billion improvement in the valuation of AFS debt securities. Offsetting this increase to equity were two items. Share repurchases and common dividends of $7.9 billion exceeded our $4 billion of earnings given the reserve build this quarter. And as a reminder, we booked a reduction in equity on January 1 by adopting CECL. Now with respect to CECL, we elected the five-year transition option made available under the fed rule to delay any capital effects of CECL until 2022. The January 1 reserve build plus Q1’s $3.6 billion build equate to a total increase in the reserve of $6.9 billion since year end. Assuming no regulatory relief, including the original relief planned for day one adoption, our CET1 ratio would be 22 basis points lower than we reported. The relief received in late March accounted for 12 basis points of the 22 basis points. As you know, a portion of the CET1 impact of future reserve increases or decreases during the emergency period will also be delayed until 2022. Beginning in Q1 of 2022, we will begin phasing in the 22 basis point reduction for these impacts in equal quarterly amounts through 2025. With respect to our CET1, our CET1 standardized ratio declined 40 basis points to 10.8%, driven by a $70 billion increase in RWA. Increases in counterparty risk in Global Markets and increased loan revolver draws in Global Banking drove the RWA increase. Lastly, our TLAC ratios remain comfortably above our requirement. Given the time constraints of Brian’s point earlier on ending deposits, I will skip the discussion on average deposits on slide eight and move to slide nine. Earlier, Brian also discussed our loan growth near the end of the quarter, which was driven by revolver draws, some of that growth affected the growth of average loans presented on slide 10. Q2 should further reflect this late quarter growth. Year-over-year average growth has been consistently in the mid single-digit range and early Q1 trends were similar to that. Note the significant increases across consumer and GWIM, which was driven by residential mortgage given continued low interest rates. This quarter we originated $19 billion in first mortgage loans, retaining 94% on our books. We continue to see good follow-through on our large pipeline but applications are down in the past couple of weeks. I would also note credit card balances, average credit card loans were down a bit more than the typical seasonality given the drop-off in consumer spending late in the quarter while customer payment rates continued at a fairly steady pace. Given the significant drop in card spending, we expect card balances to decline further in Q2. Okay. Turning to slide 11 and net interest income. On a GAAP non-FTE basis, NII in Q1 was $12.1 billion, $12.3 billion on an FTE basis and was relatively flat compared to Q4 ‘19. One less day of interest and lower asset yields driven by lower rates negatively impacted NII this quarter. Two primary things offset these negative impacts. First, we saw good loan and deposit growth. Second, lower rates reduced the costs of our long-term debt and improved our funding costs in Global Markets. The lower rates also allowed us to price our deposits more efficiently in Wealth Management and Global Banking. Before I discuss our forward view of NII, I want to emphasize that future NII results will be influenced by interest rates, as well as loan and deposit balances, which will likely be highly influenced by the virus’ impact on the economy. Both of these drivers have been volatile and may continue to be. In terms of the forward guidance, as you know, interest rates dropped significantly over the past 90 days. On the short-end, with LIBOR which impacts variable rate loan pricing, as well as longer term rates which impact mortgage and mortgage related assets, have both dropped nearly 80 basis points on a spot basis. As you think about our NII for the rest of the year, I would point you to the asset sensitivity disclosure for our banking book at 12/31 before we experienced these rate declines. Banking book sensitivity from an instantaneous parallel drop of 100 basis points in rate at that time was estimated to reduce NII by $6.5 billion over the following 12 months. Since these rates moved less than 100 basis points, the change in NII over the next 12 months is likely to be less than $6.5 billion. I would also note some additional items to consider that are expected to mitigate some of that decline. First, we have grown both loans and deposits significantly more than what would have been assumed in that asset sensitivity at year end. Second, our deposit pricing actions have been pretty swift. And last, the asset sensitivity of the banking book does not include the benefits to NII of the trading book, which is a little liability sensitive. With that said, we would expect the largest decline in NII over the balance of 2020 to impact Q2 as the bulk of the repricing of our variable rate loans should happen fairly quickly. Considering all these factors, particularly the virus’ impact on the economy and interest rates, we believe NII could approach $11 billion in Q2 and then begin to stabilize with loan and deposit growth mitigating the negative impacts of longer term asset repricing. Turning to slide 12 and expenses, at $13.5 billion this quarter, expenses were up 2%. They were 2% higher than Q1 2019 as increased investments throughout 2019 in people, real estate and technology initiatives were partially offset by savings from operational excellence initiatives. Compared to Q4 2019, expenses increased roughly $250 million, reflecting nearly $400 million in seasonally elevated payroll tax expense. With respect to our outlook, we are still assessing the impacts both positive and negative that the virus has had on the company’s expenses, and as such, are not in a position to provide any updates to our previous expectation that expenses would be in the mid-$53 billion range this year. As a reminder, that mid-$53 billion number was before considering the dissolution of our BAMS JV and surrounding actions. With respect to impacts of the pandemic, on the