Earnings Call Transcript
BANK OF AMERICA CORP /DE/ (BAC)
Earnings Call Transcript - BAC Q4 2024
Operator, Operator
Good day, everyone, and welcome to today’s Q4 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 today’s call will be recorded. And I will be standing by should you need any assistance. It is my pleasure to turn the conference over to Lee McEntire. You may begin.
Lee McEntire, IR Officer
Good morning. Thank you. Welcome, and thank you for coming to the call to discuss our fourth quarter results. Our earnings release documents are available on the Investor Relations section of the bankofamerica.com website. And they include the earnings presentation that we'll reference during this call. I hope everyone's had a chance to review the documents. Our CEO, Brian Moynihan, will make some opening comments before Alastair Borthwick, our CFO, discusses the details of the quarter. Let me just remind you before we start that we may make forward-looking statements and refer to non-GAAP financial measures during the call. Forward-looking statements are based on management's current expectations and the assumptions that are subject to risks and uncertainties. Factors that may cause our actual results to materially differ from expectations are detailed in the earnings materials and the SEC filings 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. So with that, I'm happy to turn the call over to Brian.
Brian Moynihan, CEO
So good morning, everyone, and thank you for joining us. Before we begin today, I just want to express our deep concern for our communities, clients, and teammates impacted by the California wildfires. Our top priority, of course, is ensuring the safety and welfare of our team and helping our clients and customers. Our steadfast Market President Raul Anaya is leading our team out there. We have teams on the ground assisting in any way we can and are monitoring the situation to extend support and resources. So far, we have activated our Client Assistance Program and donated $1 million in disaster relief to the American Red Cross, with additional contributions to the L.A. Food Bank and the L.A. Chamber of Commerce Small Business Efforts. With that, let's turn to earnings starting on page two of the presentation. This morning, we reported $6.7 billion in net income, which is $0.82 in EPS for the fourth quarter. That was a solid finish to another good year at Bank of America. We grew revenue on a year-over-year basis in every category in quarter four. We saw good loan and deposit growth, and Alastair is going to walk you through some of the details of the quarter in a moment, but I want to thank our team for another great year. For the full-year of 2024, we generated $102 billion in revenue and reported net income of $27.1 billion, with an EPS of $3.21. We produced 83 basis points return on assets and 13% return on tangible common equity. We generated these results working from a strong balance sheet that allowed us to support clients and economies as they continue to grow. The economy appears to be settled into a 2% to 3% GDP-type growth environment, with healthy employment levels and a resilient consumer. The strength of the American consumer can be seen in our data. So far in the first two weeks in January, they are spending money at a 4% to 5% clip over last year, similar to what they did in the fourth quarter. In our business sector, our clients are profitable, liquid, and seeing good productivity. We ended the year with $953 billion in liquidity. We also ended with $201 billion in regulatory CET1 capital and a CET1 ratio of 11.9%, leaving us nearly 115 basis points of excess capital as we begin 2025. For Bank of America, the year was characterized by a few important highlights that played out as expected and were consistent with our communications to you throughout the year. First, we saw net interest income bottom out at $13.9 billion on an FTE basis in the second quarter of 2024. We ended the year in the fourth quarter on the same FTE basis at $14.5 billion, which was a bit better than we expected. This provides a great starting point for 2025, and based on the assumptions Alastair will discuss later, we should report record NII in 2025. How did we achieve this? We drove organic growth in all our businesses, which we have highlighted on Slide 3. We saw continued growth in net new checking accounts, new households, new companies, and commercial banking growth in our institutional markets business. This organic activity enabled us to grow loans and deposits at a pace we believe is ahead of our industry average and our peers. A key for us is the growth in our deposit franchise. If you look at Slide 4, you can see we've now grown deposits for six consecutive quarters. In the most recent quarter, we saw growth in consumer balances and stability around non-interest-bearing balances across all the businesses. We continued to price in a disciplined manner, and rates paid have moved lower this quarter across the board. Overall, rates paid on deposits moved from 210 basis points in the third quarter to 194 basis points this quarter. In the fourth quarter, we're lower across every business segment. On the loan side, consumer loans grew in every category linked quarter. Commercial loan demand continued to build off the strengths we saw in the third quarter of 2024, and commercial loans grew 5% year-over-year for the fourth quarter, and at a much faster annualized pace when comparing the third quarter to the fourth quarter of 2024. Back to Slide 3. In our wealth management business, we added 24,000 new households in 2024. We ended the year with $6 trillion in total client balances that we manage for people in America across our global wealth and consumer businesses. Our consumer investments team, known as Merrill Edge, crossed a new milestone this quarter and now sits in excess of $518 billion in balances. Investment banking gained share of industry revenue in 2024. Our sales and trading team achieved the 11th straight quarter of year-over-year revenue growth and set a new full-year record of nearly $19 billion in revenue. As quality stabilized and remained strong, net charge-offs declined modestly from the third quarter. Early in the year, we highlighted that our expectation on consumer credit is that they would stabilize to normal levels, and on commercial office losses, they would trend down throughout the year. We observed both those trends continue into the fourth quarter. On the expense side, we continue to invest in our franchise. Even though spending increased in brand, personnel, and technology, and strong fee growth drove incentive and transaction processing costs higher, we managed to create operating leverage in the fourth quarter. Our digitalization and engagement expanded across all our businesses. We saw more than 14 billion logins to our digital platforms in 2024. Our Erica capability surpassed 2.5 billion interactions since its inception. Additionally, our CashPro app surpassed $1 trillion in payments made through the app in 2024. It's also noteworthy that digital sales in our consumer product areas crossed 60% in the fourth quarter once again. You can observe all these trends in our industry-leading digital disclosure on Slides 26, 28, and 30 in the appendix. All the success in our balance sheet strategies allowed us to return more capital back to our shareholders. We returned $21 billion of capital to shareholders in 2024, which was 75% more than in 2023 and included an 8% increase in the common dividend. In summary, for both the fourth quarter and the year, we enjoyed good profitability, drove healthy returns, saw good organic client activity across all the businesses, continued to manage risk well, and increased the capital delivered back to our shareholders. We positioned ourselves well for growth in 2025. I want to once again thank my team for driving another year of responsible growth. And with that, I'll turn it over to Alastair.
