Bank of America's CEO Presents at the 2013 Goldman Sachs Financial Services Conference (Transcript)

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Bank of America Corporation (NYSE:BAC) Goldman Sachs Financial Services Conference 2013 December 10, 2013 9:20 AM ET


Brian T. Moynihan – President & Chief Executive Officer


Okay, if everybody could take their seats we’re going to start with the next presentation. Okay, so of all the companies you’re going to hear from over the next two days I think it’s fair to say that Bank of America is the one that’s come the furthest over the last two years. They’ve aggressively shed non-core assets. They’ve resolved a number of their legacy issues and they’ve really improved their efficiency ratios pretty dramatically. Bank of America is now up on the floor to banking universe for two years in a row as a result of these efforts. Here to talk about the outlook for 2014 and to talk about how they can continue their momentum, it’s a great pleasure to welcome Brian Moynihan. Brian?

Brian Moynihan

Thanks Richard. Morning everyone. Thank you, Richard and thanks for inviting us again. Today I’m going to take you through where we are in the strategy that we first outlined for you a few years ago. As Richard said, the core strategy originally was to streamline the company, get the balance sheet in good shape, continue to reduce the risk profile and bring down the cost structure, all of which we made good progress and I’ll share that with you. As you think about that, that’s all -- we continue to improve the earnings visibility as we continue to grow the core business and put these legacy issues behind us. Today I’m going to focus on some of the progress we go through baking as we deepen relationships across our franchise, especially in our consumer bank. Last time I did that deep dive on consumer so I’m going to update you today on where we stand a year later.

Let’s first look at our fundamentals. We run our company against three groups of customers, people, companies and institutional investors, but as you’ve seen we are driving towards what you see at the bottom of this page which is eight lines of business against eight distinctive customer groups in the market. As you think about the strength in the balance sheet, you can see some of the statistics here. First we’ve built a strong balance sheet to serve those customers and clients. In the upper left you can see that our capital ratios exceed the various standards that are coming through and are applicable over the next several years. If you look in the long term debt, as you know that Bruce and I have talked to you a lot about, we have a goal to continue to reduce that debt to bring it more in line with the size of the company and we’ve reduced it significantly since its peak a few years ago.

If you look in the lower left, you can see as the loans continue to grow we’re finally starting to see good loan -- core loan growth, not good loan growth yet because the economy is not that strong, but core loan growth for five consecutive quarters. This is overcoming serious runoff in portfolios that we continue to manage down, especially just in the consumer side with $3 billion to $4 billion in quarterly runoff we have in some of the legacy mortgage portfolios.

Deposits continue to grow as we continue to do a great job with our customers. The rate [stage] now are down to 12 basis points. When you think about the risk in a company, the various risks, I think [DMSR] risk is much reduced. We reduced our servicing portfolio. The [bar], the trading risk has been brought down and maintained stable even when times the markets have moved around a bit. And importantly, the credit quality which is something we need to do work on has improved dramatically over the last couple of years and it continues to improve. Charge offs are down to 20005 levels. Allowance coverage remains high, covering nearly three times annualized net charge offs. Past dues also continued to come down, reflecting a healthier economy and strengthened underwriting standards.

We move to the revenue side of the company, you can see the split in revenue. About half of our revenue -- a little less than half comes from net interest income and obviously a little more than half comes from non-interest income. We’re now seeing some growth off the $10.5 billion level in NII that we spoke to you about over several quarters. Loans continue to grow. Deposits are growing. Long term debt comes down and all that combines to give us a little help as the yield curve steepens and we can reinvest at higher rates.

As you can see, the non-interest income has been bouncing around a little bit due to the FVO/DVA and you take that out, you can see more stability except in the fourth quarter last year we had a rep and warranty hit to the settlement that affected revenue. But as you look underneath the non-interest income trends, they tend to trend from biggest to smallest during the course of the year because the first quarter is the strongest trading quarter. We’ve actually seen stabilization in some of these areas, but the core area now is continuing to deal with mortgage refinance runoffs and the decreasing revenue from that production that we dealt with over the last several quarters.

One of the things that’s been driving our earnings and drive earnings outlook is what we’ve been doing on the cost across the franchise. We’re on track to achieve what we told you what we’d achieve a couple of years ago with our new BAC program, with 70% complete towards the expected $2 billion quarterly run rate on that and expect to complete those by early 2015. If you look at the red bar here you can see back a couple of years ago in the third quarter of ’11 we started the program. You can see $14.5 billion in expenses. So we’ve brought that down by well over $1 billion which is the progress we’re making on the core franchise while the other litigation and LAS costs continue to work.

