Bank of America - Q4 2022

Transcript

Operator (participant)

Good day, everyone. Welcome to today's Bank of America Earnings Announcement. At this time, all participants are in a listen-only mode. Please note this call will be recorded, and I am standing by if you should need any assistance. It is now my pleasure to turn today's program over to Lee McEntire. Please go ahead.

Lee McEntire (SVP of Investor Relations)

Thank you. Good morning. Welcome. Thank you for joining the call to review the Q4 results. I know it's a busy day with lots of banks reporting, and we appreciate your interest. I trust everybody's had a chance to review our earnings release documents. They're available, including the earnings presentation that we'll be referring to during the call on the investor relations section of the bankofamerica.com website. I'm gonna first turn the call over to our CEO, Brian Moynihan, for some opening comments, and then ask Alastair Borthwick, our CFO, to cover some other elements of the quarter.

Before I turn the call over to Brian, let me remind you that we may make forward-looking statements and refer to non-GAAP financial measures during the call. Forward-looking statements are based on management's current expectations and assumptions that are subject to risks and uncertainties. Factors that may cause actual results to materially differ from expectations are detailed in our earnings materials and SEC filings available on our website. Information about our non-GAAP financial measures, including reconciliations through U.S. GAAP, can also be found in our earnings materials that are available on the website. With that, take it away, Brian.

Brian Moynihan (CEO)

Thank you, Lee. Thank all of you for joining us this morning. I am starting on slide 2 of the earnings presentation. During the Q4 of 2022, our team once again delivered responsible growth for our shareholders. We reported $7.1 billion in net income after tax or $0.85 per diluted share. We grew revenue 11% year-over-year and delivered our 6th straight quarter of operating leverage. Again, we delivered a strong 16% return on tangible common equity. If you move to slide 3, we list the highlights of the quarter, which have been pretty consistent throughout the year. We drove good organic customer activity and saw significant increases in Net Interest Income, which all helped drive operating leverage. Revenue increased year-over-year 11%.

It was led by a 29% improvement in net interest income, coupled with a strong 27% growth in sales and trading results by Jim DeMare and the team. This growth will exceed the impacts of lower investment banking fees and the impact of bond and equity market valuations on asset management fees in our wealth management business. The positive contributions of NII in sales and trading were also enough to overcome a decline in service charges, driven by the fully implemented changes in NSF and overdraft fees in our consumer business. Importantly, we improved our Common Equity Tier 1 ratio by 25 basis points in Q4 to 11.2%, and we achieved that without changing our business strategies.

We're well above our both our current 10.4% minimum CET1 requirement and above the requirement that we'll have beginning next year in January of 10.9%. We added to our buffer. We're both growing loans and reducing outstanding shares in the quarter. On a year-over-year comparative basis, both net income and EPS are up modestly, with strong operating leverage more than offsetting higher provision expense. The higher provision expense is driven primarily by reserve builds this quarter, result of loan growth in our portfolios, also our conservative weighting in our reserve setting methodology, which I'll touch on later. Last year, we had large reserve releases. Net charge-offs increased this quarter, but asset quality remains strong. Charge-offs are well above both the beginning of the pandemic as well as longer-term historical levels. Again, I'll touch on this in a few pages.

All that being said, the simple way to think about it is pre-tax pre-provision income, which neutralizes reserve actions grew 23% year-over-year. Let's turn to slide 4. Slide 4 shows the year-over-year annualized results, Q4 results were a nice finish to a successful year in which we produced $27.5 billion in net income on 7% revenue growth and a 4% operating leverage. While the year was strong, full year earnings declined as a result of loan loss reserve actions. For the full year of 2022, again, we built about $370 million reserves. By contrast, last year in 2021, we released $6.8 billion in reserves. Isolating those changes again, you'll see that PPNR grew a strong 14% over 2021.

As I said earlier, the themes were characterized by good organic customer activity, strong NII, and all this helped by years of responsible growth. Slide 5 highlights some of the attributes of organic growth for the quarter and the year. This, plus the slides that we include each earnings materials in our appendix will show digital trends in organic growth highlights across all the businesses. Our investments over the past several years and our people, tools, and resources for our customers and our teammates, as well as renovating our facilities, have allowed us to continue to enhance the customer experience to record high levels and fuel organic growth. In the Q4 of 2022, we added 195,000 net new checking accounts, bringing the total for the year to more than 1 million.

This is twice the rate of addition that we had in 2019 in periods before the pandemic. This net growth has led to 10% increase in our customer checking accounts since the pandemic, while keeping that 92% of our accounts are primary checking accounts of the household. The average opening balance, not the average balance, but the average opening balance of these new accounts is over $5,000. We also produced more than 1 million new credit cards, the sixth consecutive quarter of doing that, bringing us back to levels that we generate pre-pandemic. Credit quality, you can see on appendix slides 28 for consumer, remains very high in new originations. Verified digital users grew to 56 million, with 73% of our consumer households fully digitally active.

We have more than 1 billion logins to our digital platforms each month. That's been going on for some time now. Digital sales are also growing. They now represent half of our sales in the consumer business. Erica, our virtual digital assistant, is now handling 145 million interactions this past quarter. Has passed 1 billion interactions since his introduction just a few years ago. This saves a lot of work for our team. When you move to the GWIM business, the wealth management business, our advisors grew by 800 in the second half of the year. Our team added 28,000 net new households across Merrill and the private bank in 2022. We experienced solid net flows despite the turbulence in markets.