Alastair Borthwick, CFO
Thank you, Brian. I am going to start on Slide 5 of the earnings presentation because it will provide just a little more context on the quarter. For the fourth quarter, as Brian noted, we reported $6.7 billion in net income, or $0.82 per share. Before we discuss comparisons between periods, I just need to remind you that our fourth quarter 2023 GAAP net income number included two notable items. In the fourth quarter of '23, first, we recorded $2.1 billion of pre-tax expense for the special assessment by the FDIC to the industry to recover losses from the failures of Silicon Valley Bank and Signature Bank, which reduced EPS last year by $0.20. Second, we recorded a negative pre-tax impact to our market-making revenue of approximately $1.6 billion related to the cessation of BSBY as an alternative rate, which negatively impacted earnings per share last year by $0.15. So when you adjust for the large FDIC assessment and the BSBY cessation charge, fourth quarter '23 net income was $5.9 billion or $0.70 per share. On Slide 6, we note some of the highlights of the quarter and we reported revenue of $25.5 billion on a fully taxable equivalent basis, up 15% from the fourth quarter of '23. If we exclude the fourth quarter '23 BSBY cessation charge, our revenues grew 8% year-over-year. As Brian said, all revenue items are showing improvement year-over-year. NII grew 3%. Investment banking increased by 44%. This quarter, our $4 billion of sales and trading revenue marked a fourth-quarter record and grew 10% from the year-ago period. Investment brokerage fees rose by 21%, with both assets under management flows and market levels contributing nicely to the growth. Our card income and service charges grew by 7%. Non-interest expense was $16.8 billion and was up when adjusted for the FDIC special assessment driven by incentives paid from the strong revenue growth, as Brian noted, and the related activity costs that come with that. Expense also included additional investments in people, technology, and brand with some major partnerships announced recently. Additionally, it included what we expect to be the peak in quarterly costs associated with enhancing our compliance costs and controls. The good news is we created operating leverage in the quarter. Provision expense for the quarter was $1.5 billion and was consistent with the previous two quarters. Lastly, returns for the fourth quarter were 80 basis points of ROA and 13% return on tangible common equity. Back to the balance sheet on Slide 7. We ended the quarter with $3.26 trillion in total assets, down $63 billion from the third quarter, driven by seasonally lower levels of client activity in global markets, while loans across the businesses grew $20 billion in the quarter. Otherwise in the quarter, the investments of our excess liquidity saw a $9 billion reduction in hold-to-maturity securities. Simultaneously, the combination of shorter-term liquidity investments of cash and available-for-sale securities increased by $28 billion. On the funding side, total deposits grew by $35 billion on an ending basis as both interest-bearing and non-interest-bearing grew. Long-term debt fell by $14 billion driven by net redemptions and valuations, and global markets funding declined in line with assets. Liquidity remains strong with $953 billion of global liquidity sources, which is up modestly compared to the third quarter, even as we paid down some debt and retired some preferreds. Shareholders' equity was flat at around $295 billion. Within all of that, we returned $5.5 billion of capital back to shareholders with $2 billion in common dividends paid and the repurchase of $3.5 billion in shares this quarter. Tangible book value per share rose to $26.58, which is a 9% increase from the fourth quarter of last year. Turning to regulatory capital, our CET1 level improved to $201 billion and the CET1 ratio rose to 11.9%, remaining well above our new 10.7% requirement. Risk-weighted assets increased modestly as increases in loans were mostly offset by lower RWA supporting our global markets client activity. Our supplementary leverage ratio stood at 5.9% versus a minimum requirement of 5%, giving us some capacity for balance sheet growth. Our $460 billion of total loss-absorbing capital ensures our TLAC ratio remains comfortably above our requirements. Let's turn to Slide 8. We can delve a little deeper into loans by looking at average balances. Loans in the fourth quarter of $1.08 trillion improved 3% year-over-year, driven by solid commercial loan growth. Overall, commercial loans grew 5% year-over-year, and importantly, this included an 8% drop in commercial real estate loans. Excluding commercial real estate, commercial loans grew by 7% year-over-year, and consumer loans grew modestly both linked quarter and year-over-year. As Brian mentioned, on a linked quarter basis, every category of consumer lending grew, and you can see that at the bottom of Slide 8. If we turn our focus to NII performance on Slide 9, regarding NII on a GAAP, non-fully taxable equivalent basis, NII in Q4 was $14.4 billion, and on a fully taxable equivalent basis, NII was $14.5 billion. Several quarters ago, we signaled our expectation that NII would trough in the second quarter of 2024 and begin to grow from there. This represents now our second quarter of NII growth, and we expect that growth to continue into 2025. In fact, if you look at the two quarters after the inflection point, NII is already growing at a 5% rate. Fourth quarter NII on a fully taxable equivalent basis increased by $399 million from the third quarter, driven by various factors. First, it was led by improvement in deposits across the businesses. Even as deposit balances increased linked quarter, our interest expense on those deposits declined by $600 million. Loan growth and fixed-rate asset repricing also benefited us again this quarter. Regarding our forward view, interest rate expectations continue to drive volatility and predictability, but we will provide some thoughts for future NII. We expect to start the year in the first quarter with NII modestly higher than the fourth. Keep in mind that the first quarter has two fewer days of interest, which is roughly the equivalent of about $250 million of NII. So even with that, we expect to see modest growth. Then we expect that growth to accelerate throughout the year to the point where it could be 6% to 7% higher in 2025 than in 2024. We expect to exit the year at least $1 billion higher in the fourth quarter, placing us in a range of $15.5 billion to $15.7 billion on a fully taxable equivalent basis, which would be significantly higher than the Q2 '24 trough of $13.9 billion. I want to note the following assumptions. We assume that the current forward curve materializes. While the interest rate curve has shifted significantly over a short period, as of January 10, the curve was expecting only one rate cut in 2025, possibly in May or June. Based on our more recent growth experience, we are assuming loan and deposit growth in 2025 that is higher than in 2024, which