When we set our expense goals, one of the questions that I often get is are you continuing to invest in the business? Throughout this process we’ve continued to invest across the franchise, whether it’s to grow loans with more loan officers, to grow deposits with what we’re doing in the consumer area in terms of investments in technology, more wealth management advisors, the financial advisors or PCAs in U.S Trust to maintain our leadership in commercial banking, global commercial banking and investment banking across the world.

We’ve also invested in many areas of the company, including the technology area. Over the last several years we’ve averaged about $3.5 billion and that’s just spending to help drive our technology and continue to consolidate the platforms across the business. We continue to invest heavily in online -- in mobile banking platforms. We’ve invested in the wealth management business and we’re investing in systems -- cash management systems and trading systems to serve our large corporate and institutional clients. The second area of expenses that we deal with is our legacy asset servicing expenses. These are expenses to service the delinquent mortgage loans that came out of the prices. You’ve seen and you can see on the lower left hand corner here is the dramatic reduction in 60 day delinquencies, which has allowed us to start bringing down the cost.

To think about last year fourth quarter, the operating costs in LAS were about $3.1 billion. That’s the operating cost. The peak employee base which was late summer 2012 was about 58,000. We now have reduced those both. So this past quarter or less than a year later, the costs are down by $1 billion per quarter. We’ve reduced the number of employees too dramatically as you can see in the grey bars in the upper right and the delinquent loans are less than 200,000. As we have stated previously, we expect that the LAS expenses, excluding litigation to end this year below the $2 billion per quarter mark and then next year at $1 billion per quarter or less.

When you get to the litigation side or the rep and warranty side of the mortgage, this is the chart we’ve shown you many times laying out the pieces as we look at them. We have put many of these things behind us, continue to work to resolve the issues that remain. What we’ve laid out here is two big buckets, the rep and warranty bucket and the mortgage rate related litigation and investigation bucket. On reps and warranties, there’s three main exposures, the GSEs, the Monolines and the Private Label ligation.

On the GSEs, we have global agreements with both Fannie Mae and Freddie Mac. We just recently completed the legacy Bank of America Freddie Mac agreement which closes this area out. On the Monolines, we completed settlements with three counterparties. We still have the other counterparties to work with their total six, but we’ve reserved for the other three at the same levels we set over the first three. On the Private Label, rep and warranty. Roughly half of the exposure was settled with the $8.5 billion case as working for the courts as we speak. The hearing was just completed as you know and we’re waiting for a decision from the judge. These are all the countrywide originated private label mortgage backed securities and the reps and warranty exposure relating there too.

The remaining half of the private label rep and warranty exposure has two parts. One is from non-countrywide sponsored originations and the other is where we sold a single loan into someone else’s securitization. We expect to receive claims on the sponsored securitization and we have reserved for them a like basis as with the $8.5 billion settlement. The second part of the exposure is hard to judge and we have little experience with that. So we handle that in our RPL calculations. In total, we still have $14 billion reserved to cover losses associated with the above rep and warrant claims.

Aside from the representation of warranty claims, we have the litigation on the residential mortgage backed securities MBIA securities. We can see the list of settlements we’ve achieved in this area, the most significant one which the Fannie came out late last week was the Luther/Maine State case which covered the countrywide mortgage backed RMBS litigation. We’ve also settled the FH -- certain matters of the FHA, the common National Mortgage Settlement at the end of 2011. And so the big piece of what’s left in the RMBS space is the Fa, Fannie and AIG cases. We also have some RMBS working group investigations that we’ve disclosed in our filings, including the Department of Justice and State AGs. All these matters are proceeding along and we seek to bring resolution to them as quickly as possible on a reasonable cost to the shareholders. So much has been done here and it has cost nearly $40 billion over the last several years. And so we continue to work, but we’ve made a lot of progress.

Now let’s switch to the businesses. I’d like to spend the rest of the time covering the businesses. I’m going to cover the wealth management business and the commercial business and institutional businesses first, then we’ll go deeper into consumer. So if you look at this slide, we have one of the best wealth management businesses in the world clearly. The wealth management business continues to post record results, demonstrating the power of delivering the entire company that Bank of America is today to more than 2 million clients that are served by both U.S Trust and Merrill Lynch, the two best brands in the business. Leading wealth advisor combined with our ability to provide broad banking capabilities separates us from the competition in the space. We’ve had an industry leading 26% year-to-date EBIT margin on $13.3 billion of revenue.