By the way, during 2022, our average Merrill household opened with the balances of $1.6 million. We get very high quality account openings. On flows, when combined across all our investment platforms in our consumer wealth management business, we saw $125 billion of net client flows this year. Additionally, we continue to see increased activity around both investments in our GWIM business and our banking products. Diversified banking element adds a strong differentiator for us as a company. It also supports the healthy pre-tax margin. This helped the GWIM business deliver strong operating leverage for the year, and they grew net revenue and net income to records. In our global banking business, we saw solid loan production and growing use of our digital platforms throughout the year and added new clients to our portfolio.

As you well know, the overall investment banking fee pool was down. However, we continued to deepen and expand client relationships with our build-out of commercial bankers. Our Global Treasury Services business also grew revenue 38% year-over-year as a result of both rates as well as fees for service on cash management. In global markets, we had our highest Q4 sales and trading performance on record, growing 27% from last year, ex DVA. This was led by strong performance in our macro FICC businesses, where we made continuous investments over the past 18 months. Equities had a recordQ4 performance as well. Let's move to slide 6 and talk about operating leverage.

As I've said to you for many years, one of the primary goals of this company, which is an important part of our shareholder return model, has been to drive operating leverage. Those efforts, including investments made for the future coupled with revenue growth, produced 18 straight quarters of operating leverage, as you can see, leading up to the pandemic. Beginning last year in the Q3 of 2021, I told you that we've now started achieving operating leverage and got back on streak. We're 6 quarters of operating leverage despite all the things are going on out there, and the team continues to drive towards that for 2023. I thought I'd spend a few minutes on a discussion of topics that's been important to, as we've talked about investors over the last couple of months, deposits and credit.

Let's go to slide 7. First on deposits. There are several factors impacting deposits. As our industry works through, and the economy works through an unprecedented period, a surge in deposits from the pandemic-related stimulus, the impact of unprecedented monetary easing, the impact of high inflation, and then the reversal of that with unprecedented pace and size of rate hikes and monetary tightening. On a year-on-year basis, average deposits of $1.93 trillion are down 5%. This reflects the market trends, and in fact, it reflects high tax payments to the governments in Q2 2022. In addition, as we move forward through 2022, customers with excess cash, investment-oriented cash, sought yield as rates increased for money market funds, direct treasuries, and other products. It's probably more relevant to discuss the more near-term trends.

Comparing Q3 of 2022 to Q4 of 2022, average deposits were down 1.9%. Non-interest-bearing deposits are down 8%. Low interest-bearing deposits are up 2%. The mix shift is especially pronounced in Treasury Services in the Global Banking business. Corporate treasurers manage $500 billion of deposits they have with us. The impact of their activities has a change in the mix. On a personal side, you can see the checking accounts balance is floating down a little bit from core expenses and spending, while more affluent customers put money into the higher yielding deposits in the market. We do manage all these products differentially, and the discussion is the deposits by business segment you can see on slide 8, and we'll talk through that. This breaks down our deposits in a more near-term trend.

In the upper left, you can see the full year across for the whole company going across the page in the upper left-hand chart. We also put in the rate hikes that you can see. On the chart, you can see the heavy tax payment outflows in the Q2. We saw the acceleration of rate hikes and deposits that moved to products seeking yield in certain customer segments. In large part, what you've seen over the course of theQ4 has been stabilization and more normal client activity. Simply put, we endedQ4 of 2022 with $1.93 trillion in deposits, roughly the overall level as we ended inQ3, ending deposit balances. Let's look at those differentiated by business.

In consumer, looking at the upper right chart, we show the difference between the movement through the quarter between the balance of low to no interest checking accounts to somewhat higher yielding non-checking accounts, money market and savings accounts, and a limited portion of CDs. Across the quarter, we saw a $24 billion decline in total, down 2%. We have seen small declines of customers' continued higher levels of spending, pay down debt, and also move money to their brokerage accounts, even in this business. Higher wages have offset this. While we saw a decline inQ4 deposits in consumer, corresponding, we also saw brokerage levels of consumer investments increase $11 billion, capturing a good portion of those deposits. In general, think of these consumer deposits as being very sticky of $1 trillion.

That stickiness, along with net checking account growth, reflect the recognition and the value proposition of a relationship transactional account with our company. It also reflects industry-leading digital capabilities we offer and the convenience of a nationwide franchise. It also reflects that the customers in our mass market segments have fewer excess cash investment-style cash balances. 56% of the $1 trillion in consumer deposits remain in low and no interest checking accounts. Because of all that, overall rate paid in this segment remains low at 6 basis points. In wealth management, which you can see at the bottom left of the chart, more than $300 billion of deposits became more stable across the Q4.

Here, you also witnessed a shift to higher-yielding preferred deposits, as you can see on the labels, from lower-yielding transactional deposits, as these customers have more excess cash and move them to seek higher yields. Early in the quarter, we saw modest declines in balances. In November, as rate hikes began to slow and the probability of future rate hikes became less, people had moved their money, and we saw an uptick in balances as we moved through the quarter. This reflects the seasonal inflows that happened in the Q4 for wealth management clients. At the bottom right chart, you can see the most dynamic part of this equation. Our global banking deposit movement is moves across $500 billion in customer deposits. The shift here is what drives the mixed total for the company.