one hand, there are many costs that declined such as travel, meeting costs, lodging, conferences and lower power costs for unused facilities, incentives will align with financial performance and market levels. But on the other hand, as you heard Brian mention earlier, there are costs associated with protecting, supporting and rewarding our employees during this health crisis, including suspending headcount reductions related to COVID for the rest of 2020. We also have costs from the setup, operation and cleaning of backup facilities for trading and other activities. This would include the cost of computers and other supplies and expenses to reposition 150,000 associates to work-from-home. Okay. Turning to asset quality on slide 13. Our underwriting standards have been responsible and strong for years now and we expect this strength to differentiate us as we advance through this health crisis. For years now, we have been focused on client selection and getting paid appropriately for the risk we take. As you all know, what really impacts banks in a recession is not the loans put on your books during stress, but rather the quality of your portfolio booked during the years leading up to stress. One independent indicator of the relative quality of our balance sheet is the Federal Reserve’s annual CCAR stress test. Our net charge-off ratio under those stress tests has been lower than peers in six of the last seven years. And our consistent focus on asset quality has been reflected in our results for many years now. Adjusted for the recoveries of loan sales in some periods I have described before, we have reported net charge-offs between $900 million and $1 billion for many quarters. Total net charge-offs this quarter were $1.1 billion or 46 basis points of average loans. Net charge-offs rose $163 million from Q4, driven by commercial losses with the largest contribution coming from energy exposure. We saw a small seasonal increase in card losses. Provision expense was $4.8 billion. Our reserve build of $3.6 billion reflects the expected increase in life-of-loan losses, given the weaker current and expected economic conditions as a result of the virus. On slide 14, we break out the credit quality metrics for both consumer and commercial portfolios, Q1 is too early to see any significant effects of COVID on net charge-offs. However, there were a couple of leading indicators of deteriorating asset quality in our commercial portfolio due to the virus as both NPLs and reservable criticized exposures increased. On the consumer front, COVID’s effect on asset quality were less observable. This is likely due to deferral offers extended to consumer borrowers. Moving forward, we believe deferrals coupled with government stimulus for individuals and small businesses should aid in minimizing future losses. Having said that, given the rise in unemployment claims, we do expect consumer losses to increase later this year and potentially into 2021. Turning to slide 15, this table provides a full picture of our allowance increase since 12/31/19, including the 1/1/20 implementation of CECL, as well as this quarter’s build given the worsening economic conditions. As you can see, our allowance including reserves for unfunded commitments was $10.2 billion at year end and now stands at $17.1 billion. That is nearly a $7 billion increase or 67% since year end. Note that we ended Q1 with an allowance to loans and leases of 1.51%. I would also note the increase in the coverage ratio for credit card increased to 8.25% and the coverage ratios for our U.S. commercial and commercial real estate increased to 1.11% and 2.16%, respectively. These ratios reflect our underwriting standards over the past 10 years, as well as our loan mix with the large concentration of secured consumer loans. We sized the increase to our allowance in the quarter by weighting a number of different scenarios, all of which assumed a recession of various depth and longevity, including an assumption of some tail risk similar to what is in the severely adverse scenarios. A weighting of these scenarios produced a recessionary outlook, which includes a marked drop in GDP in Q2, with growth recovering slowly from there, with negative growth rates in GDP extending well into 2021. Obviously, there are many unknowns, including how government fiscal and monetary actions will impact the outcome, and how our own deferral programs will impact losses. But perhaps the biggest unknown is how long. How long economic activity and conditions will be significantly impacted by the virus. Okay. Turning to the business segments and starting with Consumer Banking on slide 16. Consumer Banking earned $1.8 billion. Results were impacted by COVID-19 through lower rates, higher provision expense, and modest fee reductions. As you know, banking is considered an essential service and across the country, we have kept more than 75% of our financial centers open. In addition, we have added personnel to service calls and manage digital interactions not only with respect to existing products and services, but also on small business applications through the Paycheck Protection Program. Many of these additional personnel are working from home, while net income declined 45% from Q1 2019, it’s worth noting pretax pre-provision income declined 12%. Revenue declined by lower interest rates, as well as the impact of COVID-19, aside from the higher provision costs, consumer fees also reflected modestly lower consumer spending and fee waivers beginning late in the quarter. We continued to invest in the franchise, driving expenses up 3% year-over-year. We added new and renovated financial centers, salespeople and increased minimum wages, plus the additional associates added to service calls I just mentioned. The expense for these investments continued to be mitigated by process improvements, digitalization and technology improvements. Investments supported continued growth of loans, as well as deposits, as a result, our cost of deposits declined to 150 basis points. Client momentum continued as we saw average deposits increase $40 