is more consistent with growth in a 2% to 3% GDP environment. Other anticipated growth in NII is expected from the benefits of asset repricing as fixed-rate securities, loans, and swaps roll off and get repriced at higher rates. All these themes remain consistent with our prior discussions during the last several earnings calls. Concerning interest rate sensitivity, with a dynamic deposit basis, we provide a 12-month change in NII for an instantaneous shift in the curve, above or below the forward curve. A 100 basis point increase would benefit NII by roughly $1 billion, while a decrease of 100 basis points would decrease NII over the next 12 months by $2.3 billion. Lastly, note that our slide showing the trended investment of excess deposits is in our appendix on page 21. Deposit levels grew to $870 billion over loans at the end of Q4, which is an incredible source of value for shareholders. Of our $649 billion, or 54% of our excess liquidity, is now in short-dated cash and available-for-sale securities. The longer-dated lower-yielding hold-to-maturity book continues to roll off, and we reinvest in higher-yielding assets. Okay, let's now address expenses using Slide 10. We reported $16.8 billion in expenses this quarter. The fourth quarter of '23 included the large FDIC special assessment charge and excluding that, expenses increased. The increased expenses from prior periods were driven by several factors and were partially offset by a roughly $300 million release of prior period accruals for the FDIC special assessment. Let's discuss the drivers of expense. First, regarding revenue, our markets-related businesses of investment banking, investment brokerage, and Sales & Trading were up 20% year-over-year. Incentives for the firm were up 15% versus the fourth quarter of '23 and were largely related to these market-related revenue streams. In terms of investments made, we added bankers and advisors across most of our businesses in 2024, and we also increased our investments in our brand through significant sponsorships like the Masters and FIFA, to name a few. Additionally, we increased our investments in technology as well as financial centers. This quarter alone, we added 17 financial centers, with nine of those in our new expansion markets. We're a growth company and continue to invest in our future. Regarding headcount, we have managed our headcount carefully and have kept it relatively flat through the four quarters of 2024 at around 213,000 people. Lastly, we incurred additional costs to expedite work on compliance and controls. As you likely saw in late December, the OCC issued a compliance consent order to Bank of America, a result of examinations conducted more than a year ago. These orders aim to correct or enhance certain deficiencies in some aspects of our processes that existed during that time. The order does not limit any of our growth plans, and it acknowledges that we began taking corrective actions before the order was announced. As a result of the ongoing work, we increased our resources substantially in the second half of 2024, and those costs are already embedded in our quarterly run rate. Moving back to expenses and how to approach them from a forward perspective. First and foremost, we remain focused on growing the company while driving operating leverage. Second, we expect the first quarter to include some normal seasonal elevation, which we believe will amount to roughly $600 million to $700 million, primarily for payroll tax expense. Thus, we estimate $17.6 billion as a reasonable expectation for Q1, before it seasonally declines in Q2. This aligns with our expectation of expenses being roughly 2% to 3% higher in 2025 compared to 2024. Now let’s turn to credit on Slide 11, where you can see net charge-offs of just under $1.5 billion, which improved modestly compared to Q3. This marks the fourth quarter where net charge-offs hover around $1.5 billion. We’ve observed consumer losses remain stable in the range of $1 billion to $1.1 billion over the past few quarters. On the commercial side, we reported losses of $359 million, down from the third quarter, driven by a steady decline in commercial real estate office losses. The net charge-off ratio for this quarter was 54 basis points, down 4 basis points from the third quarter. We don’t anticipate overall net charge-offs or the related ratio changing significantly in 2025 without substantial changes in the current GDP or employment environment. We expect the net charge-off ratio to remain within the range of 50 to 60 basis points on loans for 2025. The fourth quarter provision expense was $90 million lower than Q3 at $1.5 billion, as reserve levels remain constant. Regarding reserve levels on a weighted basis, we are reserving for an unemployment rate a little below 5% by the end of 2025, compared to the most recent reported rate of 4.1%. On Slide 12, we highlight the credit quality metrics for both consumer and commercial portfolios. There’s nothing particularly noteworthy on this page that I want to highlight further. So let's discuss the various lines of business starting on Slide 13 with Consumer Banking. This segment generated nearly $11 billion or 40% of the company's earnings in 2024. In the fourth quarter, Consumer Banking generated $10.6 billion in revenue and $2.8 billion in net income, both modestly growing from the fourth quarter of '23 as fee improvements for card and service charges are now complemented by growth in NII. Consumer Banking continued to show strong organic growth with high-quality accounts and engaged clients, achieving a new record in client experience scores in December. The organic growth activity noted on Slide 3 includes over 200,000 net new checking accounts, marking six years of quarter-after-quarter growth. Moreover, we reported another strong quarter of card openings and investment account growth. Investment balances grew by 22% to $518 billion with full-year flows of $25 billion and market improvement throughout the year. Expenses rose by 8% as we continued to invest in our business. The most significant story in consumer this quarter is deposits, as these are the most valuable deposits in the franchise. In the last six months, we’ve observed the floor begin to form after several periods of slow decline. Consumer Banking deposits seem to have bottomed in mid-August at around $928 billion and concluded the year at $952 billion on an ending basis. In averages, deposits grew by $4 billion from Q3 to $942 billion, all while our rate paid declined to 64 basis points. Finally, as depicted in the appendix, page 26, digital adoption and engagement continue to improve, and customer satisfaction scores rose to record levels, illustrating our clients' appreciation for the enhanced capabilities resulting from these investments. On Slide 14, we transition to Wealth Management, where the business had a very profitable year, generating $4.2 billion in earnings from nearly $23 billion in revenue. In 2024, our Merrill Lynch and Private Bank advisors added another 24,000 net new relationships. The professionalism