Earnings Call Transcript
BANK OF AMERICA CORP /DE/ (BAC)
Earnings Call Transcript - BAC Q2 2023
Operator, Operator
Good day, everyone. And welcome to the Bank of America Earnings Announcement. It is now my pleasure to turn the program over to Lee McEntire. Please go ahead, sir.
Lee McEntire, Executive
Thank you, Catherine. Good morning, welcome and thank you for joining the call to review our second quarter results. I trust everyone has had a chance to review our earnings release documents. They are available on the Investor Relations section of the bankofamerica.com website, and include the earnings presentation that we will be referring to during the call. I'm going to first turn the call over to our CEO, Brian Moynihan, for some opening comments, before Alastair Borthwick, our CFO, discusses the details of the quarter. Before I do that, let me remind you that we may make forward-looking statements and refer to non-GAAP financial measures during the call. The forward-looking statements are based on management's current expectations and assumptions that are subject to risks and uncertainties. Factors that may cause the actual results to materially differ from expectations are detailed in our earnings materials and SEC filings that are available on the website. Information about our 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, it's my pleasure to turn the call over to you, Brian. Thanks.
Brian Moynihan, CEO
Thanks, Lee, and good morning to all of you, and thank you for joining us. I'm starting on Slide 2 of the earnings presentation. This morning, Bank of America reported one of the best quarters and one of the best first halves net income in the company's history. Our results this quarter once again include solid performance on things we can control by delivering organic growth and operating leverage. We did that in an economy that remains healthy that had a slowing rate of growth. It was also a quarter that included volatility from the debate about the debt ceiling, continuation of central bank monetary tightening actions and a slowing in consumer spending and the slowing inflation. As you look at it now, our customer spending patterns are now more consistent with the pre-pandemic, lower growth, lower inflation economy. Before Alastair takes to details, let me summarize Bank of America's quarter two performance. On Slide 2, you can see the highlights. We earned $7.4 billion after tax, and grew earnings per share by 21% over the second quarter of 2022. All business segments performed well, and I want to thank all my teammates for doing so. We grew clients and accounts organically and at a strong pace. We delivered the eighth straight quarter of operating leverage, led by 11% year-over-year revenue growth. We further strengthened our balance sheet, improving our common equity Tier 1 ratio more than 110 basis points year-over-year to 11.6%, and we have $867 billion in Global Liquidity Sources. We also produced strong returns for our shareholders with a return on tangible common equity of 15.5%, continuing a streak of many quarters at that level or above. While our business has performed well this quarter, I would particularly highlight our global markets and sales and trading team, and our investment banking teams. Both have appeared to outperform industry peers; investments made over the past couple of years and global market capabilities under Jim DeMare's leadership, as well as Matthew Koder's leadership in the global corporate investment banking area, allowed us to improve our market shares for both of these areas. I'd also note the strong contribution by our middle-market clients and our teammates there led by Wendy Stewart. I'd like to touch a few additional points before turning the call over to Alastair. These points will help illustrate continued investment in the franchise and work we do to drive growth. Let's start with the organic growth slide on Page 3. On that page, we highlight some of the important elements of organic growth. You can see evidence in every business segment as you look at the page. In consumer, in quarter two, we opened 157,000 net new checking accounts. Consumers have now had 18 straight quarters of positive net new checking account growth. Now these are core primary checking accounts across the board, allowing our tremendous deposit franchise to continue to prosper and take market share. While the progress made here has been incremental over the last three years, we've grown our core customers in consumer checking account customers from 33 million to 36 million. We opened another one million-plus credit card accounts this quarter, and have 10% more investment accounts this year than we did last year in the consumer business. Consumer investment business balances reached a new high of $387 billion, aided by a 30% increase in new funded consumer investment accounts year-over-year, and frankly moving our money from our depositors into the market as they have done so. In Global Wealth, we added 12,000 net new relationships in Merrill and the Private Bank, and our advisors opened more than 36,000 new banking relationships in the quarter, showing a strong differentiation of our model of fulfilling both investment and banking needs for clients. In the past 90 days, we added 190 experienced advisors to our salesforce, in addition to digital capabilities to help us deliver at scale. In Global Banking, we added clients and increased the number of solutions per relationship. Over the past three years, we've added net new relationship managers and increased our client-facing headcount by nearly 10%. We've also improved our tools for prospect colleagues through investments in technology, which is benefiting our ability to add customers and improve our solutions for existing clients. Year-to-date, we've added over 1,000 new commercial and business banking clients across the United States, which is the same number we added in the full year of last year. Again, operationalizing our ability to do this at scale increases our speed of onboarding these clients. In our global markets area, we saw one of the highest second quarters for sales and trading in our history, another quarter of good organic growth. To achieve that growth, we are managing our expense trajectory, which Alastair will cover; inherent efficiency progress from digital and other applied technology across all our units is required. Digital superiority is key to our operating dynamics. First, it produces a great customer experience resulting in strong customer retention and high customer scores. Second, it ensures our position as a lead transactional bank for our customers, whether they are consumers, companies, or investors. Third, it preserves a strong deposit balance, as customers value the core nature of transactional deposits. And last, but certainly not least, is efficiency. Concerning digital progress, you can see that on Slide 4, first with the consumer. In consumer, we now have 46 million active users that are digitally engaged with our platform and are logging over 1 billion times a month. Even with this scale, the stage of maturity logins is up double digits from last year. Customer use of Erica continues to be at expectations. This was an early application of natural language processing and