We’re also having great success in integrating these teammates together across the company. [Referral star] global wealth management business are up 70% year-to-date from the other parts of the company. Just from the branches alone, 20,000 new clients have been boarded in wealth management this year. This business is a good example of how providing financial solutions for clients helps the customer realize their goals and improves the profitability of the company at the same time. If you go to our global markets and banking area, we also have mirror gold banking markets business serving the three core client groups, middle market, franchise, large companies and institutional investors like all of you.

We have maintained the top two positions in global investment banking fees in 10 of the last 11 quarters. We also have a powerful global transaction services business, cash management business so called, but that’s an annuity like revenue stream that comes through our corporate banking business. We have the size, the scale and the global market capabilities to serve institutional investors around the world. We’ve had the number one global research firm in the past two years with superior coverage.

If you look at the highlights of this business, the key to this business is the client selection and delivering and driving profitability across the board. We’ve seen the success of both fronts. A return on average allocated capital in this business was 16% for the first nine months of 2013 excluding DVA and the third quarter tax charge. Again the diversity is strong in this business. It generates $25 billion in revenue so far this year across the sales and trading, the markets business, the investment banking and the corporate banking business and the business lending and treasury services business.

The global markets business which is shown in the lower left hand corner is focused to grow our clients’ needs and to drive profitability. As you look at its earnings history across the last several quarters, there’s been variability in the revenues you expect in a market based business. This is a global markets business only. This chart shows how the earnings fluctuate between just under $0.5 billion to just over $1 billion with all the quarters solidly profitable irrespective of the ups and downs in revenue. I’ll also highlight that this year we’ve been pleased with our equities business which has brought about $3.3 billion of revenue for the first nine months and strong performance for several products, cash financing and derivatives included.

This business is all about your client selection and what you do and you can see here some of the recent transactions. So as we switch from the wealth management business which is two of the leading brands of business doing well, the commercial businesses serving commercial clients and the markets business, you can see that we’ve got a great, powerful franchise. The question we used to get asked a couple of years ago is how you’re going to make core banking profitable again, what you’re going to do to make that happen. And if you saw in the quarter, we had a 32% improvement year-over-year in earnings for our consumer and business banking segment. These results include solid revenue improvement, significantly lower cost and good credit quality.

Last year we brought you up to speed on that and today I’m going to bring you up to speed a year later on this strategy. So this first chart here shows our consumer banking franchise position. It’s well positioned with an excellent footprint across the most attractive markets in the United States, including a number one position in top 10 markets and a number one position in top 30 MSAs and the largest overall retail deposit share in the country. We have a leadership position across the consumer businesses and one of the broadest distribution networks in banking, including online and mobile banking. This allows us to serve 49 million customers every day and do it well.

We segment this business into three different businesses, our retail business which serves general consumers; our preferred business which serves mass affluent consumers and our business banking which serves $50 million and under revenue companies. Our consumer strategy around the retail customer has been to optimize the cost as we strive to improve profitably and work to become their primary bank. Our strongest growth opportunity is with our 8 million preferred customers as we work to deepen their relationship, adding lending investments devised for that relationship on top of the core banking services. And then we have 3 million small businesses and the business banking relationships where we actively are lending and growing our lending presence as well as our cash management in other areas.

So when you look at the delivery network, for the base of the 38 million retail customers we have based on the early designations, it’s largely about getting the core bank account and doing it well. We’ve been selling more core bank accounts while at the same time lowering the cost to serve those accounts. One of the ways we’re doing this is by optimizing our banking center network to respond to changing customer behavior. It’s customers that drive this change because of their change the way they engage with us. All of you have a smartphone and by the way most of America does now. And if you have a smartphone in your pocket, you have a bank in your pocket and you can conduct almost everything you can do on that phone.

In the past year banking center transactions have declined 11%, while ATM, online and mobile transactions have grown 5%. We’ve invested more than $750 million over the last few years to our mobile and online platforms. Both lead the industry in terms of numbers of customers and users, but also in recognition of the feature functionality that they enjoy. Our mobile banking platform you can see on the lower left continues to grow. Last year we had 11 million customers. This year it’s 14 million customers are active mobile users. We get about 7,000 new ones a day. We’ve processed about $11.5 billion in revenue transactions a month in mobile transactions a month. This is more than 60% higher than when I was here last year.