billion from Q1 ‘19, average loans increased 8% and we continued to add consumer investment accounts and saw solid flows into our Merrill Edge platform. Let's skip slide 18, as I've already discussed many of the trends on slide 17. The importance of our customers connecting through digital banking has never been greater. All aspects of digital engagements have been on the rise, with one-third of sales now occurring through digital channels, and this percentage increased in the last few weeks of the quarter. We gained valuable insights from our digital auto and mortgage experiences, which allowed us to rapidly establish a digital pathway for small businesses to apply for loans through the Paycheck Protection Program. Moving on to Global Wealth and Investment Management, we saw the effects of lower rates and COVID-19 related credit costs affect what was otherwise a strong quarter. It's noteworthy that the lower market levels in March did not impact Q1 AUM fees, as those fees were based on market levels at the end of February. Merrill Lynch and the Private Bank both continued to attract clients and remain a preferred choice for affluent customers. Net income of $866 million was down 17% from Q1 2019, but pretax pre-provision income was down a more modest 4%. Revenue increased by 2% year-over-year, driven by a significant rise in AUM fees and brokerage fees, though it was partially offset by a decline in net interest income due to lower interest rates. Expenses rose due to revenue-related incentives and our previous investments in sales professionals, technology, and our brand. Let's skip slide 20 and move to Global Banking on slide 21. The early impacts of COVID-19 were more evident in this segment. First, the LIBOR fell rapidly in March impacting loan yields. At the same time, revolver draws didn’t happen until late in the quarter and will likely be more fully reflected in Q2 averages of loans and NII. Lastly, COVID-related credit costs are higher in this segment as the reserve build was more heavily weighted to commercial loans. The business earned $136 million, which included adding $1.9 billion to the allowance for credit losses. On a pretax pre-provision income basis, results declined 21% driven by lower interest rates and by roughly $450 million of net markdowns in the value of loans and underwritten commitments recorded at fair value in our capital markets books and FBO books. On the positive side, in Q1 we were able to improve our investment banking revenue and market share. We generated $1.4 billion in investment banking fees this quarter, a 10% increase year-over-year. In fact, despite a 20% year-over-year decline in the volume of investment banking transactions across all banks, we processed 9% more transactions in Q1 than the previous year. Turning to slide 22, Brian covered the most important points around loan and deposit growth, I just want to reiterate one point. We believe companies viewed us as a safe haven in this period of stress. Quarter-over-quarter on an ending basis, deposits increased $94 billion while loans increased $58 billion. Not only were we able to capture as deposits, the bulk of the cash that customers drew on the revolvers that wasn’t used to pay down debt or for other purposes. We were also able to attract billions more in additional deposits even as pricing deposits lower with falling rates. Turning to slide 23, as in consumer and GWIM, our digital capabilities are more important and useful than ever, enabling clients to work-from-home and seamlessly manage their treasury needs. And it’s no surprise that in this environment, we continue to see increased use of these capabilities. Switching to Global Markets on slide 24, as I usually do, I will talk about results excluding DVA. Despite the volatility experienced in the quarter, Global Markets produced $1.5 billion of earnings in Q1, a 34% increase year-over-year. Year-over-year revenue was up 15% from both higher sales and trading results and improved investment banking fees. Expenses were up a more modest 2% year-over-year on higher related revenue. Within revenue, sales and trading improved 22% year-over-year, driven by a 39% improvement in equities and a 13% increase in FICC in a significantly more volatile market environment when compared to Q1 last year. FICC revenue reflected better trading performance across macro products, offsetting weaker performance in credit sensitive products resulting from widening credit spreads, which impacted asset prices. Equity revenue of $1.7 billion was a record for the company. All right, skipping slide 25 and moving to All Other on slide 26. All Other reported a loss of $492 million. The loss reflects approximately $500 million for several valuation reductions including marks on derivative positions and certain non-core securities, which were impacted by wider spreads toward the end of the quarter. Our effective tax rate this quarter was 11.5%. It included the impact of a fairly normal level of tax credits from our commitment to sustainable energy products and other ESG efforts, many of which are tax advantaged. Applying this fairly normal level of tax credits against a lower pretax earnings base resulted in a lower tax rate, it’s just math. For the full year, I would expect the ETR to be in a range of 14% to 15%. Okay. With that, I think we will open it up to questions.
Operator, Operator
We will take our first question today from Betsy Graseck with Morgan Stanley. Please go ahead, your line is open.
Betsy Graseck, Analyst
Hi. Good morning. Thank you very much for all the detailed insight, in particular your slide that talked about the percentage of folks who have been asking for deferrals is extremely interesting, as well as the detail on the reserving analysis. My question has to do with how you thought about that reserving analysis. I know we have been through stress tests here for 10 years now and it would just be helpful to understand how you decided to size the very significant increase in the reserve and how you think it trajectories from here?
Brian Moynihan, CEO
Paul, why don’t you hit that, please.