of these teams earned them numerous best-in-class industry rankings as noted on Slide 27 in the appendix. With ongoing increases in banking product usage from our investing clients, the diversity of revenue in the wealth business continues to improve. The number of GWIM clients with banking products now exceeds 60%. Importantly, approximately 30% of our revenue now derives from net interest income, complementing the fees earned in our advice model, which has also grown. Net income rose by 15% from the fourth quarter of '23 to nearly $1.2 billion. We reported revenue of $6 billion in the fourth quarter, representing a 15% year-over-year increase, led by 23% growth in asset management fees. Although expenses rose year-over-year, they did so at a slower rate than revenue, resulting in operating leverage for the business. The business saw a pretax margin of 26% and a strong return on capital of 25%. Average loans increased by 4%, driven by growth in custom lending, securities-based lending, and a pickup in mortgage lending. Deposits grew by 2% from Q3, and the teams displayed discipline in pricing those deposits. Both Merrill and the Private Bank continued to experience strong organic growth, contributing to impressive asset under management flows of $79 billion this year, reflecting a healthy mix of new client investments, along with existing clients putting money to work. We also want to highlight the continued digital momentum demonstrated on Slide 28; notably, three-quarters of Merrill bank and brokerage accounts were opened digitally this quarter. Slide 15 illustrates the results from Global Banking, which generated $8.1 billion or 30% of the company's earnings for 2024, maintaining its reputation as the most efficient business in the firm with an efficiency ratio of less than 50%. The business experienced a nice rebound in investment banking fees in 2024, which we expect to continue into 2025. For Q4, Global Banking produced earnings of $2.1 billion. Pretax pre-provision results were flat year-over-year, as improved investment banking fees offset lower NII and higher expense. Total earnings were down 13% year-over-year due to higher provision expense resulting from prior period reserve releases. Investment banking fees amounted to $1.7 billion in Q4, increasing by 44% year-over-year, primarily driven by mergers and acquisitions. We also observed strength across debt capital market fees, particularly in leverage finance and equity capital market fees, solidifying our number three position for investment banking fees. The fourth quarter brought about strong momentum as election outcomes positively influenced sentiment towards a more pro-business climate, with expectations for more deals to be finalized. Expenses in this business rose by 6% year-over-year, driven by 13% growth in non-interest income and continued investments in personnel and technology. Client activity saw a healthy uptick even though it was slightly muted by the strength of the U.S. dollar. Year-over-year stability in Global Banking loans came from this foreign exchange impact, notwithstanding a $6 billion decline in commercial real estate from paydowns. Otherwise, loans in Global Banking see an increase of 2%. Deposits have been consistently growing over recent quarters with our commercial and corporate clients, now achieving a total increase of 10% year-over-year in global banking deposits, reaching a new all-time high. We are observing strong growth in all categories from our corporate to commercial clients and even in the business banking segment, alongside a 10% increase in our international deposits. Moving on to Global Markets on Slide 16, I want to focus my comments on results excluding DVA as we normally do. Our team has continued their impressive streak of robust revenue and earnings performance. They achieved operating leverage and consistently delivered solid returns on capital. For the year, record sales and trading results of nearly $19 billion represented a 7% increase from 2023 and have been growing steadily on a year-over-year basis for nearly three years. This led to $5.7 billion in full-year profits, making up more than 20% of the company's total results. In the fourth quarter, earnings of $955 million rose by 30% year-over-year. Revenue, again excluding DVA, improved by 15% compared to the fourth quarter of '23, as both sales and trading and investment banking fees showed favorable year-over-year improvement. Specifically, in sales and trading excluding DVA, revenue grew by 10% year-over-year to $4.1 billion, marking the first time we recorded more than $4 billion in our Q4 results. This quarter included Q4 records for both FICC and Equities. FICC increased by 13%, while equities improved by 6% compared to the fourth quarter of '23. FICC benefited from tighter credit spreads and increased volatility in interest rates, while equities benefited from heightened activity surrounding the U.S. elections. Year-over-year expenses climbed by 7%, in line with the revenue increase and our ongoing investment in the business. Moving to Slide 17, we see other results with a loss of $407 million in the fourth quarter. We previously discussed the charges from BSBY and the FDIC special assessment, and their reversals impact comparisons in revenue, expense, and net income in this segment. Otherwise, there isn't anything particularly significant to report in this section. Our effective tax rate for the quarter was 6%, and excluding discrete items and the tax credits linked to investments in renewable energy and affordable housing, the effective tax rate would have been approximately 26%. Looking ahead, we anticipate the tax rate for 2025 to fall within the range of 11% to 13%. This projection considers our expectations for higher earnings in 2025 along with relatively stable tax credits. Lastly, on page 18, we felt it crucial to summarize some guidance points we discussed this morning, hoping you'll find it helpful. In summary, we anticipate strong growth in NII while also continuing to make critical investments in the franchise while driving operating leverage throughout the year. We don't foresee much movement around credit based on what appears to be a solid economic outlook. We remain committed to maintaining a strong balance sheet with excess capital available to support growth and return capital to shareholders as appropriate. With that, I will stop here. Thank you, and we will open it up for Q&A.
Operator, Operator
And we'll take our first question from Steven Chubak with Wolfe Research. Your line is open.
Steven Chubak, Analyst
Hi, good morning, Brian. Good morning, Alastair.
Brian Moynihan, CEO
Good morning.
Steven Chubak, Analyst
So wanted to start off, Alastair, with maybe unpacking some of the drivers of the NII growth in '25. How much of the build that you're guiding to is attributable to loan growth versus some rate or repricing tailwinds, runoff of legacy swaps, what have you? And does that acceleration in NII you cited for the second half continue into '26 given some of those tailwinds should remain in place beyond '25?