Adoption of this channel continues to move rapidly. In the third quarter, 8% of all the checks deposited at Bank of America were deposited through mobile devices. That’s 13 million checks. It’s a major change in activity. This application has only been around a year so far and the activity rate of change is faster than any technology we’ve brought to the industry. All this gives us a chance to reduce the physical banking center presence and build a concentrated network that can serve the customers better. We’ll continue to strengthen our best in class network in the top MSAs while we continue to consolidate in areas where we need to do that.

The result is that we now have the third largest branch network in terms of numbers of branches. We have more deposits per banking center and more deposits in the aggregate in our retail business and other people. Our customers seem to respond to this approach .deposits have grown and satisfaction is up at the same time. But there’s another side of this, which is we still have branches which are critically important to what we do every day. 8 million people come to our branches a week and this presents a great opportunity to engage with those customers, having moved the routine transactions to other means and engage those customers about what they really want us to do for them. There will always be banking centers all will be critically important to what we do. Every type of customer who comes in you can see in the middle bar whether they’re a preferred customer, small business customers or wealth management customers.

The question is, what’s the opportunity and you can see that across the bottom of the chart. The penetration rate of our customers for the various products you can see is still low despite these great capabilities and the sizeable businesses we have. So we’re number two and three in credit card and you can still see we have 45% wallet share as opposed to a higher number. We’re number two in direct to retail mortgage and you can see 13% so think of the opportunity on top of that. So the key to all this is how you convert the customer business into sales opportunities and engagement opportunities. And we measure this in every branch and every place we call customer engagement. So it’s critical to engage the customers and understand their needs and take care of them by having highly qualified specialists to meet those needs in all locations.

So as we optimize the branch network, if you think that we’re pulling down the physical plant size, but increasing the scope and capabilities of every branch as well. That’s going on at the same time. We’ve added specialists like mortgage loan officers. We’ve added what we call FSAs, Financial Services Advisors which are in the branch. We’ve even added in some of the larger branches the U.S Trust and Merrill Lynch teammates depending on the size. For example, you can see the different pictures here, in Boston we took four branches within blocks of each other and put them into one branch. The first floor is what you think as a traditional branch and above that there are areas for wealth management and areas for commercial banking and business banking.

Then we have express formats, like we have here in lower Manhattan. These are piloting interactive teller machines which have live tellers working out of Jacksonville who can engage the clients in off hours. You could also do, by taking more routine transactions to the ATMs or to the mobile phones, it also frees our tellers up to engage on a better way with clients and help them with their needs. This helps improve our customer satisfaction. At the same it increases our sales capacity. We’re going to continue to evolve this experience, following the customer where they’re going at each step of the way.

So what happens as you deepen relationships? This is an example on the preferred business. This chart shows you that as you increase your relationship depths, whether it’s for a primary checking account which we call step one to the next step which is -- having a checking account which is step one to the next step which is having the primary banking account to banking and borrowing to banking investing. You can see in the blue bubbles, you can see the revenue multiplier that goes on. You can see the retention changes dramatically and this is what we shoot for in every branch and every engagement. So as we work people up the stair step as the team calls them, we’re working them from a checking account to core checking account to a credit card and auto loan and ultimately to mortgage loan and then to investment.

This happens literally thousands of times a day and we continue to drive it. So examples of what’s coming out of this. This is our direct lending and auto, our direct auto lending and other indirect auto lending is up about 50%, 60% year-over-year. Our home equity origination has gone from maybe $1 billion a quarter to about $1.8 a quarter last quarter. Our mortgage originations as you know we took out the correspondence business and now have grown back to be a high direct consumer market share. So we continue to drive these relationships at every turn to focus on bringing the best products in the business which we have to every customer at every engagement. So the idea here is we’re not trying to sell them product which is not -- we’re selling them products which are the best in the business and that’s what we’re up to.