It's pretty typical with the exception that it happened very quickly in Q4, driven by the pace of rate hikes. In a rising rate environment where a company's operational funds are more expensive, we anticipate these changes, particularly in high liquidity environments, as clients use both cash for in-inventory yield, pay down debt, or manage their cash for investment yield. We have seen the mix of global banking interest-bearing deposits move from 35% last quarter to 45% in Q4. Obviously, we're paying higher rates on those deposits to retain them. Customer pricing here is on a customer-customer basis based on the depth of relationship, the product usage, and many other factors.

Overall deposits rates paid as percent of Fed funds increases are still very favorable to last cycle, even as rates are rising much faster than last cycle. I would note, though, to the last cycle that the Fed increases have been rapid and would expect to pay higher rates as we continue to move through the end of the interest rate cycle. Just remember, while we're paying more for deposits, we also get that on our asset side. That is simply why the NII is up. Net interest income is up 29% from Q4, 2022 versus Q4, 2021. Let's move to the second topic I want to touch on specifically, which is credit.

This begins on slide 9. First, it is an ineluctable truth that our asset quality of our customers remains very healthy. On the other hand, it's impossible to again say that the net charge-offs are moving to pre-pandemic levels. In the Q4, we saw net charge-offs of $689 million increase $169 million from Q3. The increase was driven by both higher commercial and credit card losses. As these charts show, they're still very low in the overall context. In commercial, we had a few of older company-specific loans were not related or not predictive of any broader trends in the portfolio.

These were already reserved for in prior periods, and based on our methodologies, went through charge-off in Q4. Credit card charge-offs increased in Q4 as a result of the flow-through of modest increase in last quarter's late-stage delinquencies. This should continue as we transition off the historic lows in delinquencies to still very low pre-pandemic levels. Provision expense was $1.1 billion in Q4.

In addition to higher charge-offs, provision included roughly $400 million reserve build. This was higher than Q3, reflecting good credit card and other loan growth combined with the reserve setting scenario. Let's just stop on the reserve setting scenario. Our scenario, our baseline scenario contemplates a mild recession. That's the base case, the economic assumptions in the Blue Chip and other methods we use. We also add to that a downside scenario, and what this result results in is 95% of our reserve methodologies weighted towards a recessionary environment in 2023. That includes higher expectations of inflation leading to depressed GDP and higher unemployment expectations. This scenario is more conservative than last quarter's scenario.

To be clear, just to give you a sense of how that scenario plays out, it contemplates a rapid rise in unemployment to peak at 5.5% early this year in 2023 and remain at 5% or above all the way through the end of 2024. Obviously, much more conservative than the economic estimates that are out there. We included again the updated slides in the appendix, pages 36 and 37, to highlight differences in our credit portfolios between pre-financial, pre-pandemic, and current status. We also again gave you the new origination statistics for consumer credit on page 28. The work the team has done on responsible growth continues to show strong results. From an outsider's view, you don't have to look any further than the Fed's stress test results.

We've had the lowest net charge-offs for peer banks in 10 of the last 11 stress tests. On slides 10 to 12, we included some longer-term perspective. We showed long-term trends for commercial net charge-offs, total consumer charge-off rates, and more specifically, credit card charge-off rates. This compares those ratios to pre-financial crisis during the recovery after the financial crisis, pre-pandemic, and then through the pandemic. That gives you a long-term perspective which I think keeps in context the idea that we're moving off the bottom in credit costs towards a level which is normalizing to pre-pandemic, but that level is very low in the grand context of banking. Before I move to Alastair, I want just to update a few comments on our consumer behavior.

Consumer deposit balances continue to show strong liquidity with the lower cohorts of our consumers continue to hold several multiples of balance that they have as the pandemic began. They still have plenty of cushion left. While their spending remains healthy, we've continued to see the pace of that year-over-year grow slow. In the aggregate in 2022, our consumers spent $4.2 trillion, which outpaced 2021 by 10%. You can see that on slide 35. Two things to note on that consumer spending pace. There continues to be a slowdown. Year-over-year growth percentage earlier in 2022 were 14% year-over-year. They've now moved to 5% year-over-year in the Q4. What does this mean?

Well, that level of growth in year-over-year spending is consistent with a low inflation, 2% growth economy we saw pre-pandemic. They're also moving from goods to service and experience and spend more money on travel, vacations, and eating out, and things like that. That is good for unemployment, but continues to maintain service-side inflation pressure. With that, let me pass the mic over to Alastair to go through the rest of the quarter. Alastair?

Alastair Borthwick (CFO)

Okay, thanks, Brian. Let me start with the balance sheet, and I'll use slide 13 for this. During the quarter, our balance sheet declined $23 billion-$3.05 trillion, driven by modestly lower Global Markets balances. Our average liquidity portfolio declined in the quarter, reflecting the decrease in deposits and securities levels. At $868 billion, it still remains $300 billion above our pre-pandemic levels. Shareholders equity increased $3.7 billion from the 3rd quarter, as earnings were only partially offset by capital we distributed to shareholders, and roughly $700 million in redemption of some preferred securities. We paid out $1,000,000,008 in common dividends, and we bought back $1 billion of shares, which was $600 million above those issued for employees in the quarter.

AOCI was little changed in the quarter as a small benefit from lower mortgage rates was more than offset by change in our annual pension revaluation. With regard to regulatory capital, our supplementary leverage ratio increased to 5.9% versus our minimum requirement of 5%. That obviously leaves capacity for balance sheet growth, our TLAC ratio remains comfortably above our requirements. Let's turn to slide 14 and talk about CET1, where as you can see, our capital remains strong as our CET1 level improved to $180 billion, and our CET1 ratio improved 25 basis points to 11.2%. That means in the past two quarters, we've improved our CET1 ratio by 74 basis points as we've added to our management buffer on top of both our current and 2024 requirements.