Paul Donofrio, CFO
Sure. Let me start by addressing the last part of your question. We established a reserve on our balance sheet that we believe reflects the information available at the end of Q1. As for future developments, this reserve may increase or decrease depending on the facts and circumstances and our outlook at the end of Q2. When considering reserves, it's important to focus on loan mix and portfolio quality while also taking into account various future scenarios under CECL. In Q1, we calculated our reserve build by weighing multiple economic scenarios, all of which anticipated a recession of varying severity and duration, including some tail risks similar to the severely adverse scenarios. The scenarios indicated a recessionary outlook, highlighting a significant GDP decline in the second quarter and negative growth rates potentially continuing into 2021. We also evaluated the effects of different credit groups and stressed industries, and although this had a minor impact relative to scenario weighting, we included this analysis in our reserve sizing. There are many uncertainties, such as how government fiscal and monetary measures might shape outcomes, and we aimed to factor these in as well. Additionally, we considered how our own deferral programs could influence losses. However, the most significant unknown is the duration for which economic activities and conditions will remain adversely affected by the virus.
Brian Moynihan, CEO
So, Betsy, I want to add a few points. If you think about it from a benchmarking perspective, this isn't related to GAAP, it's more of an overview. We are currently around 65% of last year's supervisory adverse total loss estimates. That's one way to consider it. Another aspect to keep in mind is the structure of our portfolios. Those of you who are familiar with our company might recall that I started questioning how different we actually are. People often forget about the gold option program, which was a restructuring of card debt back in the mid-2000s that peaked around the 2008 crisis at $25 billion. A few quarters later, that figure had dropped to $12 billion, with half of that being charge-offs. We don't have that situation now, so it's not just about FICO scores; there are parts of the portfolio that caused significant costs during the last crisis that are absent today. This is how we have positioned the portfolio. Even certain sectors that people are concerned about, such as entertainment and travel, have minimal exposure because of our diverse mix. Regarding deferrals, particularly in small businesses, I previously mentioned that there's a significant number of doctors and dentists in that category, and it’s expected that they would pay. Prior to any deferrals, 95% to 98% of these individuals were current on all measures, meaning they weren't struggling but just needed a break due to circumstances. The FICO scores for over 90% of the mortgage deferrals and more than 95% for credit cards, are around 600 or above, with the average being nearly 700 for those deferring. Thus, these individuals are likely deferring for convenience and should return to regular payments once the economy reopens. The loan-to-value ratios on mortgages are mostly at or below 95%, with only 5% to 10% being FHA or VA-related, and those are also at 95% or better. The majority are below 80% LTV. These are solid borrowers who have experienced a temporary change, and we anticipate they will resume performance. We'll see how it unfolds, but it's quite different from previous deferral situations we've encountered.
Betsy Graseck, Analyst
It’s a very impressive reserve ratio, and in addition, your CET1 stayed relatively high this quarter as well. I just wanted to ask a follow-up, Brian, around how you are thinking about the dividend, it’s been a question that many investors have been asking, and maybe you can give us a sense as to how you think through that question?
Brian Moynihan, CEO
Let me just, Lee has corrected me. It’s 65% of the adverse, not severely adverse, I think, is what Lee is telling me. We are in two different locations, so usually he can wave at me when I have made a mistake. But in terms of the dividend, we kept the dividend payout ratio below 30% of the sort of normalized earnings level and we did it for a reason that one of our operating principles is we wanted to maintain a dividend. And given what we know, we have earned twice the dividend this quarter at $0.40 versus $0.18 payout ratio and we expect that to continue and that shows you the 100-plus basis points, 130 basis points of excess capital. We have tested it lots of ways as you might expect, as we talked to our Board about capital management, as we talked to our Board about dividends. On any given time, we are showing them severely adverse cases, adverse cases and thinking through the pretax PPNR capability of withstanding different reserve builds and outcomes and so that’s what we are doing and trying to keep it going.
Betsy Graseck, Analyst
Thank you.
John McDonald, Analyst
Yeah. Hi. Just a quick follow-up on that, Paul, I know you mentioned in terms of the macro assumptions it’s a weighted average, but what you described is kind of a 2Q deep dive in GDP and then continuing negative for the rest of the year. Is that kind of the central case? Is there any more details you could provide on that as we compare different banks and what macro assumptions are embedded into the reserve? It’s helpful to know the kind of the maybe central case of assumptions? Thank you.
Paul Donofrio, CFO
What I meant to convey is that we expect a significant decline in GDP in the second quarter, followed by negative growth that could extend into 2021, likely lasting until the end of the year. We see this as a recessionary outlook and would not characterize it differently. The scenarios we are analyzing all suggest a recession, and we have also taken into account the possibility of a severely adverse situation.
John McDonald, Analyst
No. No. Go ahead, please.
Paul Donofrio, CFO
I was going to mention that when it comes to specifics on different variables, there are numerous factors involved in these models. We believe that providing detailed information could be somewhat misleading. Unless you understand all the elements we considered when establishing the allowance, comparing single factors could lead to confusion. Furthermore, the impact of those various inputs will differ for each bank based on their loan mix and, importantly, the quality of their loan portfolios developed over the years. We've been focused on prime and super prime borrowers for many years now, which means the effects on us from those inputs will vary. I hope that clarifies our perspective on the matter.
John McDonald, Analyst
Yeah. I think it’s helpful for us to compare across banks that way. Thank you.