As we look forward, you can see we’re starting to make progress on the metrics. Look at our average deposits in a consumer business. That’s the upper left. You can see that they’ve increased while the cost of paying for the deposits has come down. As you know our card balances stabilized around $90 billion in balances, while the risk adjusted margin moved up 200 basis points. So higher credit quality for every customer and also the way we originate the customer accounts is much more efficient as you can see in the upper right hand side because the branch originated customer for the card business is about 30% of the cost of a mail customer. When you see overall in cards, you can see we’ve grown from about 850,000 a couple of years ago in the third quarter to over 1 million in the third quarter of this year. That product continues to hold and we see in the fourth quarter it will continue to be strong. When you look at the upper right, you can see our Merrill Edge business. This is a business that serves the preferred customers’ investors needs and you can see that their client assets are now $90 billion, up 18% the past year and 45% two years ago.

So in conclusion, over the past several years we’ve continue to reposition the company, strengthen the balance sheet, reducing the risk, taking in the complexity. Again it’s a strategy that’s been going on for four years of servicing the customer or serving the customer needs, whether it’s a corporate client, a consumer client or an institutional investor client to drive more and more the great capabilities we’ve spent 230 years putting together through those customers. The results continue to shine through and as we work the cost structure and the legacy issues and ligation, we continue to see the earnings improve.

With that, I’ll be happy to take your questions.



Thanks Brian. So Brian, perhaps I can kick it off. If you think about ’13, there were a number of bright spots, including the continued recovery in the housing market, higher asset prices and the fact that the U.S economy seems to be on a better path. But it was obviously a pretty tough operating year. As you think about ’14, what do you think the key differences will be relative to ’13? And I guess specifically, how do you think Fed tapering is going to impact the operating environment for the industry and for you?

Brian Moynihan

I think more generally on the first question before the Fed tapering piece, the difference for us in ’14 if you can go to one thing which is the legacy assets servicing side has come down because through the servicing sales and the work we’ve gotten numbers of serious group of mortgages are down below 400,000 in the third quarter. You can’t estimate, not only does that mean money because the run rate is $1 billion less year-over-year per quarter, but not doing that helps our brand, helps the spirit of the company in getting that behind us and tax litigations. So as you look at ’14 just have a lot less to work on and while we still have to deal with a few things left over, a lot of that stuff is working behind us. And so we’re employing a new consumer bureau of standards and service thing and you’re getting through all that. So that changed the operating environment year-over-year dramatically.

When you look at Fed tapering, the reality is if you look at our interest rate projection, if we show you 100 basis points parallel shift and things like that, the long rate helps, but the short rates are really the drivers. Not unless you guys are different than the market, everybody thinks that that’s still out there. And that would drive the value of the core deposit platform even higher. And so that’s a ’15 event. And so we get some benefit off of incrementally higher yields in the mortgage and stuff you have to buy because we have excess liquidity and to put it to work or even treasuries. But I don’t think it’s going to change the environment. If the tapering is done because of why we think it’s being done and then why it is being done and why it’s being debated is the economy is growing and that’s always good for us.


So can you also spend a couple of minutes talking about the competitive environment, both from banks but also from non-banks? I think principally the last year something like one of the hot trend dollars in servicing rates have ended up outside the banking industry. A very large number of leverage loans are now held outside of the banking industry. How do you see the competitive dynamic evolving between banks and non-banks and is that a new dynamic as well for operating model?

Brian Moynihan

I don’t think it’s particularly new. I think there was a massive consolidation of one of the Monoline players into the, what we call the banking industry and your company wasn’t considered a bank six years ago. It wasn’t a bank coming into the city. You had a massive consolidate. It will be natural that some of that might go back out in the future. So in the mortgage are a I think you’re seeing a natural reselling of specialized servicers as banks are focused more and more on their core activity which is generating consumer mortgages and then servicing them for the customers. I think that’s just a natural hedge on because 30 years ago we could only bank in a certain part of the country and mortgage was something you could take national if you were a national player. So you want a mortgage business that’s your size. I think that’s natural.

Remember in our case we actually split LAS away from the core mortgage business with a theory that the LAS products and services were things that came out of mostly the legacy countrywide that we were trying to get out of. So I think that’s natural. But when you flip to other sides of the business, the participants are our clients too. So in the institutional business we serve the non-bank providers and stuff. And so that helps us in our growing in that business capital markets activity and things like that. But I don’t think it’s much different. I think that the non-bank lenders have always been out there in the commercial finance. And so I think the real challenge for us in the industry is more the technology challenge question which is a little bit different than you’re talking about there, but which is the impact of the pure technology provided by payments area and things like that and how do you deal with that. And that’s a long term strategic challenge for the industry.