We can walk through the drivers of the CET1 ratio this quarter, and you can see earnings net of preferred dividends generated 43 basis points. Common dividends used 11 basis points, and gross share repurchases uses 6 basis points. While the balance sheet was down, loan growth drove a modest increase in RWA using 3 basis points of CET1. We were able to support our loan growth and return capital and add to our capital buffer in the same quarter. Let's spend a minute on the loan growth by focusing on average loans on slide 15. Here you can see average loans grew 10% year-over-year, driven by credit card and commercial loan improvement. On a more near-term linked-quarter basis, loans grew at a slower 2% annualized pace, just driven by credit card.

The credit card growth reflects increased marketing, enhanced offers, and reopening of our financial centers, delivering higher levels of account openings. Mortgage balances were up modestly year-over-year, and linked quarter were driven by slower prepayments. Commercial growth reflects a good balance of global markets lending as well as commercial real estate, and to a lesser degree, custom lending in our private bank and Merrill businesses. Turning to slide 16 and Net Interest Income. On a GAAP, non-FTE basis, NII in Q4 was $14.7 billion, and the FTE NII number was $14.8 billion. Focusing on FTE, Net Interest Income increased $3.3 billion from Q4 of 2021 or 29%, driven by a few notable components. First, nearly $3.6 billion of the year-over-year improvement in NII was driven by interest rates.

Year-over-year, the average Fed funds rates has increased 359 basis points, driving up the interest earned on our variable rate assets. Relative to that Fed funds move, the rate paid on our total deposits increased 59 basis points to 62. Focusing just on interest-bearing deposit rates paid, the increase is 91. Even while Fed funds rates have increased 140 basis points more than the last cycle, at this point, our cumulative pass-through percentage rates still remain lower in this cycle. That includes an increase in the pass-through rates in the past 90 days due to the unprecedented period of rate hikes.

Included in the rate benefit was a $1 billion improvement in the quarterly securities premium amortization. Long-term interest rates on mortgages have increased 345 basis points from the Q4 of 2021, which has driven down refinancing of mortgage assets, and therefore slowed the recognition of premium amortization expense recognized in our securities portfolio. The second contributor is loan growth, net of securities paydowns, and that's added nearly $400 million to the year-over-year improvement. Lastly, partially offsetting the banking book NII growth just described was higher funding costs for our Global Markets inventory. Now that is passed on to clients through our non-interest market-making line. It's revenue neutral to both sales and trading and to total revenue. As you can see in our material, Global Markets NII is down $660 million year-over-year. Okay, turning to a linked quarter discussion.

NII is up $933 million from the Q3, driven largely by interest rates. That $933 million increase included a $372 million decline in our Global Markets NII. The net interest yield was 2.22%. That improved 55 basis points from the Q4 of 2021. Nearly 30% of that improvement occurred in the most recent quarter, with the primary driver being the benefit from higher interest rates, which includes a 13 basis point benefit from lower premium amortization. As you will note, excluding Global Markets, our net interest yield was up 89 basis points to 2.81%. Looking forward, I would make a couple of comments. As I do every quarter, let me provide the important caveats regarding our NII guidance.

Our caveats include assumptions that interest rates in the forward curve materialize, and we anticipate card loans will decline seasonally from holiday spend paydowns. Otherwise, we expect modest loan growth. We expect a seasonal decline in global banking deposits, and that the other deposit mix shifts experienced in Q4 may continue into the Q1 in the face of more rate hikes. We also expect the funding costs for global markets to continue to increase based on higher rates. As noted, the impact of that is recognized and offset in non-interest income, so it's revenue neutral. Starting with the Q4 NII of $14.8 billion, and assuming a decline of roughly $300 million of global markets NII in Q1, which would be similar to the Q4 decline, that would get us to a Q1 number around $14.5 billion.

We have to factor in two last days of interest, which is about $250 million. That would lower our starting point to $14.25 billion. We believe the core banking book will continue to show the benefit of rates and other elements and can offset most of the day count. We're expecting Q1 NII to be somewhere around $14.4 billion. Beyond Q1, with increases in rates slowing, and if balances continue their recent stabilization trends, we expect less variability in NII for the balance of 2023. Let's turn to expense, and we'll use slide 17 for the discussion. Q4 expenses were $15.5 billion, they were up $240 million from Q3, driven by an increase in our people and technology costs. In addition, we also saw higher costs from our continued return to work and travel and costs of client engagement.

We've seen pent-up demand for our teams gathering back together in person to drive collaboration and to spend more time with our clients. Inflationary pressures continued, but our operational excellence improvements, as well as the benefits of a more digitized customer base, helped offset those pressures. Our head count this quarter increased by 3,600 from Q3. As we faced increased attrition in 2022, our teams were quite successful in their hiring efforts to continue to support customers. As the attrition slowed in the fall, our accelerated pace of hiring outpaced attrition, leaving us with growth in our headcount. As we look forward to next quarter, I would just remind everyone that Q1 typically includes $400 million-$500 million in seasonally elevated payroll taxes.