Paul Donofrio, CFO
And remember those tests basically are an independent way to evaluate the quality of somebody’s portfolio and the mix of somebody’s portfolio. So we think, again, we didn’t size it that way, but we think that’s an interesting way for you to kind of get some sort of independent perspective on allowances.
Mike Mayo, Analyst
Hey, Paul. Same question, maybe more specifically, how much more could reserve…
Paul Donofrio, CFO
Same answer, Mike.
Mike Mayo, Analyst
Same answer?
Paul Donofrio, CFO
Yeah.
Mike Mayo, Analyst
How much more could the reserves increase in the second quarter, and how do you define a significant drop in GDP? The stock seems like it's going to open down 6% or 7%, based on my numbers. You guided for better net interest income and earned your dividend at least two to four times, depending on the calculation, and your book value grew. You have strong capital ratios and balance sheet strength to cover additional charges. Why not prepare for the worst-case scenario allowed and communicate that your capital remains fine? One of your peers signaled this, but you appear hesitant due to various variables. Can you provide a bit more guidance for reserve builds in the second or third quarter?
Paul Donofrio, CFO
We have the liquidity and capital for our reserve build, and when comparing our reserve levels to independent assessments from the Fed and other sources, our reserves as a percentage of future losses are comparable to those of our competitors. Regarding your question about future reserve builds, if we anticipated needing to increase reserves, we would have reflected that in the current quarter, as the rules require us to reserve for expected lifetime losses. Our reserve build indicates what we believe we need to account for losses based on our current asset portfolio. By the end of the second quarter, our perspective on the future may change, leading us to either release or increase reserves. However, the quality of our loan portfolio and its composition remain fairly stable during the quarter due to our longstanding underwriting standards. Therefore, any changes to reserves in the second quarter will depend on our updated outlook.
Mike Mayo, Analyst
Got it. If I could follow-up with Brian then, I mean, clearly, the biggest input is when does the economy come back online. And Brian, you and your firm have as many touch points nationally as anybody. There must be some underlying thought process that goes into the reserve build and the losses about when the economy comes back online, kind of what’s your base case, best case, bad scenario, what are you seeing, what are your thoughts?
Brian Moynihan, CEO
One factor that sets this situation apart is the authority we have from governors, mayors, and the President, which influences our actions. While we can speculate on potential outcomes, the healthcare crisis fundamentally alters the usual economic dynamics, including shifts in demand and the issues caused by overvalued commercial real estate. This scenario is unlike anything we have encountered before, and it's crucial that we focus on resolving the healthcare crisis as our top priority. To provide some data, we saw the flow of payments, whether through ATM withdrawals, checks, ACH transfers, and card transactions, average around $65 billion weekly in January and February. Currently, that figure has dropped to about $51 to $52 billion over recent weeks, but the rate of decline appears to be stabilizing. Based on our geographic data, this flattening trend is evident, even after the unemployment claims have been processed and reflected in accounts. Comparing year-over-year decline rates across various industries reveals that some sectors like travel and entertainment have hit rock bottom, while sectors like drug stores and grocery stores are stabilizing. This indicates a potential sustained decline of around 15 to 16 percent. We'll continue to monitor these trends, particularly as extended shutdowns impact certain areas. It’s important to note that gas prices and consumption are significantly down, affecting these figures as well. We are proactively looking for indicators related to unemployment and its effect on our customer base. A majority of households we've surveyed, around 75%, where one member received unemployment benefits still have another member earning a regular paycheck. It will be interesting to see how this dynamic influences spending habits, especially in cases where there's only one income earner. We are observing that checking account balances are increasing among moderate-income households, likely due to reduced spending and cash accumulation. On the Wealth Management side, individuals can defer tax payments, which is another factor to consider. While it's too early to make any definitive calls, we are assessing potential losses based on customer behavior and economic reopening prospects. Our guidance to businesses looking for quicker recovery avenues includes engaging the healthcare sector first. For example, dental practices could resume operations with minimal risk due to fewer people in close proximity. Ultimately, we will rely on healthcare professionals for those decisions, and as we progress through the quarter, we aim to provide clearer insights based on what we observe.
Mike Mayo, Analyst
All right. So that’s why you say reserves could go up or they could be relieved, you just don’t know yet?
Brian Moynihan, CEO
Yes, we all want clarity on the situation, including you, Mike, and we are in the same boat. However, we need to allow some time to pass in order to better understand it.
Glenn Schorr, Analyst
Hello. Thank you very much. I have a quick question regarding allowance and reserves. The healthy reserve on cards seems reasonable considering the current economic environment and its relation to unemployment. Looking at U.S. commercial and non-U.S. commercial around 1%, that figure is certainly higher than recent levels but not necessarily concerning given the current global situation. So my question is about the quality and business mix you mentioned. Is the less severe reserve on the commercial side due to uncertainty in timing and business mix, or is it related to your capital position? Even if some of those businesses face challenges, your historical performance has been quite positive over the past few years. I assume it’s a combination of factors, but I would appreciate your thoughts on the commercial side.