artificial intelligence that we built in our company, and it continues to learn more with additional use. Interactions with Erica rose 35% in just the past year and now have crossed over 1.5 billion client interactions in the first five years of its introduction. There's a lot of questions about our artificial intelligence, but one must bring together a series of systems. We have to build a system and it's highly regulated, high customer-focused business, and Erica is one such application where you can see its impact. Likewise, Zelle hasn't slowed down either. The number of people using Zelle grew 19% this past year. Remember, these aren't new functionalities at this point; they've been around for years, but they continue to grow at very strong growth rates, showing customer desire and acceptance of the activities. You can see digital sales continue to grow. We continue to have both great high-tech and high-touch options. As part of that, we've added 310 new financial centers since 2019, and by the end of this year, we have refurbished every one of our existing centers in the company. We plan on opening 50 more centers a year for the next few years, which includes an expansion in nine new markets we announced a few weeks ago. Our entrance into these markets is enhanced by digital and leads to strong early success. Just to give you a point of reference, for all the expansion markets where we opened branches a year or more ago, our average deposit balances per branch are $160 million in each branch. You go to the wealth management section on Slide 5, and you can see that they continue to be the most digitally engaged clients in our company. Our advisors have led the way in driving a personal advice model, supplemented by our digital tools. You can see the client adoption rates of 82% in Merrill and 92% in the private bank, while 78% have embraced digital delivery as a tool for providing more convenience for them and our advisors. Erica and Zelle also continue to expand these client sets. A new program we announced just a few quarters ago has generated 20,000 digital leads to 7,000 advisors; it's called Advisor Match, matching our clients with advisors of their choice. On Slide 6, you can see the digital engagement of the global banking area. Corporate treasury teams and our clients appreciate the ease of doing business with us digitally. CashPro App sign-ins are up nearly 60% from last year, and the value of payments through CashPro App is up 20%. As you can see, every line of business is delivering strong organic growth. Investments made in technology have enabled us to grow industry-leading positions in digital tools, while enabling our clients to do great things, making us more efficient. This results in a very satisfied, stable customer and client base with Bank of America as their primary provider. And by doing so with a digital application, that also produces operating leverage. On Slide 7, you can see our streak of operating leverage continued in the second quarter of 2023. We're now back for eight quarters in a row. The chart on Slide 7 covers the 8.5 years, at 34 quarters, and all but eight of those quarters can be identified; six of which were in the heart of the pandemic, during which we've achieved operating leverage. Operating leverage is simply the task of growing revenue at a better growth rate than expenses. As I said, Alastair's going to discuss with you our good and declining expansion trajectory, which sets us up to continue to provide operating leverage, even with the shift in the economy. In sum, in the quarter we delivered earnings that are 19% higher and a 15% return on tangible common equity driven by continued strong organic growth and operating leverage in a volatile economic environment. Alastair is going to talk to you about a bit more strength we see ahead in our net interest income for the balance of the year, and that provides a better start as we think about 2024. You'll hear our expectations for the quarterly decline in expenses in the following quarters for the rest of '23, even as we keep investing, and you’ll hear about the resilience of credit and strong trajectory in capital; this all positions us well to continue both our streaks of organic growth and operating leverage. With that, let me turn it over to Alastair.
Alastair Borthwick, CFO
Thank you, Brian. On Slide 8, we list the more detailed highlights of the quarter, and then Slide 9 presents a summary income statement, so I'm going to refer to both of those. For the quarter, we generated $7.4 billion in net income, resulting in $0.88 per diluted share. A year-over-year revenue growth of 11% was led by a 14% improvement in net interest income, coupled with a strong 10% increase in sales and trading results excluding DVA. Revenue was strong, and it included a few headwinds, and I thought I'd go through those headwinds first. We had lower service charges from both higher earnings credit rates on deposits for commercial clients, and the policy changes we announced in late 2021 to lower our insufficient funds and overdraft fees for our consumer customers. The good news on the consumer piece is that year-over-year comparisons get a bit easier starting next quarter, as the third quarter of '22 reflects the full first quarter of these changes. Second, we had lower asset management and brokerage fees as a result of lower equity and fixed income market levels, and market uncertainty that impacted transactional volumes compared to a year ago quarter. Third, we have a net DVA loss of $102 million this quarter compared to a gain in DVA of $158 million in the second quarter a year ago. We also recorded roughly $200 million in securities losses as we closed out some available for sale security positions and their related hedges and we put the proceeds in cash. Lastly, as a reminder, our tax-rate benefits from ESG investments, which are somewhat offset by operating losses on the ESG investments that show up in other income. So, this quarter, our tax-rate is a little bit lower and the operating losses are a little bit higher from the volume of these deals. You have to be careful in analyzing the lower tax-rate without considering the operating losses, and that in turn often offsets what would have been higher revenue elsewhere. Our tax-rate for the full year is expected to benefit by 15% due to the ESG investment tax credit deals, and in absence of these credits, our effective tax-rate would still be roughly 25%, and we continue to expect a tax-rate of 10% to 11% for the rest of 2023. Expense for the quarter of $16 billion included roughly $276 million in litigation expense which was pushed higher this quarter by the agreements announced last week with the OCC and the CFPB on consumer matters. Asset quality remains solid and provision expense for the quarter was $1.1 billion consisting of $869 million in net charge-offs and $256 million in reserve built. The provision expense reflects the continued trend in charge-offs towards pre-pandemic levels, and it is still below historical levels. The charge-off rate was 33 basis points, and that's only 1 basis point higher than the first quarter and still remains well below the 39 basis points we last saw in Q4 of 2019, which was a multi-decade low. I'd also use Slide 9 just to highlight