Alastair Borthwick, CFO
Well, first of all, I admire you asking about '26. I'm always reluctant to talk about the back half of '25. So I'll leave '26 for another time. But we don't have a whole lot of news, Stephen, relative to what we talked about in the prior quarters. We're obviously pointing right now to deposit growth in particular because it's beginning to get back to something more normal. There was a period there where deposit balances were declining as people got back to something more normal in their accounts. But we're highlighting here that consumer found its floor in August, while wealth found its floor in July. That is providing some support as we grow deposits. That's helping us with the NII growth. So that hasn't changed. It's just that now we've got successive quarters of growth to actually point to. The loan growth that you asked about is interesting in that there were several quarters where we were bouncing around flat on loans. In Q2, we added $9 billion of loans. In Q3, we added $19 billion. In Q4, we added $20 billion. So loan growth has picked up slightly. We can observe a little more optimism among clients, a little more activity, and a little more demand for loans. So these two elements—growing confidence in deposit growth and increasing loan demand—will compound over the course of the year and help us in the back half of '25. Additionally, as you pointed out, we still benefit from fixed asset repricing. This has already started as some old loans are rolling off our books, and we reprice them; this includes some cash flow swaps that will mature throughout the year. So that's what leads us to our expectation of accelerating NII growth to 6% to 7% for the full year. There could be a slight uptick in the second half, yes, but this remains a summary of our confidence on NII.
Steven Chubak, Analyst
That's great, Alastair. And maybe a follow-up for Brian. Just at a recent conference, you spoke about the expectation of delivering 200 basis points of sustainable operating leverage, laying out an algorithm where revenues grew 4% to 5%, expenses grow 2% to 3%. What gives you confidence in that ability to deliver that level of top-line growth on a sustainable basis? Just want to unpack that a little bit further.
Brian Moynihan, CEO
What gives us confidence is that we have periods with stable rate environments and a stable economy growing at a slower rate than it is now. We've achieved that for five years in a row. So it's not something we haven't done. However, in the current environment, what's driving growth is different. Our revenue growth is growing at twice the rate plus, and the expense growth is growing close to that number. Higher growth rates will stem from robust business growth, particularly in areas like Wealth Management, and investment banking, which attach a higher sort of instantaneous expense. Yet it still produces some operating leverage at higher growth rates, leading to good after-tax EPS and strong net operating income results. This is a different context; this is a model where revenue is growing faster than in more normalized environments. But the businesses are experiencing that rapid growth, which drives the overall requirement for initiative from expense management. Relying on past experiences illustrates that our income base has become much broader compared to prior years, so we expect to see returning profitability rates. Hence, we see a lot of setup for growth. We have implemented stable expense management, so we can get back to the operating leverage that's expected, again, we have to ensure stability in the relative business positioning.
Steven Chubak, Analyst
That's great color. Thanks so much for taking my questions.
Brian Moynihan, CEO
And Steve, the easiest thing to think about is headcount. Ultimately, our costs are largely personnel-related, which have remained relatively stable. That should start to reach a point of efficiency; during the last year, we maintained headcount relatively steady around 213,000 conductors with the goal of optimizing operational efficacy.
Operator, Operator
We'll move next to John McDonald with Truist Securities. Your line is open.
John McDonald, Analyst
Hi, good morning. I wanted to ask as a first question, just a follow-up to Steve's NII questioning. Alastair, is the deposit growth in the model that you've laid out for the year being used to pay down more expensive funding? You've talked about the ability to kind of self-fund balance sheet growth. And then also, is there any sense of the yield pickup you could give us kind of ballpark on?
Brian Moynihan, CEO
John, before Alastair starts, welcome back from the cold to cover our company. It's always good to know that you're going to consistently focus on NII, but let me turn it over to Alastair.
Alastair Borthwick, CFO
Sure, the first question was whether we think we’ll leverage the anticipated deposit growth to pay off some of our higher-cost liabilities on the balance sheet. Yes, we have done that, and you can see that logged in various institutional CDs, which lessened by another $7 billion this quarter. As we further grow our quality deposit franchise, it allows the reduction of these liabilities, and that will support net interest yield over time. This strategy remains under the same premise, and you will see that continue. Regarding the cash flow swaps, we generally don’t detail the specifics on how to repricing occurs over time, but it's embedded within our guidance. Each quarter, when I provide guidance, that includes what we know regarding upcoming cash flow swaps and their repricing. The other fixed-rate assets can be observed in our supplemental information based on the originations of residential mortgages and auto loans. We’ve been booking new residential mortgages, with old residential mortgages rolling off, where we're picking up 250 basis points every time. Those numbers can be found in our supplemental material. We more typically refrain from disclosing cash flow swaps, but I will be sure to provide updates as we progress throughout the year.
John McDonald, Analyst
Okay. And then just to switch topics so Brian doesn't make fun of me.
Brian Moynihan, CEO
That's all right, John. Just kidding.
John McDonald, Analyst
Now in terms of capital, how are you thinking about the CET1 target and the buffer that feels appropriate in this environment? And how does that play into your thinking on buybacks?
Brian Moynihan, CEO
We bought $3.5 billion in buybacks this quarter, and we’d expect to continue stepping back at the highest levels, including the common dividend and investing in the growth of our business, and then we typically utilize the remaining balance for stock buybacks. That total $3.5 billion is a reasonable expectation over the past few quarters. At 11.9%, we think with a 10.7% requirement, a buffer of about 50 basis points means you could potentially target 11.2%. Obviously, we could see some changes in capital rules, and we’ll need to adjust after those factors play out. We hope for some relief from CCAR volatility because remember, last year, we saw a considerable jump without a lot of correlation to the actual risk of the company, so we will have to see how that settles down.