So I guess on charge offs for the industry that have continued to drop to levels that we haven’t really historically seen in a long, long time, as the economy continues to normalize over the next couple of years, do you think the charge offs will normalize in lock step with that or do you think you’ll have this Goldilocks period of loan growth and higher revenues coupled with charge offs continuing to trend down?

Brian Moynihan

I think in our case we’ll continue to see them trend down, although if you sort our charge offs on a quarterly basis, you have 800, 900 ish to a 1 billion-ish from the car business which has been -- changed its underwriting in 2008 and 2009. So it’s a long way into that process. So we get incremental improvement, but that one quarter was 10 million. It’s come down a lot in the charge off rate both. So you’re always going to have a little bit of that because part of the way the car business operates as part of this cost of goods sold is this charge off. And so it’s always going to be incrementally higher. But I think with the underwriting done and things like the mortgage businesses fit in our mortgage business, the charge off on a quarterly basis is still much higher because of some legacy products going through. So you can see improvement, but I think the rate of improvement obviously is going to be slower. But I think you’ll still see improvement. I think reservedly it will stop at some point because we get the reserves their level and I think it will all be in the cash flow charge offs and we still see some upside there. But that’s in part obviously a better economy and in part the underwriting standards that were put in and part -- and the third and the major part is you’ve actually you’ve gotten through a lot of the portfolios here far enough to deal with the incremental impact list.


So I guess on the expense side of the equation, a lot of your peers are talking about some of the regulatory and technology investments that they need to make to just keep up with the current environment. How much of an offset could that be to some of the savings that you’ve realized and where do you think you are in that process? How you think you can speak of regulatory spend?

Brian Moynihan

I think it’s hard to isolate regulatory spending. If you talk about what we spend to support our chief risk officer it might be 10% of our spending. Is that regulatory or not? People can debate it, but the reality is these models … these technologies and systems developments are critical for us to be able to measure the risk more and more accurately and more quickly. And so I think that things like I&M and things like that they’re necessary and also have other attributes. So I’m not sure I’d expect that cost to go up relatively -- it’s already a pretty high cost. I’m not sure I expected a big piece of it either, whether it be an ongoing cost. But if you think about in our markets and banking business we spend about $900 million a year now in technology. I don’t think that comes down, even though we may finish off some systems that have been redeployed to continue to improve those systems plus ongoing for different types of things.

I think in a consumer side we’re on a massive redo of all the systems. We’ve consolidated deposit systems. We’re redoing the card system, the front end mortgage system, the back end mortgage system. We get through all that you’d expect to have more money, but I guarantee you my teammates are going to ask to spend on more future functionality. They never ask for less. So we expect that number to be in excess of $3 billion. But that’s all in the -- we give the numbers, we don’t give you like net -- we don’t subtract that we’re investing. Incorporating the estimates we’re giving you net of all includes us spending all the money we’re spending to get this stuff. So we don’t back that up we’ve got the savings that we had this benefit. It’s all net of that.


And then I ask you this every year so I don’t want to break the tradition. So what is your thought process going into the seek off, in 2014? I guess specifically, this has been a hybrid year, shifting from Basel I to Basel II. How again does that impact your thinking in terms of what you think is a reasonable ask capital?

Brian Moynihan

Actually I was thinking about this morning Richard because I knew you’d ask and I decided maybe we should do this conference at the end of March to answer the question. But our thinking is consistent with the past. We’ve got to do a great job in the process because it builds credibility. In the long run we’ve got to be able to turn a lot of capital and so we continue to work on it. It’s premature to say what we’re going to ask for and stuff you find that out. But I think if you look at our history, we’ve been able to build, last year we got 5 billion in common, we turned in 5.5 billion in preferred and we’ll continue to work. But I don’t want people to over read particular quarters ask or years ask because this is a process to where we’ve got to make sure we meet all the rules which we do. We’ve got to make sure our liquidity is all met and all that stuff. And then at some point, all the capital comes out of the system across the whole industries, not only myself. And that is -- if that’s this year, next year or the next year is not -- I know people tend to be interested in exactly when, but the reality is it’s all the capital waiting to have that happen anyway.


Right. And dividends versus buybacks, is it realistic to expect you could increase both this year or you think it’s one or the other?

Brian Moynihan

We’re very mindful of all the -- I’ve got a lot of retirees that send me notes about the dividend, let’s just say it like that.


So we’ve got a few minutes for more questions from the audience. Go ahead.