Q1 will also be the Q1 to include the costs of the late October announcement by regulators of higher FDIC insurance costs. As a result of holding the leadership share in U.S. retail deposits, that will add $125 million to each of our quarterly costs or a total of $500 million for the year. We expect these things will put expenses around $16 billion in the Q1 before expectations that they should trend back down again over the course of 2023. On asset quality, we highlight credit quality metrics on slide 18 for both our consumer and commercial portfolios. Since Brian already covered much of the topics on asset quality, I'm going to move to a discussion of our line of business results, starting with consumer on slide 19.

Brian noted the earlier organic growth across checking accounts, card accounts, and investments was strong again this quarter. That's as a result of many years of retooling and continuous investments in the business. Let me offer some highlights. At this point, we have the leading retail deposit market share. We have leadership positions among the most important products for consumers. We're the leading digital bank with convenient capabilities for consumer and small business clients. We also have a leading online consumer investment platform and a great small business platform offering for our clients. Importantly, when you combine all these capabilities with improved service, at this point, customer satisfaction is now at all-time highs. We produced another strong quarter of results in consumer banking that resulted in $12.5 billion in net income in 2022.

For the quarter, consumer banking earned $3.6 billion on good organic growth and delivered its seventh consecutive quarter of operating leverage, while we continued to invest for the future. Note that our top line grew 21% while expense grew 8%. The earnings impact of 21% year-over-year revenue growth was partially offset by an increase in provision expense, That provision increase reflects reserve builds this period compared to a reserve release in the Q4 of 2021. Net charge-offs increased as a result of the card charge-offs that Brian noted earlier. While this quarter's reported earnings were up 15% year-over-year, pre-tax pre-provision income grew an even stronger 36% year-over-year. That highlights the earnings improvement without the impact of the reserve actions.

Revenue improvement reflects the fuller value of our deposit base as well as deepening with our deposit relationships. I'd note the growth also includes a decline in service charges of $335 million year-over-year as our insufficient funds and overdraft policy changes were in full effect by the end of Q2 of this year. As a result of those policy changes, we continue to benefit from the better overall customer satisfaction and the corresponding lower attrition and the lower costs associated with fewer customer complaint calls, obviously, as a result of fewer fees. The 8% increase in expenses reflects business investments for growth, including people and technology, along with costs related to reopening the business to fuller capacity.

Remember, much of the company's minimum wage hikes and Q2 increased salary and wage moves impacts consumer banking the most of our lines of business, and therefore impacts most the year-over-year comparisons. We also continued our investment in financial centers. For the year, we opened 58 and we renovated 784 more. Against all of that, both digital banking and operational excellence helped us to pay for investments, and that allowed us to improve the efficiency ratio to 47%, an impressive 600 basis point improvement over the year-ago period. Before moving away from consumer banking, I want to note some differences to highlight just how much more effectively and efficiently this business is running since even just before the pandemic. It's easy to lose sight of how well this business is operating from an already strong position in 2019.

You can see some of the stats on slide 17 in the appendix. We can best summarize by noting we've got $318 billion more in deposits, 10% more checking customers, 92% of whom are primary, 28% more investment accounts. Absent the card divestitures, we've increased the amount of new card accounts by 4%, and our payment volumes are 36% higher. We're servicing those customers with 387 fewer financial centers because of our digital capabilities, and it's allowed us to need 10% fewer people to run the business. Our combined credit and debit spend was up 35%. Digital sales increased 77%, and we sent and received 3 times the number of Zelle transactions.

All of this allowed us to run the business with fewer employees and lower our cost of deposits ratio below 120 basis points. Moving to slide 20. Wealth management produced strong results, earning $1.2 billion on good revenue and 29% profit margin. This led to full-year records for both revenue and net income of $21.7 billion and $4.7 billion, respectively. This was an especially good result given the nearly unprecedented negative returns of both the equity and the bond markets at the same time this year. The volatility and generally lower market levels put pressure on certain revenues in this business, again in Q4. What helps differentiate Merrill and the private bank is a strong banking business at scale with $324 billion of deposits and $224 billion of loans.

Despite a 14% decline in asset under management and brokerage fees year-over-year, we saw revenues hold flat with the Q4 of 2021. Our talented group of wealth advisors, coupled with powerful digital capabilities, generated 8,500 net new households in Merrill in the Q4, while the private bank gained an impressive 550 net new high-net-worth relationships in the quarter. Both were up nicely from net household generation in 2021. We added $20 billion of loans in this business since Q4 of 2021, growing 10%. Marking the 51st consecutive quarter of average loan growth in the business despite securities-based lending reductions related to the current market environment. That's consistent and sustained performance by the teams. Our expenses declined 1%, driven by lower revenue-related incentives, partially offset by investments in our business.

Moving to global banking on slide 21, you can see the business earned $2.5 billion in the Q4 on record revenues of $6.4 billion. Pretty remarkable given the decline in investment banking fees during this year. Lower investment banking fees, higher credit costs, and a modest increase in expenses were mostly offset by stronger NII and other fees. Overall, revenue grew 9%, reflecting the value of our global transaction service business to our clients and our associated revenue growth, while investment banking fees declined a little more than 50%. The company's overall investment banking fees were $1.1 billion in Q4, declining $1.3 billion year-over-year in a continued tough market. Still, we increased our ranking in overall fees for the full year 2022 to number three as we've continued to invest in the business.

The $612 million increase in provision expense reflected a modest reserve build of $37 million in the Q4 compared to a $435 million release in the year-ago period. Pre-tax, pre-provision income grew 13% year-over-year. That was driven by strategic investments in the business, including hiring and technology. Switching to global markets on slide 22. As we usually do, I'll talk about the segment results excluding DVA. You can see our Q4 record results were a very strong finish to a good year. The continued themes of inflation, geopolitical tensions, and central banks changing monetary policies around the globe continue to drive volatility in both the bond and equity markets and repositioning from our clients.