Paul Donofrio, CFO
Look, we have got $2.16 billion on commercial real estate. Given how we have run our commercial real estate business over the last 10 years, especially relative to others. We feel that’s up from $1.6 billion at January 1. We have got $1.11 billion on U.S. commercial. Those commercial losses, they just don’t run as high because of collateral and other protections we have in the structure. So we feel pretty good. If you look at total commercial, we are at $1.16 billion. So we feel good about where we are. And again, it’s when you sort of add all of that up and you just look at it relative to the losses that people are projecting including the fed, whether it’s an adverse scenario or it’s an adverse scenario, you are going to come out with percentages that are pretty healthy on an absolute basis and relative to our peers.
Brian Moynihan, CEO
And Glenn, I want to emphasize a point. Let's revisit the beginning regarding the pretax profit, provisions, and reserves, which we all learned from the last crisis. This earnings capacity allows us to manage pay-as-you-go losses on the consumer side, like card charge-offs, and to build reserves. On the commercial side, this typically occurs as well. We believe this earnings strength puts us in a favorable position to handle any circumstances that arise. We have more liquidity than at the start of the year, more capital than necessary, with an increase of 130 basis points, and the profit volume enables us to navigate through challenges. When we consider the stress test and related metrics, we are operating at levels significantly above what the stress test predicted, as it assumed market losses that we did not face, even during the most turbulent times in market history. So, as we analyze this, whether discussing specific reserves that you are focused on or the broader context, the key takeaway is how much earning power you possess to continuously generate capital and profits, which allows you to mitigate whatever challenges come your way, and that is what we feel confident about.
Paul Donofrio, CFO
That…
Glenn Schorr, Analyst
Great detail. I appreciate it. Thank you.
Vivek Juneja, Analyst
Just…
Brian Moynihan, CEO
Hello?
Paul Donofrio, CFO
You still there, Vivek? Is it us?
Operator, Operator
Vivek, we are not able to hear you at this time. Please check the mute function on your phone.
Brian Moynihan, CEO
Operator, let’s move on to the next one. We will pick him up later.
Matt O’Connor, Analyst
Good morning. The NII guidance, obviously, helpful and coming off a much better than expected Q1, just wonder if you can give a little more detail in terms of I assume some of the sharp drop is higher bond premium amortization, lower trading, and then, obviously, kind of coordinate pressure, is how I think about the three buckets. I don’t know if that’s right or you want to parse it differently, but any additional color would be helpful? Thanks.
Brian Moynihan, CEO
We did notice that bond premium amortization in the first quarter is typically lower than usual. We anticipate an increase in the second quarter due to the decline in rates during the first quarter. It's important to keep in mind that prepayments usually lag behind changes in net interest income, or they may occur before those changes, generally by six to eight weeks. What else would you like to know?
Matt O’Connor, Analyst
I assume trading benefit 1Q…
Brian Moynihan, CEO
Yeah.
Matt O’Connor, Analyst
…and is being factored in and then just kind of…
Brian Moynihan, CEO
Yeah.
Matt O’Connor, Analyst
…call it pressure from the rate environment is the third bucket?
Brian Moynihan, CEO
Trading is indeed sensitive to liabilities in Global Markets. However, the impact is not significant and can fluctuate from quarter to quarter based on the types of assets being booked and whether they were acquired at par, above, or below par. This variability affects whether profits or revenue are reflected in net interest income or in market-making and similar activities. This is why we refrain from providing guidance, as the situation can change quickly based on the buying and selling activities for clients in Global Markets. Currently, it has been slightly sensitive to liabilities and contributed marginally in Q1, and it is likely to provide some support in Q2.
Matt O’Connor, Analyst
Okay. And then as we think about the balancing growth component, obviously, 2Q average balances will benefit from the run-up on a period end in 1Q. But I would think as you kind of look to the back half this year and beyond, some of those line draw downs in commercial start to get paid off, so that maybe it’s tougher to grow the balance sheet or at least tougher to grow loans? I don’t know if that’s the right way to think about it?
Brian Moynihan, CEO
Yeah. I mean, there’s no question that commercial revolver lines which spiked in March, will start to pay down once economic conditions start to improve. But obviously the timing of that is very uncertain. So I think we are just going to have to wait and see. Clearly, we are going to see some carry over from these draws in Q2 and we may see a very significant amount stay with us for some time, we will just have to wait and see. Obviously, deposit balances also benefit NII because you don’t necessarily have to make a loan. You can earn on those deposit balances and they are way up as well and they may be with us for a little while, we will just have to wait and see.
Matt O’Connor, Analyst
Okay. And just last quickie.
Brian Moynihan, CEO
Just so our NII guidance, I am not going to get into the details, but our NII guidance, of course, assumes some sort of runoff. We are making some sort of guesses at this point about what the runoff would be in both loan and deposits.
Matt O’Connor, Analyst
Yeah. Understood. And then, just lastly, a quick one on the spread of the commercial lines drawdowns, any rough numbers on that, I am often asked that question.