Unidentified Analyst

Can you just talk about your expectations for net interest margin the next year and in particular how your thinking about the outlook has changed over the last few months.

Brian Moynihan

We’ve been pretty consistent talking about -- think of that $10.5 billion per quarter level is building off of that slowly as we get little more loans for stability now, a little bit of growth, the cost of deposits continue to wind down the long term debt. So that $10.5 billion if you will at that chart on that one page you can see has been pretty solid for market adjustments which are fairly 91 stepping in that fundamental. So I think that’s a good place to start. I think we’re incrementally working off of that. And I think as rates rise, that will help the long side it helps a little bit, short side it helps a lot. But I don’t think that that’s a ’14 issue on the short side clearly and we’ll see. But I think $10.5 billion is a good number to start with. I’ve said before, we were more in a maintenance mode and now I say we’re able to have you think of that as a place to grow off is what we said.

Unidentified Analyst

Can you just talk a little bit more about -- can I just pull options on just some of the drivers, what you’re seeing in terms of asset strength, for example corporate lending is fairly more competitive than we might have expected. Another driver is short rates are unlikely to rise in 2014, the short end of the yield curve which is actually not really moves very much might steepen. So presumably that would be positive for you?

Brian Moynihan

Yeah. What we’ve disclosed is 100 basis points increases. The parallel shift is over $3 billion a year. It’s $750 million a quarter and think of, add on 60% of that or so is driven off the short rate move. It values however it gets there is you -- if LIBOR moves you start to get the assets re-priced that are LIBOR based which is substantially part of the floating rate assets in the company are LIBOR based. But the drivers are the cost to pay for our funds which is our deposit cost which we’ve been driving down and our debt cost. We have about 30% of our balance sheet has no cost of carry between the equity and the non-interest deposits. And then on the asset side it’s very competitive out there for some of the commercial lending, but then you’ve got to look at the fee side of the business that comes and makes the clients profitable.

So it’s our loan yields which are stabilizing because things like the car business which had a much better loan yield term have been stable. The home equity business which has a low loan yield because a lot of floating rate is still coming down because of the runoff portfolios and the rest of the stuff. Commercial banking business is starting to grow, has been growing a little bit and that’s solid. So we get a little loan growth, continued cost of funds coming down relatively, even though the rate environment may rise due to pay higher debt and driving deposit cost down. That’s the dynamic. At the end of the day I think we try to be very clear about the $10.5 billion and we’ll account for that.

Unidentified Analyst

I don’t have the numbers in front of me, but I’m guessing maybe your branch account is down more than some of the other large banks over the last two years. And I recognize with the millennial increasingly more technology adapt, you’ve got 8% of your checks being imaged. That seems to make sense to me, but at the same time you’ve still got small businesses that need to deposit cash every night and people like to get a branch for mortgage et cetera. So how do you balance that going forward over the next three or five years? Do you think the branch count will go down another 10% to 15% or should we expect it to level off? Can you talk about that?

Brian Moynihan

So I think -- see the two parts that we -- two or three parts that we’re working on. One was we divested some lower growths, smaller markets which is 700 of that reduction. So we have 6100 at the highest point. We’re down to 5400 now. In that timeframe from 6100 to 5400, the deposits in the retail business were up 40%, the customers up 10%, the satisfaction is up and the branches are down 700, primary checking accounts were up. And so it’s an evolution, not an absolute. So we told people when we started new BAC 750 branches will take us down close to 5000. But that keeps us busy for the next couple of years. So what goes on after that will really be driven by the customer behavior. And so one of the -- we had step changes for lack of a better term of getting out of some of the smaller stuff. The other -- looking at a market like Manhattan and how do you optimize around it. And the piece that people miss is the capacity of the receiving branches is often bigger than two branches. And so a lot of the adage about people wouldn’t go so far, if they’re going to actually engage in a serious conversation about their finances, that’s different than if they need to deposit a check.

That’s where the ATM network and all the other things are back filled and also the mobile and online. And so we’re just monitoring the customer behavior and I think it’s working. We don’t have a goal. We don’t have a number. What we have in the 30 or the 100 markets we serve we want to be big enough in those markets. So we want to have the right density and we want to serve them. And then the top 30 or 40 we really want to own those markets because that’s the lion’s share of the population and that’s what we’ve been working to redesign the thing to. Meanwhile as you saw, 8 million customers come in each week and we’ve got to take great care of them and that takes great tellers and great engaged tellers that understand it, with personal bankers and mortgage loan officers and all the other pieces of the branch. That’s the migration pattern you’re on. So it’s less routine and more deep substance around the customer’s relationship going on at the same time. That’s what makes this hard to predict because that will be 7000 places of completely different looks. There are some much more express for routine or it could be 3000 of the different look to five. We don’t know yet over the next 10 years, but we’ve got to figure it out.