As a result, it was another quarter that favored macro trading, while our credit trading businesses improved also as spreads fared better than the prior year. Our Q4 net income of $650 million reflects a good quarter sales and trading revenue, partially offset by lower shares of investment banking revenue. It's worth noting that this net income excludes $193 million of DVA losses this quarter as a result of our own credit spread movements. Reported net income was $504 million. Focusing on year-over-year, sales and trading contributed $3.7 billion to revenue, and that improved 27%. That's a new Q4 record for this business, besting the previous one by 21%.

At $16.5 billion in sales and trading for the year, it marked the best in more than a decade. FICC improved 49%, while equities was up 1% compared to the quarter a year ago. The FICC improvement was primarily driven by growth in our macro products, while credit products also improved from a weaker Q4 '21 environment. We've been investing continuously over the past year in our macro businesses. We've identified those as opportunities for us. Again, we've been rewarded for that this quarter. Year-over-year expense increased about 10%, primarily driven by investments in the business.

Finally, on slide 23, we show all other, which reported a loss of $689 million, that was consistent with the year-ago period. For the quarter, the effective tax rate was approximately 10%, benefiting from ESG investment tax credits and certain discrete tax benefits. Excluding those discrete items, our tax rate would have been 12.5%, and further adjusting for the tax credits, it would have been 25%. Our full year GAAP tax rate was 11%, and we would not expect 2023 to be a lot different. With that, we'll stop here, and we'll open it up, please, for Q&A.

Operator (participant)

If you would like to ask a question, please press star and one on your touchtone phone. Again, that is star and one to ask a question. You can remove yourself from the queue at any time by pressing the pound key. We'll take our first question from Glenn Schorr with Evercore. Your line is open.

Glenn Schorr (Senior Managing Director and Senior Research Analyst)

Hi. Thanks very much. Need a little more help. You gave a lot, but I need a little more help on NII for 2023. You walked us to the $14.4 starting point on the quarter, and your words were less variability in NII for the rest of 23. I guess my question is, you got a lot of loan growth. You have a few more rate hikes hopefully coming through.

I understand the opposite. The flip side of that is deposit migration, some outflows and betas. Could you fill in those blanks? Because I think, I know I won't speak for everybody else. I know I was still expecting some growth in NII for the calendar year. Maybe you could talk through some of those pieces and maybe the outflow in global banking, non-interest bearing is a big piece of it. Thank you.

Alastair Borthwick (CFO)

Glenn, I'll start with just, you know, just by way of context, obviously. We're coming off a period with historic inflows for pandemic deposits. Now in Q4, we're beginning to see the impact of quantitative tightening and a number of sharp rate rises. That obviously creates some uncertainty. We don't necessarily have a playbook for that. We just gotta see how actual balances perform, and we've gotta see how the rotation and the rate paid develop. It's dynamic, it's evolving, and we manage, and we forecast that weekly.

When we lay out for you the actuals on page 7 and 8 of the earnings presentation, we're trying to show you what we're seeing in real time around balances and mix. What we've said with respect to this quarter coming up is we've got to adjust for the day count as we would every year. That's timing. We'll get that back obviously in Q2 and Q3. We highlighted the Global Markets NII impact. It's always been there. The last couple of quarters, it's been around $300 million. It is revenue neutral to shareholders, as we point out, because we pass that along to clients and we capture elsewhere in sales and trading. It does obviously impact the NII.

That's why we're highlighting it. As it relates to the forecast, look, we feel like the modest balance declines are kind of in there. That may continue. This continued rotation from some of the non-interest bearing to interest bearing, we got some pricing and rate pressure. That's in the back of our mind too. The only final thing I'll just say is we're reluctant to go a whole lot further out.

You know, last year we declined to give a full year guide. This year we feel that way in particular because it's just a much more sensitive environment when we're modeling when interest rates are at 5% than when they were at 50 basis points. For all those reasons. I will say this, the final point. I think we got to stay patient because we got to see how rates and balances and rotation shake out. As rates return to more normal and as customer behavior, and you can sort of see it's behaving maybe a little more normally than we should be able to resume our upward path over time. We got to see how this shakes out, and that's why we don't want to go out beyond Q1 at this stage.

Glenn Schorr (Senior Managing Director and Senior Research Analyst)

Fair enough. I feel bad for all of us. maybe a quick one on credit. good to see, charge-offs down given everything that's going on in the world. Can you talk through the big, the $1.6 billion sequential pickup in criticized books from last quarter? What's driving that, and how you feel about reserves against that? Thanks.

Alastair Borthwick (CFO)

So you're aware, the main driver there is commercial real estate, it's specifically around about $1 billion of it is office. Obviously, there's a significant amount of change going on in office. What we've chosen to do is as rates are rising here, we're pushing that through the models. You know, just with the debt service coverage, it comes down, we push through the downgrade. We've chosen to do that.

The performance is still okay, so we're not concerned with the performance, but we're just making sure we're being tight on the modeling there. It is, obviously a portfolio where I think you know this, we're pretty focused on making originations into office buildings that are leased up generally at 55% LTV at origination, and 75% of that book is Class A office buildings. We're not alarmed there. We're just following our own process with respect to making sure we're current on the debt service coverage.