Brian Moynihan, CEO
Yeah. Sure. The spread on the drawdowns were no different than what they were pre-crisis because they are just drawdowns. They are existing arrangements. We worked with some clients to adjust the liquidity we were giving them. There were a few new loans in there that were at higher spreads, but most of the spreads were the same as were spreads pre-crisis. So you are not going to get a spread benefit on those draws.
Matt O’Connor, Analyst
Maybe like a LIBOR…
Brian Moynihan, CEO
I think.
Matt O’Connor, Analyst
…plus 150 or 200?
Brian Moynihan, CEO
Well, given the quality of our loan book, I wouldn’t go as high as LIBOR plus 150.
Matt O’Connor, Analyst
Got it. Okay. That’s helpful. Thanks so much.
Brian Kleinhanzl, Analyst
Yeah. Good morning. Quick question, I know you commented on the consumer deferrals that you were seeing. But what’s kind of been the trends on the corporate side as well and kind of what’s been the inbound with regards to using some of these government programs from your clients out there?
Brian Moynihan, CEO
In terms of the government programs, we started taking applications for the PPP program 12 days ago. We have received hundreds of thousands of applications and are processing them according to the guidance from Treasury. Thousands have gone through the SBA and have received a number, and many thousands are with clients who are signing promissory notes, and we are funding them. The real economic impact of the money being distributed will come in the coming period. Today, we received the first major distribution of direct payments related to the $1,200 stimulus payments. We are also seeing unemployment benefits, including an additional $600, coming through as we serve the state with prepaid card access to these programs, which is reflected in our accounts. These programs are just starting to reach the general consumers and businesses. Our industry peers are in a similar situation, and the stimulus they provide will be from this point forward, not retroactively, as this program was initiated only three weeks ago, just 12 days back, and several hundred thousand people have applied, and we are processing them as quickly as possible, with around 10,000 to 12,000 on the commercial banking side.
Brian Kleinhanzl, Analyst
Just a separate question, I know you have built a big qualitative reserve now with CECL. But kind of what are your expectations with regards to how the charge-offs will roll through given all of the deferrals that are going on, forbearance which could push potential charge-offs out to a year or more. Are you really looking that you may not see much of an uptick this year and it could really be 2021 before you start to see meaningful degradation in the charge-offs? Thanks.
Brian Moynihan, CEO
The total amounts are detailed on page five of the balance of deferrals. If we consider the 95% of cards that are not deferred, those will pay us. The key question is what happens with individuals who temporarily deferred due to concerns about job loss. These individuals, like someone with a 750 FICO score who just needed a month, are likely to return. We expect any losses to materialize by the fall, as our approach considers the 180-day period during which we evaluate various scenarios. We will see how this unfolds, albeit with some delay. With CECL, we are accounting for our anticipated outcomes during this delay, as indicated by Paul. We will assess the expected credit costs of the portfolio through the upcoming cycle, anticipating a gradual recovery, as Paul mentioned. The primary question remains...
Brian Kleinhanzl, Analyst
Yeah.
Brian Moynihan, CEO
People's behavior is influenced by government programs and the additional cash available, particularly the PPP program which supports employment and pays wages for up to eight weeks. We will assess how this affects individuals over time. While it may be premature to draw conclusions, I believe it will postpone charge-offs. However, our reserves at any point represent our expectations of what will eventually happen to those customers, rather than when it will occur.
Operator, Operator
And we will go now to Ken Usdin with Jefferies. Please go ahead.
Ken Usdin, Analyst
Hey. Thanks a lot. Hey, Paul, just a couple of follow-ups on the NII front for you. With LIBOR expanding versus fed funds and the TED spread still wide, which typically happens obviously in times of stress. How are you expecting that to traject as you talk about your $11 billion number and just your expectation for rates in the long end of the curve?
Paul Donofrio, CFO
We are taking into account the timing differences between LIBOR and fed funds over the year. Additionally, we are considering some growth in loans and deposits to offset that. We also have securities and other assets maturing that we will replace at lower yields, which is included in our outlook. We believe that with the growth in loans and deposits, we can maintain net interest income around the $11 billion level, give or take, through the end of the year.
Ken Usdin, Analyst
So considering all the cash on the balance sheet and the expected tapering of that, what is the decision regarding asset liability in terms of investments, and what is the usual investment rate compared to what is maturing?
Paul Donofrio, CFO
Currently, the excess liquidity that has entered our accounts is in cash, and we will need to consider how to manage this surplus as we gain clarity on how long it will remain. Presently, if we examine our securities portfolio and compare it to the yields available for reinvestment, we find they are approximately 50 basis points lower. However, this has already been incorporated into our guidance.
Ken Usdin, Analyst
Right. And one more question on the deposit side. Can you just talk about across the businesses, what you are seeing from customers in terms of money coming out of the markets and whether it’s sitting in money market mutual funds in Wealth Management or whether its moved on to the balance sheet and just kind of how that ties into your ability to re-price deposits? Thanks.