returns, and you can see we generated a 15.5% return on tangible common equity and a 94 basis points return on assets. Let's turn to the balance sheet starting with Slide 10, and you can see our balance sheet ended the quarter at $3.1 trillion, declining $72 billion from the first quarter. A $33 billion or 1.7% reduction in deposits closely matched a $41 billion decline in securities balances through paydowns from the hold to maturity and sales of available-for-sale securities. Securities are now down $177 billion from a quarter to '22. Cash levels remained high at $374 billion and loans grew by $5 billion. As Brian noted, our liquidity remains strong with $867 billion of liquidity, up modestly from the first quarter of '23, and still remains nearly $300 billion above our pre-pandemic fourth quarter '19 level. Shareholders' equity increased by $3 billion from the first quarter as earnings were only partially offset by capital distributed to shareholders. AOCI decreased by $2 billion, driven by derivatives valuation and AFS securities values; there was little change. So, there is little change in the AOCI component that impacts regulatory capital. Tangible book value is up 10% per share year-over-year. During the quarter, we also paid out $1.8 billion in common dividends, and we bought back $550 million in shares to offset our employee awards. Last week, we announced the intent to increase our dividend by 9%, beginning in the third quarter. Turning to regulatory capital, our CET1 level improved to $190 billion from March 31st, and the ratio of CET1 improved more than 20 basis points to 11.6%, once again, adding to the buffer over our 10.4% current requirement. While our risk-weighted assets increased modestly in the quarter. Also noteworthy, on July 3rd, we initiated dialog with the Fed to better understand our CCAR exam results, and remain in discussions today with no news to update as of now. In the past 12 months, we've improved our CET1 ratio by more than 110 basis points, and we’ve done that while supporting claims for loan demand and returned $11.3 billion in dividends and share repurchases to shareholders. A supplemental leverage ratio was 6% versus our minimum requirement of 5%, leaving us plenty of capacity for balance sheet growth. Finally, the TLAC ratio remains comfortably above our requirements. So, let's now focus on loans by looking at average balances, you can see those on Slide 11, and there you can see that average loans grew 3% year-over-year. The drivers of loan growth are much the same. Consumer credit card growth is strong, and commercial loans grew 4%. The credit card growth reflects increased marketing, enhanced offers, and higher levels of account openings over time. In commercial, we saw a little bit of a slowdown this quarter, driven by higher paydowns from borrowers and weaker customer demand as opposed to any credit availability from us. We are still open for business for loans. While loan growth has slowed, it's generally remained still ahead of GDP and commercial client conversations remain solid, as our clients seem to be waiting for some of the economic uncertainty to lift before borrowing further. Slide 12 shows the breakout of deposit trends that's on a weekly ending basis across the last two quarters, and it's the same chart that we provided last quarter. In the upper left, you see the trend of total deposits. We ended the second quarter at $1.88 trillion, down 1.7% with several elements of our deposits seeming to find stability. Given the normal tax seasonal impacts on deposit balances in Q2 and the monetary policy actions, we believe this is a good result. I want to use the other three charts on the page to illustrate the different trends across the last quarter and more specifically in each line of business. In consumer, looking at the top right chart, you see the difference in the movement through the quarter between the balances of low to no interest checking accounts and the higher-yielding non-checking accounts. Here you can also see the low levels of our more rate-sensitive balances in consumer investments and CD balances, both are broken out here. In total, we still have more than $1 trillion in high-quality consumer deposits, which remains $274 billion above pre-pandemic levels. In the second quarter, the decline in consumer deposits was driven by higher debt payments, higher spending, and seasonal tax activity, and some non-checking balances that rotated from deposits into brokerage accounts. We did see some competitive pressure this quarter within about roughly $40 billion of CDs, as some financial institutions pushed prices higher. At this point, with deposits far exceeding our loans, we have not yet felt the need to chase deposits with rates. Broadly speaking, average deposit balances of our consumers remain at multiples of their pre-pandemic levels, especially in the lower end of our customer base. Total rates paid on consumer deposits in the quarter rose to 22 basis points, yet remains low relative to Fed funds driven by the high mix of quality transactional accounts. Most of this quarter's 10 basis point rate increase remains concentrated in those CDs and consumer investment deposits, which together represent only 11% of our consumer deposits. Turning to Wealth Management, this business is also impacted by tax payments and normally shows the most relative rate movement because these clients tend to have the most excess cash. The previous quarters trend of clients moving money from lower-yielding sweep accounts into higher-yielding preferred deposits and moving off-balance sheet on to other parts of the platform have stabilized this quarter, and our sweep balances were more modestly down by $72 billion. At the bottom right, note the global banking deposits stability. We ended the second quarter at $493 billion down $3 billion from the first quarter. We've now been in this $490 billion to $500 billion range for the past several quarters; these are generally the transactional deposits of our commercial customers that they use to manage their cash flows. While overall balances have been stable, we've continued to see a shift towards interest-bearing as the Fed raised rates one more time during the quarter before pausing in June. Non-interest-bearing deposits were 40% of their deposits at the end of the quarter. Focusing for a moment on average deposits using Slide 13, I really only have one additional point to make. While you've seen the modest downtick in deposits for the past several quarters, as the Fed has removed some accommodation, we just want to note that deposits remain 33% above the fourth quarter 2019 pre-pandemic period. Looking at the page, every segment relative to pre-pandemic is up at least 15%; consumer is up 40%, consumer checking is up more than 50%, and as noted, global banking has been around $500 billion for the past five quarters, remaining 31% above pre-pandemic. Moving to Slide 14, we will continue the conversation that we began last quarter around management of excess deposits above loans. In the top left, note the balances in the second quarter of each year since the pandemic began. The excess of deposits needed to fund loans increased from $500 billion pre-pandemic to a peak of $1.1 trillion in the fall of 2021. As