Glenn Schorr (Senior Managing Director and Senior Research Analyst)

Thanks very much. Appreciate it.

Brian Moynihan (CEO)

Just remember that we're talking about office, you know, with very high quality underwriting characteristics, all A class, et cetera. We just have a conservative rating process, frankly. It's, you know, well, well viewed out there and well looked at by many people. Remember, office is $14 billion-$15 billion of the total portfolio, we feel very comfortable where we are. You know, obviously we built reserves against the portfolios across the board that are strong and reflect the, you know, as I said earlier, basically a mild recession in the base case and a worse recession in the adverse case that we weight 40%.

Operator (participant)

We'll go next to Gerard Cassidy with RBC. Your line is open.

Gerard Cassidy (Managing Director)

Thank you. Alastair, on the loan loss reserving, Brian just talked about the adverse case being about 40%. Can you guys share with us how much of the reserve building is what may be referred to as management overlay relative to what the models are specifically dictating on reserve building?

Brian Moynihan (CEO)

Don't disclose that, but you might assume that there's a fair amount. There are three components to this. One is what the models say. Two is basically imprecision and other things we overlay, and then a judgmental. You might think that there's a fair amount out right now with the uncertainty. The model piece, that would be a portion of it.

Gerard Cassidy (Managing Director)

Very good, Brian. When you look at your depo-deposit behavior of the consumer, the past cycles, is there any material differences in the way they're moving money around or not moving money around, from their, you know, checking accounts or low-yielding savings accounts?

Brian Moynihan (CEO)

You know, I think when you look at the higher end consumer, not really. You know, they move to when the rate in the market yields money market funds, we move them to it, and it's part of what we do. That sort of investment cash draw down, as we call it, moves the checking accounts don't move. The difference, frankly, is that, you know, there was a lot of stimulus that was in addition to the earnings power of a consumer. We've never had that, you know, in history. That amount of stimulus, the question is, will they spend it down or will they keep storing it up?

They've been spending it down very modestly across, you know, sort of, Median income households or so, and the general consumer business, you know, give you example, the cohort that, you know, was $2,000-$5,000 in average balances pre-pandemic had $3,400. They're still sitting at $12,800, but they peaked early in 2022 at $13,400. They're drifting down, but it's still multiples. The big question was will they end up spending that down? If they're employed, probably not. But if the unemployment rate changes, and our models assume the unemployment rate changes. You know, I think we're at 6 basis points now in total consumer rate paid. The rate structure is very high. And we are 11 basis points, which was where we got to.

We have very low CD volumes and things. Have a fair amount of money markets. Most of it's checking. That's why we showed you that differential on checking. Is it different? Yeah, probably in the mass consumer business, just because they are sitting on more cash and may use that cash in, you know, certain scenarios. You know, the rest of the behavior is largely the same, including in the corporate business where people, you know, can have less balances, and the effective credit rate generates a bigger number to cover their fees, so they tend to pull the balances out.

Gerard Cassidy (Managing Director)

Just quickly, Brian, when you look at the high net worth in corporate, did that move, you know, from 0 to 3% Fed funds, for example, versus 3% to where we are today at 4.5%? Is most of that completed where the people that were going to move the money have already moved it in those two categories?

Brian Moynihan (CEO)

Well, I mean, I can't say definitively, but you've seen... that's where we showed you on those pages where we show the stable that the account balances are relatively stable in wealth management in the Q4, you know, $300 odd billion and basically they're flat, if you look across the last several weeks. You know, there's always a little bit of migration, you know, to the preferred deposit, which is a market for a higher yielding sort of money market account. The big shift in that was, you know, frankly, in the Q2 of 2022 when I think we had, you know, $50 billion odd numbers of tax payments, which was a lot higher than in past years due to if you think about the 2021 dynamic in capital gains and other things that went through.

What we're seeing is, you know, the last four or five weeks, we're seeing relatively stable in deposit balances. Quarter end three, Quarter end four, basically flat. A little bit of movement among the categories, but in that business, frankly, a fairly, you know, sort of stable place right now. I think the long answer relies on the short answer. If they move the money, they've kind of already moved it.

Gerard Cassidy (Managing Director)

Brian, thank you very much.

Operator (participant)

We'll take our next question from Mike Mayo with Wells Fargo. Please go ahead.

Mike Mayo (Equity Research Analyst)

Hi. I guess Alastair. I guess no good deed goes unpunished. I mean, NII did grow 21% for the year 2022. It did grow 7% linked quarter in the Q4, up $900 million. But 6 weeks after you gave guidance last quarter, you lowered that guidance by $300 million. It just raised some questions about the quality of your modeling or if you had your arms completely around the asset liability management. What happened to cause you to change that guidance, albeit in the context of still some of the best NII growth you guys have seen in many years?

Brian Moynihan (CEO)

Mike Mayo, if I go back to 6 months ago, Q2 earnings, what we said at the time was we thought over the course of the next 6 months, NII might go up by $1.8 billion-$1.85 billion. In actual fact, it's gone up $2.25 billion. That's the actuals. Remember, we're forecasting as best we can at any given time, up $2.25 billion. Q3 was more favorable than I think we had thought, and Q4 was less favorable. The Q4 was less favorable in large part because the balances behaved just a little bit differently, and the rate paid behaved just a little bit differently. The mix or rotation, if you like, that behaved a little differently.