John McDonald, Analyst
Okay. Does that lead you towards a mid-teens ROTCE target, Brian, as NIM normalizes and capital normalizes?
Brian Moynihan, CEO
Yes. I think normalizing capital will likely mean holding that capital to grow and not needing to retain more capital for growth, frankly. The NIM will probably be critical in increasing from sub-2% this quarter to over 2% by the end of fourth quarter, hence it will directly impact profitability. Therefore, we’ll keep driving the ROTCE higher as the factors mentioned come together. Historically, you can observe these trends. When Fed funds were 2%, we were running a couple of hundred basis points over that. It's a substantial interest-earning deposit base, particularly through consumer accounts where significant interest discounts create leverage. That should be a driver of growth, but capital returns would help, although I anticipate complexity stemming from different rules and regulations.
John McDonald, Analyst
Got it. Thank you.
Operator, Operator
We'll take our next question from Glenn Schorr with Evercore. Your line is open.
Glenn Schorr, Analyst
Hi, thanks very much. I have a relative question on trading. I know how impossible it is to predict the environment. But you took share in investment banking and invested in trading, so I see good record revenues in FICC and equities, as you mentioned. That said, when we have good environments, some companies tend to really blow out numbers. You guys have zero loss days, and tend to perform consistently strong. Is that a comment about gaps in the business mix that you'd like to fill in? Is that a comment about risk tolerance? Just curious how to think about it on a relative basis?
Brian Moynihan, CEO
You have to step back and observe that Jim Demar and his team have driven the business to achieve 11 straight quarters of year-over-year growth. Frankly, I am unsure if any other company comes close to matching that. Thus, while other companies may have more volatility, we strive to keep seeing consistent growth over time. If you assess the last few years, our business has shown stable growth without the severe fluctuation others experience, all while gaining market share consistently. Perhaps the model we embody allows for this reduced volatility and predictability in performance. It's not that we shy away from volatility in principal activity, as we've capitalized on it effectively over the years.
Glenn Schorr, Analyst
Okay, I appreciate that. This might be a simple follow-up, but on your comments regarding credit and reserves, you mentioned reserving for unemployment just below 5%. Given that we're currently at 4.1%, I think that is typical of BofA conservatism as it relates to accounting. My real question is: your reserves may be fine; your P&L might be fine, however, if that scenario plays out, does that shift how we view consumer spending, overall loan growth, and similar factors down the line? Because we're focusing on just the next four quarters?
Brian Moynihan, CEO
Yes, Glenn. This is about reminding you to separate reserve-setting methodologies from our real belief derived from our research team. Core assumptions remain that GDP will grow in the low-2s this year with unemployment fluctuating between 4.1% and potentially peaking at 4.3%. So fundamentally, this is a base-case weighting. It doesn’t indicate that we expect to see 4.8% unemployment in the next four quarters.
Glenn Schorr, Analyst
Well, I hope with that all I want to appreciate that.
Brian Moynihan, CEO
Yes, thank you.
Operator, Operator
We'll move next to Erika Najarian with UBS. Your line is open.
Erika Najarian, Analyst
Yes, hi. Good afternoon, about to be good afternoon. My first question, just as a follow-up. Brian, I think I heard you say in response to John's question that you think the exit rate net interest margin will be 2.1% in 4Q '25; I wanted to confirm that I heard that correctly. Also, Alastair, could you talk about the repricing or down deposit beta dynamics that you would assume to bring us to that net interest margin?
Brian Moynihan, CEO
Yes, you have indeed accurately stated my point regarding John's question; however, I will leave it for Alastair to provide insight on deposit rates.
Alastair Borthwick, CFO
Generally, Erika, we are observing Fed rate cuts and repricing things accordingly. There are certainly two aspects worth mentioning at the current moment. Firstly, in the commercial businesses with higher-end deposits, we typically emulate the rate cuts and just moving down 25 basis points. On the other hand, on the noninterest-bearing side, our course of action is locked in so there is little we can do there. Secondly, we've noticed a rotation of deposits over the previous two years, transitioning from noninterest-bearing to interest-bearing across different parts of our businesses, and that has slowed significantly. For example, consumer noninterest bearing balances seems to have bottomed out back in February of the last year, which is perhaps one of the reasons that consumer noninterest-bearing balances are now growing once again. Both elements factor into the guidance we have provided.
Brian Moynihan, CEO
Erika, it’s worth noting that action we've observed over the last quarters has had an interesting outcome. If you analyze our accounts open pre-pandemic through now, you could see a surge followed by depletion, but it has now stabilized. Not only that, but in aggregate, what we've discerned is that the depletion from large accounts has dramatically slowed, while lower balance accounts still maintain a consistent upward path, trending up year-over-year. Specifically, checking accounts that were once around 7,000 are now sitting somewhere around 9,000, or perhaps 11,000, while the increase in lower balance accounts may signal potential growth.
Erika Najarian, Analyst
Got it. That's very helpful. Just as a follow-up, both you and Alastair have started introducing the concept of a normalized net interest margin of 2.3%. With the neutral rate potentially around 4%, can BofA reach that threshold more quickly, especially given the deposit dynamics that you mentioned, Brian? I'm just trying to understand the reason behind introducing normalized NIM.
Brian Moynihan, CEO
If the Fed funds rate remains elevated, we will indeed reach that benchmark quicker, primarily due to the sheer volume of loans. If we were having this discussion back in October where there were projections of 3 or 4 additional rate cuts, we've witnessed a shift; currently, it may only be one. It’s logical that remaining rates at a higher nominal level will expedite our transition to that normalized NIM. Two caveats arise; one, we maintain a larger markets balance sheet, slightly less robust compared to before, and secondly, we are carrying a significant amount of liquidity as mentioned earlier. Nevertheless, over time, we would observe that an accelerated transition toward that margin will remain favorable as rates do adjust.
Erika Najarian, Analyst
Thank you.