you can see, it remains high at the end of June at $826 billion. In the top right, note that the amount of cash and securities held has increased over time, in line with the excess deposit trend. You will also note the mix shift over time. This excess of deposits over loans has been held in a balanced manner through the period shown, with roughly 50% fixed longer dated held-to-maturity securities and the rest held in shorter dated available-for-sale securities and cash. Cash and the shorter-day-to-day securities combined were $516 billion at the end of the quarter. Cash of $375 billion is more than twice what we held pre-pandemic and you should expect to see that come down over time. We made these investments, given the mix and transactional nature of our customer deposits, particularly considering the excess deposits built. Note also in the bottom left chart, the combined cash and securities yields continue to expand this quarter and remain meaningfully wider than the overall deposit rate paid. This is a result of two things. The securities book has seen a steady decline since the fall of 2021 when we stopped adding to it. With less loan funding needs, proceeds from security pay-downs have been deployed into higher-yielding cash, and through this action, and the increased cash rates, the combined cash and securities yield has risen further and faster than deposit rates. Deposits at the end of the quarter were paying 124 basis points, while our blend of cash and securities has increased to 319 basis points. Over the past year, the deposit cost has risen by 118 basis points, and the cash and securities yield has improved by 164 basis points. As a reminder, this slide focuses on the banking book because our global markets balance sheet has remained largely market-funded. Finally, one very last - one last very important point that I want to make is on the improved NII of our banking book. The NII excluding global markets, which we disclose each quarter, troughed in the third quarter of 2020 at $9.1 billion, and that compares to $14 billion in the second quarter of 2023, almost $5 billion higher on a quarter basis, or $20 billion annually. That's led to a stronger capital position even as we returned capital to shareholders and supplied capital to our customers in the form of loans and other financing capital. More specifically on the hold-to-maturity book, the balance of that portfolio declined again by $10 billion from the first quarter; down $69 billion since we stopped adding to the book in the third quarter of '21. The market valuation on our hold-to-maturity book, which is in a negative position, worsened by $7 billion since March 31, 2023, driven by a 54 basis point increase in mortgage rates. The OCI impact from the valuation of our hedged AFS book modestly improved this quarter. Let's turn to Slide 15, and we can focus on net interest income. On a GAAP or non-FTE basis, NII in the second quarter was $14.2 billion, and the fully tax equivalent NII number was $14.3 billion. I'm going to focus on that fully tax equivalent. Here, NII increased $1.7 billion from the second quarter of '22 or 14%, while our net interest yield improved by 20 basis points to 2.06%. This improvement has been driven by rates, which include securities premium amortization, partially offset by global markets activity, and $137 billion of lower average deposit balances. Average loan growth during the period of $32 billion also aided the year-over-year NII improvement. Turning to a linked quarter discussion, NII of $14.3 billion is down $289 million or 2% from the first quarter, and that's driven primarily by the continued impact of lower deposit balances and mix shift into interest-bearing balances, partially offset by one additional day of interest in the period. Global markets NII increased during the quarter. The net interest yield fell 14 basis points in the quarter, driven by a larger average balance sheet due to the cash positioning we chose and some higher funding costs. This quarter's compression, we believe, was just a little anomalous, driven by our decision late in the first quarter to position the balance sheet around higher cash levels. Turning to asset sensitivity and focusing on a forward yield curve basis, the plus 100 basis point parallel shift at June 30 was unchanged from March 31, '23, at $3.3 billion of expected NII over the next 12 months in our banking book. That assumes no expected change in balance sheet levels or mix relative to our baseline forecast, and 95% of the sensitivity remains driven by short rates. A 100 basis point down-rate scenario was unchanged at negative $3.6 billion. Let me give you a few thoughts on NII as we look forward. We still believe NII for the full year will be a little above $57 billion, which would be up more than 8% from full year 2022; it could include third quarter at approximately the same level as the second quarter, think $14.2 billion, $14.3 billion. In the fourth quarter, somewhere around $14 billion. That's a slightly better viewpoint than we had last quarter for the third and fourth quarters, with a little more stability closer to the second quarter level, and therefore provides a better start point for 2024. So, let's talk through the caveats around our NII comments. First, it assumes that interest rates in the forward curve materialize, and an expectation of modest loan growth driven by credit cards. On deposits, we are expecting modestly lower balances led by consumer, and we expect continued modest deposit mix shifts from global banking deposits into interest-bearing accounts. The past few months have provided us a little more positive outlook around NII, given the apparent stabilization of some elements of deposits as well as better pricing, and now we'll see how the rest of the year plays out. Okay, let's turn to expense, and we'll use Slide 16 for that discussion. Second quarter expenses were $16 billion, that was down $200 million from the first quarter. As I mentioned, the second quarter included $276 million of litigation expense. In addition, we saw slightly higher revenue-related expense driven by our sales and trading results. Those higher costs were more than offset by the absence of the first quarter's seasonal elevation of payroll taxes and savings from a reduction in overall full-time headcount. Excluding the 2,500 or so summer interns that we welcomed into our offices over the summer months, our full-time headcount was down roughly 4,000 from the first quarter start point, to 213,000. That's some good work after peaking at 218,000 in January. Our summer interns will leave us in the third quarter, and hopefully many will return as full-time associates next summer. At the same time in Q3, we welcomed back about 2,600 new full-time hires as college grads, many of whom interned with us last summer. That's a very diverse class of associates who are excited to join the company. As we look forward to next quarter, we would expect the third quarter expense to more fully benefit from the second quarter headcount reduction, even as we remain in a mode of modest hiring for client-facing positions. Additionally, the proposed notice of a special assessment from the FDIC to recover losses from the failures of Silicon Valley and signature banks could add $1.9 billion in expenses for us, $1.5 billion after tax, and we just remain unsure at this point of timing to record that expense. Let's now move to credit, and we'll turn to Slide 17. Net charge-offs of $869 million increased by $62 million from the first quarter, and the increase was driven by credit card losses as higher late-stage delinquencies flowed through to charge-offs. For context, the credit card net charge-off rate was 2.6% in Q2 and remains well below the 3.03% pre-pandemic rate in the fourth quarter of '19. Provision expense was $1.1 billion in Q2, which included a $256 million further reserve build, driven by loan growth, particularly in credit cards, and it reflects a macroeconomic outlook that on a weighted basis continues to include an unemployment rate that rises north of 5% in 2024. On Slide 18, we highlight the credit quality metrics for both our consumer and commercial portfolios. On consumer, we note that we continue to see asset quality metrics come off the bottom, and they remain below historical averages. Overall commercial net charge-offs were flat from the first quarter. Within commercial, we saw a decrease in C&I losses that were offset by an increase in charge-offs related to commercial real estate office exposures. As a reminder, commercial real estate office credit exposure represents less than 2% of our total loans, and this is an area where we've been quite intentional around our client selection, portfolio concentration, and deal structure over many years, and as a result, we've seen NPLs and realized losses that are quite low for this portfolio. In the second quarter, we experienced $70 million in charge-offs on office exposure to write down a handful of properties where the LTV has deteriorated. Our charge-offs on office exposures were $15 million in the first quarter. We pulled forward some of the office portfolio stats provided last quarter in a slide in our appendix for you. We continue to believe that the portfolio is well positioned and adequately reserved against the current conditions. Moving to the various lines of business and their results, starting on Slide 19 with consumer banking, for the quarter, consumer earned $2.9 billion on good organic revenue growth and delivered its ninth consecutive quarter of strong operating leverage, while we continue to invest in our future. Note that top-line revenue grew by 15% while expenses rose by 10%. These segment results include the bulk of the impact of the costs of the regulatory agreements from last week. While reported earnings were strong in both periods at $2.9 billion, it understates the success of the business, because the prior year included reserve releases while we built reserves this quarter. EPNR grew by 21% year-over-year even with the added cost of the agreements. The revenue growth overcame a decline in service charges that I noted earlier. Much of this success is driven by the pace of organic growth of checking and card accounts, as well as investment accounts and balances, as Brian noted earlier. In addition to the litigation noted, expenses reflect the continued investments in the business for growth, and as you think about this business, remember that much of the company's minimum wage hikes and the mid-year increased salary in wage moves in 2022 impact consumer banking the most, which therefore impacts the year-over-year comparisons. Moving to wealth management on Slide 20, we produced good results earning a little less than $1 billion. These results were down from last year as asset management and brokerage fees felt the negative impact of lower equity, lower fixed income markets, and some market uncertainty, impacting transactional volume. Those fees were complemented by revenue from a sizable banking business, which remains an advantage for us. As Brian noted earlier, both Merrill and the private bank continued to see strong organic growth and produce solid client flows of $83 billion since the second quarter of '22. Our assets under management flows of $14 billion reflect a good mix of new client money as well as existing clients putting money to work. Expenses reflect lower revenue-related incentives and also reflect continued investments in the business as we add financial advisors. On Slide 21, you see the global banking results; this business produced very strong results with earnings of $2.7 billion, driven by 29% growth in revenue to $6.5 billion. Coupled with good expense management, this business produced strong operating leverage. Our global transaction services business has been robust. We've also seen a higher volume of solar and wind investment projects this quarter, and our investment banking business is performing well in a sluggish environment. Year-over-year revenue growth also benefited from the absence of marks taken on leveraged loans in the prior-year period. We saw modest loan growth on average year-over-year, and linked quarter, the utilization rates declined, and more generally, we saw lower levels of demand. The company's overall investment banking fees were $1.2 billion in the second quarter, growing 7% over the prior year and 4% linked quarter, a good performance in a sluggish environment that saw fee pools down 20% year-over-year. Provision expense declined year-over-year as we built more reserve in the prior year. Expenses were held relatively flat year-over-year, even as we drove strategic investments in the business, including relationship management hiring and technology costs, and additionally comparisons benefit from the absence of elevated expense for some regulatory matters in the second quarter of '22. Switching to global markets on Slide 22, we had another strong quarter with earnings growing to $1.2 billion driven by revenue growth of 14%, referring to results excluding DVA as we normally do. The continued themes of inflation, geopolitical tensions and central banks changing monetary policies around the globe, along with this quarter's debt ceiling concerns, continued to impact both the bond and equity markets. It was a quarter where we saw a strong performance in both our macro and micro trading businesses. The investments made in the business over the past two years continued to produce favorable results. Year-over-year revenue growth benefited from strong sales and trading results and the absence of marks on leverage finance positions last year. Focusing on sales and trading excluding DVA revenue improved 10% year-over-year to $4.4 billion. FICC improved 18% while equities were down 2% compared to the second quarter of '22. Year-over-year expenses increased 8%, primarily driven by investments in the business and revenue-related costs, partially offset by the absence of regulatory matters in the second quarter of '22. Finally, on Slide 23, all others show a loss of $182 million. Revenue included a $197 million loss on securities sales and increased volume of solar and wind investment operating losses that create the tax credits for the company. As a result of the increased solar and wind tax deal volume, and their associated operating losses, our effective tax-rate in the quarter was lower at 8%, but excluding ESG and any other discrete tax benefits, our tax-rate would have been 26%. So, with that, let's stop there and we'll open it up for Q&A.