Brian Moynihan, CEO
Just to start on that, just generally customers put more cash and you saw that in the Wealth Management deposits being up $19 billion. So that reflects not only the moving money but also the reallocation in our models and things like that. So you have seen that. We have seen them stabilize. My guess is two-thirds of that was more what you are speaking about a third or so was sort of the core growth building up that we saw coming into the tail end of last year into the quarter maybe or a little less than that. But a lot of it was moving and it will move back in the markets based on the allocations and methods and in terms of deposit forms of the markets. And then on the money funds, the allocations reflected there, because of the prime money funds versus the government money funds, there’s a lot of instability around that towards the quarter. So I think this will all settle out and you will see it return to more normal when people are thinking about that. So you will see less volume growth in the balance sheet deposit driven than Wealth Management.
Paul Donofrio, CFO
In terms of who drew, there will be a temporary impact from these draws, which could lead to greater market stability and economic reopening. However, what isn't temporary is the solid performance in our Consumer business, Wealth Management, and treasury services. The core growth we've seen will persist, even if the deposits people have accumulated shift to other uses or diminish. For a time, we may be focused on the decline in loan issuance, but long-term, our performance will hinge on the fundamentals. The ongoing COVID-19 situation allows for continued activity in our underlying business, and our officers are engaging with clients. Although we're adding accounts in various areas at a slower pace due to the limitations on face-to-face meetings, Wealth Management interactions are increasing, and referrals between our business lines remain strong, albeit at a reduced rate. These dynamics will improve as soon as we can resume normal operations.
Brian Kleinhanzl, Analyst
We will go now to Brian Kleinhanzl with KBW. Please go ahead. Just a quick question, I know you commented on the consumer deferrals that you were seeing. But what’s kind of been the trends on the corporate side as well and kind of what’s been the inbound with regards to using some of these government programs from your clients out there?
Brian Moynihan, CEO
In terms of the government programs, we started taking applications in the PPP program 12 days ago. We have received hundreds of thousands of applications and are processing them based on the guidance from the Treasury. Thousands have already gone through the SBA and have received their numbers, and many clients are currently signing promissory notes, allowing us to fund them. I believe the real economic impact of the funds will be realized over the coming period for the entire industry.
Brian Kleinhanzl, Analyst
Just a separate question, I know you have built a big qualitative reserve now with CECL. But kind of what are your expectations with regards to how the charge-offs will roll through given all of the deferrals that are going on, forbearance which could push potential charge-offs out to a year or more. Are you really looking that you may not see much of an uptick this year and it could really be 2021 before you start to see meaningful degradation in the charge-offs? Thanks.
Brian Moynihan, CEO
Yeah. So I think the… We have got to wait for some time to figure that out.
Operator, Operator
We will take our final question today from Vivek Juneja with JPMorgan. Please go ahead.
Vivek Juneja, Analyst
Sorry about that earlier. But let me just jump in and not hold everybody up that much. In your loan drawdowns, you said 90% investment grade. What percentage of those were BBB minus and what are you thinking as you reserve how many of those are more vulnerable or more at risk of downgrades?
Paul Donofrio, CFO
All well over 90% were investment grade or secured. I don’t have how many were BBB minus in front of me.
Vivek Juneja, Analyst
Okay. Going back to the reserve build, it's an important topic. You've mentioned that GDP is expected to remain negative well into 2021. Can you provide some insights on your thoughts regarding unemployment? What do you anticipate for your weighted-average unemployment rate in 2021, given this outlook?
Paul Donofrio, CFO
No. As I mentioned earlier, we are not providing that level of detail because comparing this input to that input can be misleading given the number of variables in the models, unless you understand the full context of all the factors involved.
Vivek Juneja, Analyst
Right. Okay. Okay. Another one and small business, the deferrals that you have seen so far probably going to rise, what are you thinking in terms of as you have done your reserving, what percentage of those ultimately may not make it at this point?
Brian Moynihan, CEO
If you are listening to the earlier calls, you should know that a lot of them are in clinical practice solutions which are doctors and dentists and you would expect that they would pay. We have seen them perform well pre-crisis and will likely come back. Okay. Let’s wrap up now. Thank you all of you for your time this morning. Number one, please keep your families and yourselves safe as we go through the rest of this health crisis. Simply put, we earned $4 billion. We added substantially to our reserves based on our view at the end of the quarter. Our capital ratio is 130 basis points over our minimums. The liquidity is increased during the quarter. But importantly, we drove responsible growth, supported our teammates, our clients and our communities and delivered, I think, for the shareholders too, given the circumstances that were going on. As we look forward, we will continue to keep you apprised of what we are seeing on our client base due to our purview. And as we see that, we will continue to try to keep people informed to help people understand how the company and the economy might operate given the stay-at-home orders. Thank you for your time, and we will talk to you next quarter.
Operator, Operator
This does conclude today’s program. Thank you for your participation. You may disconnect at any time.