Operator, Operator
We'll take our next question from Mike Mayo with Wells Fargo Securities. Your line is open.
Mike Mayo, Analyst
Hi, you've upped your NII guidance for the next several quarters. This was the first question asked. But how much is attributed to short rates? How much is from long rates? More importantly, how much of it is influenced by the yield curve steepening? Which part of the yield curve is most impactful for that? Additionally, what's the sensitivity for every 10 basis points of additional steepness that could impact NII?
Alastair Borthwick, CFO
Mike, short-term rates likely drive around 90% of the sensitivity relative to NII. If you think about our fixed-rate exposure, we just don’t have enough of those repricing that materially moves NII. In each quarter, we see only a few billion of residential mortgage and related fixes that impact those bottom numbers. Essentially, the focus on revenue growth and loan growth remains paramount. Therefore, while fixed rate asset repricing provides some marginal benefit, deposit and loan growth are the critical factors we rely on to bolster our underlying performance.
Mike Mayo, Analyst
Got it. And then a big-picture question. Brian, with the new incoming administration and a different tone as it relates to bank regulation. In fact, the incoming Treasury Secretary has expressed desire to reinvigorate. If you were to talk to them, what would you want to see changed regarding bank regulation? Additionally, could you provide a rough estimate of how much your CET1 ratio would rise if you found a level playing field without excessive operating risk penalties?
Brian Moynihan, CEO
Mike, your second question illustrates an important point: the capital requirements stemming from the pre-pandemic to post-pandemic must be addressed. In the last couple of years, capital requirements have surged nominally by 10%, 15%, 20% without a substantial change in the risk of our operations. We see issues around the G-SIB index, which isn’t tied to the growth in ongoing economic realities. The value of capital assessments and changes to CCAR represent ongoing concerns. We speculatively estimate that factoring in our regulatory burdens within a new structure would potentially provide a 100 basis points increase over our current CET1 ratio.
Mike Mayo, Analyst
All right, great. Thank you.
Operator, Operator
We'll move next to Jim Mitchell with Seaport Global Securities. Your line is open.
Jim Mitchell, Analyst
Hey, good afternoon. Focusing on your deposit growth, you appear to be outperforming your peer group. Let’s hone in on consumer deposits for a moment. You generated 1.1 million net new checking accounts, which seems to be among the best results for peers. I was curious if you could elaborate on the consistent success in adding new accounts and any insights you may have.
Brian Moynihan, CEO
Ultimately, our brand resonates well in terms of service scores; our customer service capabilities have reached their highest rating. The fairness of our account structures, along with a commitment to transparency and enhanced digital services, resonate with the market. The addition of over a billion new checking accounts isn't just important; approximately 90% of them qualify as primary accounts with high initial balances that grow significantly over time. This consistent performance reflects the dedication of our leadership team in those sectors. Our strategic initiatives, such as working with organizations to offer our products as employee benefits or targeting university campuses, also yield successful engagement. This multifaceted approach supports our goal for continued growth. Our expansion into new markets contributes significantly as well.
Jim Mitchell, Analyst
That makes sense. And then pivoting, regarding expense management, the growth guidance of 2% to 3% indicates a notable drop from what we observed in the back half of the year. What areas are you taking the step to decelerate expense growth in '25 as you maintain optimism about organic growth?
Brian Moynihan, CEO
Three factors play into this. If we achieve a sustained revenue growth pace for the markets-related businesses, such as investment banking, it could promptly outperform the percentage I outlined. If those revenues climb 20%, our expense guidance may tighten. Secondly, some recent project-related works, including remediation efforts, have drawn to a close, providing further breathing room. Thirdly, we've maintained a steady headcount and worked diligently to identify operational excellence improvements. We are committed to the success of recent branding initiatives with key properties like the U.S. Soccer affiliations and The Masters. Each of these efforts position us well for continued efficiency in a business that has historically driven down costs.
Jim Mitchell, Analyst
Okay, yes, that's fair. Thank you very much.
Operator, Operator
We'll move next to Vivek Juneja with JPMorgan. Your line is open.
Vivek Juneja, Analyst
Hi, I have two separate questions. First one, with expenses, I want to clarify on the incentive compensation in '25 in your guidance. Are you assuming flat year-over-year growth or an increase? Any color would be helpful.
Brian Moynihan, CEO
It would grow in alignment with our market conditions, but overall compensation will also be influenced by efficiency targets.
Vivek Juneja, Analyst
Okay. Second, I can't leave without asking—given the BSBY hedges, can you share how much was the benefit this quarter? What will the cadence of that look like across '25?
Alastair Borthwick, CFO
We can expect the BSBY to accrue back into P&L similarly to how we monitor cash flow swaps, Vivek. As a reference, we expect several hundred million this quarter and consider that within our overall guidance. When indicating that we foresee Q1 slightly higher than Q4 of last year, that estimate accounts for a $250 million day count adjustment along with various factors encompassing deposit growth, loan growth, and cash flow swap activity.
Vivek Juneja, Analyst
Okay, so that would provide a consistent benefit all through '25 then, right?
Alastair Borthwick, CFO
Yes, much of it will play out in 2025, with marginal effects extending into 2026 and a slight impact by 2027.
Vivek Juneja, Analyst
And then, if I may, another one. Brian, regarding your capital comments, you aim to keep a 50 basis-point buffer over your CET1 target of 11.9%; if that’s managed at 11.2, is there a potential plan to reduce it through buybacks, or how are you approaching that?
Brian Moynihan, CEO
I wouldn’t anticipate the approach will lead us to reducing that ratio quickly through buybacks. The objective is ensuring growth can be supported. However, Vivek, the reality of the current uncertainty brings about rules that can shift, obligating us to adjust strategies as circumstances unfold. We expect some of that will be driven naturally through loan growth and through solid markets activity that our teams present.
Vivek Juneja, Analyst
That makes sense. Thanks.