Operator, Operator
We'll take our first question today from Gerard Cassidy with RBC. Your line is open.
Gerard Cassidy, Analyst
Thank you. Good morning, Brian. Good morning, Alastair. Brian, can you give us a view from your standpoint of the - and the new proposal I should say new but the speech by Vice-Chair Barr about the likelihood of capital ratios going up for large banks, like yours, and then second, there was a report today, Bloomberg that the capital requirements for holding residential mortgages may go up meaningfully. Any thoughts on that as well?
Brian Moynihan, CEO
So I think broadly stated, I think as we said by many people that have held the position of the year is that capital on the industry is sufficient. There has been a desire to finish up the Basel 3 rules; we think those rules will come out in a few weeks, and like anything else, we'll deal with them, and we have an 11.6% CET1 ratio. Our requirements currently at 10.4%, and so we have plenty of capital, and it's built up. We have to be careful here from a global competitive standpoint because the U.S. industry is the best industry in the world and actually does a lot of good for all the countries, including the U.S. The rules applied tend to be more favorable to those outside our country. We have to be careful to maintain competitive parity, but at the end of the day, Gerard, you need to finish this and get it behind us, and the industry will adopt and move forward, but they’ve got to think through the downside of some of these rules that could push up outside the industry to non-banks that have the asset classes across the board, including mortgage-lending which you referenced, half of it goes through non-banks. The resilience of those institutions is interesting to watch as we recycle through. We also have to worry about overall competitiveness. A 10% increase in our capital levels would enable us to make about $150 billion of loans at the margin, and you want your banks to support the economy like we do. Overall, I think we have to balance everything as they go to adopt these rules.
Gerard Cassidy, Analyst
Very good. And then as a follow-up, Alastair, you talked about the balance sheet. I think you said a 100 basis point increase wouldn't lead to over $3 billion in net interest revenue growth over the next 12 months. Can you share with us when you think you might change or what would make you change that position to be liability sensitive? Would you rely on the forward curve? What's the outlook for the balance sheet management as you're looking at now?
Alastair Borthwick, CFO
Well, Gerard, I don't think much has changed for us. We’ve talked about the idea of balance being key. If you look at our disclosures around interest-rate risk over the course of the past couple of years, you’ll see it’s more balanced both upside and downside and a narrower corridor over time. We’re trying to sustain NII at a higher level for longer, that's what we're trying to engineer. Going forward, there won't be a lot of change to our philosophy in that regard. We feel like we're in a pretty good position in terms of balance. We'll be tweaking at the margin, but what will largely drive things from here is just normalization of deposits and good old-fashioned loan growth.
Operator, Operator
We'll go next to Glenn Schorr with Evercore. Your line is open.
Glenn Schorr, Analyst
Good morning. So, no one to take issue with your 600 basis points of operating leverage. But I always like doing a little gut check. Expenses are up 5%. I heard all the reasons why it has to do with investment and FDIC charges coming, but I just wanted to make sure: did anything change over the last decade or so? You have been basically flat for life. Are expenses more of a relative game throughout the revenues, or do you think you can keep expenses in and around the same area as we continue to invest?
Brian Moynihan, CEO
Yes. So, Glenn, I think Alastair gave you a trajectory, which if you look at it from the fourth quarter last year to the fourth quarter this year, it gets you relatively flat year-over-year. As your revenues flatten out due to interest-rate movements, you'll see as we decline in the quarters, it'll be strong. So we think about the forward, we think about the ability to control headcount and have expenses continue to come down, but they’re going to stay at a level that’s relatively consistent with where we are now over time, and the goal is then to grow revenue faster than expense. We've been doing it for many decades, and you can see that in our data. But the way we do it differs from five years ago to 10 years ago to last year. The ability to move the branch configuration around when we had 6,000 branches down to 4,000, or 3,900, 3,800, now it is different from 3,800 to where it might end up. You should expect us to continue to engineer by applying massive amounts of technology. Erica saves a lot of transactional activity; Zelle saves a lot of transactional activity. All that continues to go on, and then we offset with that is from the decade you talk about, we went from $2.5 billion of technology initiatives a year to $3.8 billion. A lot more revenue compensates for the investments we have in our wealth management business, and those are things we manage over time. We expect to manage expenses in line with revenue. As we got to '19, we told you we would have to start growing expenses at a modest rate relative to the revenue growth rate, which will outgrow the economy on revenue expenses by a couple of hundred basis points lower; we’re kind of going to be back in that mode frankly. With inflation kicking up, we’ll flatten them back out and then get back in sync as we move to '24 and beyond.
Alastair Borthwick, CFO
Glenn, look, the only thing I would add to what Brian just said: we put up 16.2 in the first quarter; we were 16-ish this quarter. We feel like next quarter, just with all the work we’ve done around headcount and getting the firm in the place that we want now, we feel like we are well-positioned to deliver 15.8 this quarter. If and when we keep going, we think we are going to be somewhere around 15.6 or so in Q4. To Brian's point, we like the trajectory now. We’ve shaped the headcount over time to get to the place we want to be. That would compare, I think the Q4 last year was 15.5, so when you talk about that flattish idea in an inflationary environment, we feel like that’s a pretty good way to end this year and a good way to set up for next year.
Operator, Operator
We’ll take our next question from Mike Mayo with Wells Fargo. Your line is open.