Unidentified Analyst

What’s your outlook for capital markets for 2014 and whether there’s a cross between maybe clients risking and just how low the risk levels are in the system versus the impact to some of the new regulatory rules?

Brian Moynihan

So this quarter the launching off point seems to be solid and a little better than last year’s quarter and down from the third as it always does. Everything is going the way we thought. The most encouraging thing as we go into ’14 has been the equities business. [Inaudible] and team and Tom Montag have been able to get that business back on a course. It was a great cash equities business. We didn’t’ have as much on the financing derivatives and they’ve build that back and done a good job over the last couple of years. So that’s been encouraging. Fixed income business ebb and flow as you said high taking risk. But as we look forward, the reason we separate global markets in our disclosure away from global corporate investment banking is the global corporate investment banking is very much an annuity stream. Corporate loans, cash management, investment banking and even investment banking which you can see across the quarters are relatively stable.

The markets business moves up and down based on taking risks and opportunities. What we try to show in that page is we’ve got this thing at a breakeven point that when it represents 2.5 to 3 -- the high $2 billion level, almost at $3 billion. We made $0.5 billion and they go to $4.5 billion we make $1.5 billion. That’s a good business while the risk is under control and Tom and his team have done a great job of getting the risk down and picking relevant picks. So as we look at ’14, we don’t see it a lot differently than ’13 in terms of general outlook it will be fine. Then you say what about the rules, how will it affect you? A lot of the rules -- I don’t know Volcker yet unless you guys are reading it right now because it was supposed to be released at 9:30. You can tell me. I don’t think it would be appropriate for me to be going on my BlackBerry reading while I’m speaking. But you can be on your BlackBerry and tell me what it says. But if you think about from a prop change definition that went out two years ago we stopped doing that. It cost us a $0.25 million in revenue, a quarter and a half million, half billion on a quarter.

Private equity, I think some people have in the markets business, we’ve been shutting down for four years now or getting it down to a point where it’s not that a big part of our company and to get capital back out. And so we’ll have to work through it. I don’t know what the rules say, but in the end I think if we serve our customers there’s a business there. You need us. We need you. And that brings together the phase between our issuing customers and our investing customers is critical. And so I don’t think it changes anything dramatically. A lot of the change is already taken out of the system because of prop and other things a couple of years ago we took out. So it’s a pretty pure flow business now as we look at what we call our production credits which is the customer driven activity. It dominates it. When you look at the issuance through the business it dominates it. And so we’ll have to see because we don’t know the rule yet. But on the other hand I don’t see it being that hard to work to position the company because we’ve been doing it for three years.


I think we have time for one more question if there is one. Sure, go ahead.

Unidentified Analyst

You’ve mentioned a couple of times that loan growth is still low. What do you think will change that and what’s your outlook for 2014?

Brian Moynihan

It’s going to come down to the economy. So let me give you why loan growth is tough right now. If you look at the business banking segment which is $50 million and under revenue companies in the middle market -- global commercial banking segment which is up to $2 billion revenue companies and down to $50 million, the draw rates on lines of credits are about 1,000 basis points below where they typically average in a reasonable economy. So the first step of loan growth is if those companies see opportunity, they’re going to draw more lines of credit and if they draw back a part of that, that’s going from say high 30s%s to mid-40s% in the first case in the bigger segment case and from the low 40s to high 40s. That’s loan growth. No more clients, no more work, you just get more drawing.

So one of the issues in loan growth is just the economic activities causing the people not to borrow as much because they don’t have much opportunity and then in their sunset. So we’ll see what happens. So I think next year will look a lot like this year, but incrementally better for two core reasons. One is where you’re deeper in this housing and other things are much more solid. Consumer spending is much more solid. And so you’re further into less runoff. And then secondly just I think that the average business person we talk to is getting incrementally more frisky and they want -- if they can see the window for it they’ll start to make activities and they’ll draw on their lines I think.


I think we’re out of time. Thanks Brian. Thank you very much.

Brian Moynihan

Thank you.

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