Operator, Operator
Our next question comes from Matt O'Connor with Deutsche Bank. Your line is open.
Brian Moynihan, CEO
Hey, Matt.
Matt O'Connor, Analyst
Hi. Thanks for taking my question toward the end here. Just trying to understand the implications of a capital relief scenario—if there’s some relief on your capital, are there areas that you would incrementally lean into? Obviously, it's difficult without knowing all the rules, but just are there particular areas that you'd target to augment if you had that excess capital?
Brian Moynihan, CEO
None of our businesses are constrained by capital factors currently. If our consumer team observes more credit card lending opportunities based on their effective risk balance—indicating a higher willingness to borrow—that could catalyze growth. Those opportunities are present across all our businesses, and as you know, in the previous years, the market for commercial lending continues to provide strong growth, fueling revenue and gain for the business overall.
Matt O'Connor, Analyst
And I guess that indicates that depending on how the capital rules change, there could be business lines becoming more profitable, right? I've heard some of your peers mention factors like equity prime brokerage that might evolve better with capital changes; again, we don’t know how it will all work out, but do you see potential additions to your strategy if regulatory pressure was eased?
Brian Moynihan, CEO
Regulatory capital outlook won’t reshape our approach because we assess factors beyond regulations when analyzing businesses. We assess risk dynamics, notably the enduring market-based factors that inform decision-making. While certain adjustments could increase the profitability of business lines, we still look at the overall return on assets approach, so nothing is pending based purely on capital measurements.
Matt O'Connor, Analyst
Okay. Thank you. That was helpful.
Operator, Operator
We'll move next to Gerard Cassidy with RBC. Your line is open.
Gerard Cassidy, Analyst
Hi, Brian. Hi, Alastair.
Brian Moynihan, CEO
Hi, Gerard.
Alastair Borthwick, CFO
Hi, Gerard.
Gerard Cassidy, Analyst
Brian, we've talked about this in the past and also with you, Alastair. Obviously, credit quality for you and your peers has been very strong. In light of the recent rate cycle moving from zero to over 5% at the short end, we haven’t observed a notable spike in charge-offs due to that increase in rates. When you assess where credit quality is, do you attribute this trend to improved underwriting standards, client fortitude, or the consumer and corporate balance sheets becoming more resilient due to post-pandemic developments?
Alastair Borthwick, CFO
Yeah, it's certainly been benign. While our underwriting strategy, standards, risk appetites, and client selection processes remain unchanged, we can see that current conditions differ greatly from those in 2019. The pre-rate spike period felt quite favorable, but now we are seeing stronger consumer balance sheets. This is evidenced in deposit balances and continued consumer spending in the 3% to 4% range. Moreover, our understanding of the unemployment levels, income, and housing dynamics certainly confirms some stabilization. We anticipated seeing these factors plateauing around where we are now. Hence, we’re optimistic about consumer and commercial sectors holding up.
Gerard Cassidy, Analyst
Very good. And as a follow-up, I share your optimism on the broader economic outlook shared by your peers in the capital markets business. But what do you identify as the main risks? When everything is going smoothly, what curveballs do you need to monitor? Is it a regulatory earning curve shift that could arise unexpectedly? Is it geopolitical uncertainty? What are your views on potential risks?
Brian Moynihan, CEO
You have considerations like ongoing wars, and we hope there’s a resolution to the one currently impacting us. There's also the challenges of trade wars and the need for resources, both physical and human, to ensure successful workforce productivity remains stable. Those are the primary risks. Reflecting on the trends we’ve experienced over a 15-year span continuously improving credit statistics, we did hit interruptions during the pandemic but stabilized thereafter. Nonetheless, we need to remain cognizant of excessive leverage building up in the system. The ramifications could extend throughout the corporate world and the banking system.
Gerard Cassidy, Analyst
Thank you, gentlemen. Alastair, I appreciate your thoughts on the growth comments regarding additional financial centers and your growth ambitions.
Alastair Borthwick, CFO
There's plenty of opportunities there, but I will appreciate your overview of the capital aspects.
Gerard Cassidy, Analyst
Okay, fair enough. Thank you.
Operator, Operator
We'll take our final question from Betsy Graseck with Morgan Stanley. Your line is open.
Betsy Graseck, Analyst
Hi, good afternoon. Thank you for taking my question. Brian, with small business optimism on the rise, paired with a flattened front-end curve, I wanted to gain insights into your views on C&I demand. how do you interpret the conversations with small businesses, mid-market, and corporates in their preparations for this potential change?
Brian Moynihan, CEO
In our business banking segment, the sentiment among small and medium-sized businesses indicates hesitancy, particularly surrounding drawing rates on lines of credit. The levels of capital drawdowns remain comparatively subdued. Clients are pulling back somewhat, but the optimism for growth is palpable regardless. We frequently hear frustrations about regulatory hurdles, which complicate operational ease. Ultimately, should regulations ease, that could cascade into improved loan growth. However, we likely won’t see immediate spikes in loan growth among these segments as businesses navigate their operational realities. Our dialogue with customers consistently focuses on assisting them in seizing brighter opportunities, especially concerning employment dynamics.
Betsy Graseck, Analyst
It’s interesting to note your consistent growth in small business loans; combined with the positive sentiment on small business, it could indicate potential benefit. Thank you very much for your insights.
Brian Moynihan, CEO
Thank you, Betsy, and thank you to everyone for joining us today. We finished 2024 with good momentum as we enter 2025. The economy is resilient and healthy. Consumers continue to spend at an impressive rate, with strong employment levels. We can see positive progress in asset quality. We experienced growth in loans for several quarters. Deposits have also grown for six consecutive quarters. The rate environment continues to remain conducive. The added value created in the last couple of quarters derives from strengthening our fee business, given the heightened market activity. Collectively, this positions us well for 2025. Thank you for your continued support, and we look forward to our next conversation.
Operator, Operator
This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful afternoon.