Mike Mayo, Analyst
Hi, good morning. So, I don’t think consensus has you with a positive outcome over the third and fourth quarter, and I just want to make sure I heard you correctly, Brian, in your opening remark, you expect that eighth quarter of positive operating leverage to continue, so you expect nine quarters or ten quarters or as long as you can, and you know, the one reason is you’ll see NII headwinds, you said it should be kind of flattish in the third quarter and then down some in the fourth quarter. You mentioned commercial loan demand is a little bit less and utilization is less. Can you give me specifics on how long these expectations will go? To what degree do your digital efforts on your first three slides—Slides 4, 5, and 6—play a part in sustaining this positive operating leverage through 2024 and 2025? Is that a goal or is that an expectation?
Brian Moynihan, CEO
Our goal is always to maintain it. Mike, you point out that the toughest times are when you have sort of a twist in the interest-rate environment; you can see that at the end of '19. We got right back into it right after the environment stabilized. In thinking through the question you asked me a few years ago, Mike was: when NII is coming in, are you going to let it fall to the bottom line? You will see about 80% plus of it falling to the bottom line, showing how we positioned the franchise from the second quarter of '21 until now as we went through the fast interest-rate raising. We gave you the specific expense guidance by quarter, and we'd expect that should produce operating leverage; it gets tougher then, and it will get easier as we start to see the stabilization of deposits and loans and loan growth shaking through whether we're going to have a recession or not. We feel good about what we've done; that’s why I tried to give that longer time frame for people to have context—it’s very different environments for how you achieve it; sometimes revenue fell and expense fell faster; sometimes revenue grew and expense grew, but slower and all the different ways. We will keep working at it in a key leading indicator that we like is how we’ve been able to manage headcount down as Alastair said earlier. That is in the face of a turnover rate year-over-year which has dropped in half; this is good because we’re not training and hiring as many people, and that then sets us up for the second half of the year because that headcount benefit is not really come through the P&L and will offset some of the other inflation.
Mike Mayo, Analyst
As it relates to NII specifically, you said that the last few months you’re a little bit more confident given stabilization in pricing. We’re not seeing that at every bank; right? Some banks getting worse, some banks getting better. What gives you more confidence on the NII front and the deposit stabilization front?
Brian Moynihan, CEO
I can’t speak to other banks, Mike. But obviously, we know we're in a privileged and advantageous position relative to our client base. If you look at our global banking set of results over the course of the past year and a half in particular, that’s extraordinary resilience. Look, Q2 is tax season; if you look at the wealth management business, for example, deposits were down by $9 billion, but we know they paid tax payments of $14 billion, $15 billion, $16 billion last quarter. There is beginning to be a little more stability; our focus has always been on transactional primary operating, so we may be seeing the benefits of that to some degree, but will continue—we show you on slide, I think it was Page 12 of the earnings deck, that's where it is. We showed that last quarter, and we will show it again next quarter. The Fed's engineering this across the board, and we're just reacting to what we see from our customer base.
Operator, Operator
We'll take our next question from Jim Mitchell with Seaport Global. Your line is open.
Jim Mitchell, Analyst
Hi, good morning. Maybe just a follow-up on deposit behavior. I appreciate the comment that you have very low loan-to-deposit ratio, do not have to chase rates. It feels like deposits can stay low, but how do you think about the mix going forward? We are seeing NIB's come down, CD demand is picking up. How are you thinking about your deposit base regarding the mix?
Brian Moynihan, CEO
Jim, one of the things we’ve been thinking about is across each of the customer bases, which is what Page 12 shows you. We think about what do they have cashless for and to have cash in excess of that. What happens is depending on the customer segment that cash moves to the market, and that excess cash moves to the market. The transactional cash is all with us, that transactional cash far exceeds for us our loan balances. So we have excess transactional cash, a lot of it is in low-interest checking, no-interest checking, even if it’s in money markets as a sort of cushion that you have. Consumers and wealthy consumers maintain to pay their bills and unexpected expenses. So, that’s what you’ve seen in the producers; the cost to deposits is around $1.24, which is far different than we see other people have and that happens. In other questions, how much moves, as Alastair said earlier, we’re after tax time now where we have a big wealth management payout to tap into taxes. We’ve also passed the point where people have made payments; that money has been in their accounts and is still there to a large degree as we look at them, and they’re paying that down slowly.
Jim Mitchell, Analyst
Right. So do you feel like that mix shift is starting to slow and stabilize?
Brian Moynihan, CEO
That data on Page 12 shows you that. That’s why we show you the level of detail in our customer bases across lines of business that won’t be shown in other places. The consumer segment is around $700 billion pre-pandemic; it’s now $1 trillion. Checking those pages in the deposit descriptions show you how much has stayed in checking. More importantly, the average consumer through inflation has more money around, providing great scope for growth.
Operator, Operator
We’ll go next to Chris Kotowski with Oppenheimer. Your line is open.
Christopher Kotowski, Analyst
Yes, good morning and thanks for taking the question. In the press release from last week settlement with BofA, CFPB Director, Chopra alleged that you among other things opened customer accounts without consent. I’m just wondering how is such a thing possible in the post-Wells Fargo era? And can you compare and contrast what happened at your firm with what happened at Wells?
Brian Moynihan, CEO
Frankly, Chris, it’s—when we went through the horizontal review by the OCC and all the practices, everything was cleaned up. These small accounts that are part of this are from that time period. It’s not that the other agencies didn't do anything; the consumer bureau had to review, and we kind of cleaned it up this quarter. So that was that one.
Christopher Kotowski, Analyst
The time period that reflects which time period?
Brian Moynihan, CEO
It reflects up to the current time, but the accounts were from '16 and before '17. Back when—remember the Comptroller Curry did a 3-phase review of all the firms. They didn’t find—you can go look at the data. Hopefully, the next Comptroller will testify in Congress and started in the Obama administration after Wells, then led in the early part of the Trump administration. You can go look at that; that was cleared up, and we made the changes in those processes at that time.
Operator, Operator
We'll go next to Erika Najarian with UBS. Your line is open.
Erika Najarian, Analyst
Hi, good morning. I’m sorry I missed the earlier call. On the net interest income trajectory, Alastair, clearly a big focus for your shareholders. You mentioned when you were responding to Gerard's first question that you narrowed the volatility of net interest income, and I think that investors are going to start asking you about the starting point of $14 billion for NII next year. I guess we're wondering if the Fed stays higher for longer, doesn't move, how does that impact that $14 billion run rate? Does that $14 billion capture a cumulative deposit beta that would reflect what you would expect to experience through the cycle? And then I have a follow up question from there.
Alastair Borthwick, CFO
All of our asset disclosures reflect the betas we believe at the time. That part is always in the disclosures. It’s too early for me to say on 2024. We’re giving guidance for the rest of the year, so you have a pretty good sense of what we’re fairly confident around. Last time I looked at the forward curve, we had one, possibly two hikes this year and then as many as five declines next year. So there’s a lot between here and there, and I think we’ll just assume the next three to six months to figure out exactly how we feel about '24.
Erika Najarian, Analyst
Totally understand. Going back to the down 100 basis point disclosure that would yield a down $3 billion on a full-year basis. How much of that, given that you have exposure to the shape of the curve, not just the short end of the curve because of your securities book, how much of that is short rates versus long rates? What I’m trying to figure out is, if I divide $3 billion by 4, that would get me a run rate of $13.25 billion on a quarterly basis. You mentioned five cuts in next year, if it’s not on the short end, right? If it’s half-half, then it could get to a run rate of $13.75 billion. I know there’s a lot in there, so I would love your thoughts on everything I just said.
Alastair Borthwick, CFO
You lost me a little, but I’ll say this: it’s actually down to $3.6 billion, not $3 billion. So that’s number one. Number two is that you should think about the short term being the vast majority of that. Part of the reason that I think we feel like we’ve narrowed this corridor, and we’ve got a little more stability around it is, A, the securities book. B, just as importantly, there’s been a large rotation into interest-bearing. As rates come down, one would expect we’ll be somewhat insulated from that in a different way than we might have two years ago when we didn’t have as much interest-bearing.
Operator, Operator
We'll take a follow-up from Mike Mayo with Wells Fargo. Your line is open.
Mike Mayo, Analyst
Hi, I just keep staring at Slides 4, 5 and 6 for the digital progress that you're making and trying to connect that to your expenses and operating leverage. Where I get to is: certainly, you’re signaling that trend should be good for revenue versus expense, or at least you’re trying to have that. But I still look at the efficiency ratio of expenses to revenues of 64% or 62%, and then you compare that to the levels from 2018 and 2019 when it was 57% and 58%. Why can’t you get back to levels from '18 to '19 or at least below 60%? How long would it take?
Brian Moynihan, CEO
Mike, the linkage of the digital activity to produce the many quarters of operating leverage over the past 8.5 years is definitely tied in. Betsy asked about the branch count and all the things we've done. The efficiency ratio for us is as a plain element, which is the wealth management business is a big part of our revenue base and has a different operating dynamic because of how it's reported. As you well know, the revenue has the cost of compensation as a percent of revenue is high. We basically make 50 cents on the dollar for every dollar past the revenue taken out from adviser compensation. We're trying to improve that and keep making the adviser more efficient, but that’s a major change, and we improved year-over-year. We’re still cleaning out some pandemic-related costs. We will continue to drive that down. As net interest income has come up, a more important part of the business will help push that efficiency ratio back down. And that is the goal. What you are describing is what we go to work and do every day. The way we do it is by applying technology across the board, removing work in the system and enhancing it to the bottom line; then continuing to make the investments needed. We expect to do that, but the efficiency ratio for us remains best-in-class. And we’re still working at it.
Mike Mayo, Analyst
On Erica, it could be Bank of America AI, maybe you spin out your Erica business, but you highlight a number of hours it takes in manual labor. Do you have a connection of that to what that saves in expenses or what that could save or should be over the next few years?
Brian Moynihan, CEO
Yes. That will continue to allow us to do more with the same amount. From '19 to now, remember, the number of customers who do their core checking list is up 10%. That is a lot of people—3 million more customers doing 20 to 30 transactions a month, and all that’s going through on a relatively flat expense base. We’ve had—during inflation and wages we’ve absorbed all that as part of the broader environment, and that’s why the costs have changed. The reality is we will flatten that back out, and we will continue to drive it back down. The cost of deposits remains a percentage of deposits, and you can see that on the consumer page. We maintain a nice break against the rate they would receive for their deposit balances. We’ve worked at it; the numbers show that we had 100,000 people in the consumer business a decade-plus ago. We now have 16 going, and it comes down a little bit every quarter. Even though we’re putting new branches with an average between 5 to 10 people, this keeps going in the right direction. We have invested back in the technology side for more developers, 20,000 on our payroll plus about 10,000 to 15,000 from third parties that go through to the top line. We keep trying to drive efficiency, and those principles you describe are right.
Operator, Operator
There are no further questions in queue at this time. I'd like to turn the program back over to Brian Moynihan for any additional closing remarks.
Brian Moynihan, CEO
Thank you for joining us all. As you think about the quarter: strong profitability, a strong 15% return on tangible common equity or better. Continued to drive organic growth, and continued to drive our operating leverage. We gave you clarity on the future path of expenses and NII, and above all else in the quarter where we had strong capital markets performance. I think, along with our business's usual great performance, we feel good about the company and its position going forward.
Operator, Operator
This does conclude today's program. Thank you for your participation. You may disconnect at any time.