It kind of makes sense because Q4 is where Q3 kind of kicked in. Look, we don't have a great deal of precedent. It's obviously a historic period. It's, it's difficult to forecast quarter to quarter, and our models are just a lot more sensitive right now. You know, I think we're gonna try and share with you what we know when we know it, but it's just a more difficult environment at this point to predict looking forward.

Mike Mayo (Equity Research Analyst)

Sure. It's like the first half of your round of golf, you played well, you should have just stopped after then, I guess. you know, I guess as we look. In other words, that $400 million extra that you got, you're kind of giving back here from the fourth to the Q1. $14.4 billion NII guide. If you annualize that would be still 9% NII growth in 2023. Is that a fair starting point? Can you give us, you know, not big confidence, but a little confidence, given that deposits have stabilized, the day count cards are seasonally lower. Again, you analyze that's 9% NII growth. you know, Brian, still on expenses, any change there? Are you gonna keep it to just, like, 1.5% growth?

Brian Moynihan (CEO)

On the first thing, Mike, it was something I was gonna pick up on earlier to the first question. You picked up it going to the point, you know, we will have growth at NII year-over-year in the range you talked about if you take the $14.4. As Alastair said, we expect it to sort of be less variability and annualize that, compare that to 2022, you know, of 9%, as you said. You're exactly right. That's good growth. I think you'll see as you move through the year of 2023, leave aside the economic scenario, Playing out.

You'll see, you'll move from where we are today, which is uncertain about where the balances will finally settle in and the plateauing of those balances to where you get back to normalized growth and normalized loan growth, et cetera. You've got it right. There'll be, you know, nice NII growth year-over-year. On expenses, you know, if you look at your guys' estimates for us, $62.5, which is what we sort of said earlier this in the Q4, you know, we're comfortable with that.

That's what the average of the street analysts are, you know, and that takes a lot of good management to get there. You know, we'll continue to work on it and letting the headcap drift back down and continuing to invest in things that provide efficiency. You've got it. Key to that is the six quarters of operating leverage and the idea of continuing that going.

Mike Mayo (Equity Research Analyst)

The last part of the income state or the EPS is simply your excess capital, which you highlighted. It seems like you're well above your CET1 ratio. What does that mean for the pace of buybacks and your desire to buy back stock at this price?

Brian Moynihan (CEO)

We've always said that, you know, the first desire is always to support business growth, and that's what we've been doing. We're well above our minimums. We're on a path to close out the requirement for next year. You know, we bought back a chunk of shares this quarter. You'd expect that to start to increase, neutralizing employee issuances and then, going above that each quarter now because we, you know, 11.2 something, we're close to 11.4 targets, so we're back in the game.

Mike Mayo (Equity Research Analyst)

All right. Thank you.

Operator (participant)

Our next question comes from John McDonald with Autonomous Research. Your line is open.

John McDonald (Senior Research Analyst)

Morning. Alastair, I know we're asking you to predict a lot of things here. Just thinking about the credit and the pace of normalization, do you have any sense of where charge-offs kind of might start out the year and what kind of pace of normalization? If we look at the charge-off ratio, that moved up a little bit this quarter, what might that look like for 2023?

Alastair Borthwick (CFO)

Yeah. We're not going to look too far into the future, John. If you look at our 90 days past due in the credit card data that we show you every quarter, that tends to give you a pretty good leading indicator of what's coming down next quarter. You can see that the 90 days past due have picked up just a little bit. 30 days past due have picked up just a little bit. We're still well below where we were pre-pandemic, but that would tell you on the consumer side it looks like it's drifting just a little higher. That's number one. Number two, with respect to commercial, this quarter was a little unusual. We had 3 deals that we ended up having to charge off. Not correlated in any way. They're in totally different businesses.

They've been hanging around for a while, but it was. Two of them were fully reserved, so they didn't come as a surprise. I think, you know, the because the commercial stuff was so close to zero, it immediately looks like a, you know, a pop in any given number. That's part of the reason why we showed those graphs of what charge-offs have looked like over time in the earnings materials. The commercial portfolio continues to look very strong.

John McDonald (Senior Research Analyst)

Okay. You touched on this a little bit in Brian's comments, but just on loan growth, what are you guys thinking about for this year? What's the perspective of where you closed the spigots a little bit in the Q3 as you managed RWA? You kind of said those were opening up in the fourth, but we didn't really see it translate to robust loan growth. Just kind of that dynamic between what you're looking to do and what you're seeing on demand for loan growth outlook. Thank you.

Alastair Borthwick (CFO)

We said we're wide open for business in the Q4, that remains the case. Brian covered the capital point. We had to do what we had to do in the Q3. We did it. We've added 75 basis points of capital in the last two quarters, puts us in a great place. Mainly what you're seeing in Q4 is just it was a slower environment for loan growth. A year ago, you know, we were talking about the fact we anticipated that loan growth might be high single digits, we grew 10. This year we feel like it's going to be, you know, mid-single digits. It's going to be slower and it's going to be led by commercial. It'll be led by card.

Things like securities-based lending, that's just quieter now. We've got balances being paid down there. Mortgage is quieter this year. In our base case, you know, you look at the economic Blue Chip consensus, you can see the forecast is for recession. It'll be a quieter loan growth year this year, I suspect, but we're open for business to support our clients.

John McDonald (Senior Research Analyst)

Okay. That's helpful. Thank you.

Operator (participant)

We'll go next to Erika Najarian with UBS. Please go ahead.

Erika Najarian (Equity Research Analyst)

Yes. Hi. Good morning. I just had one compound clarifying question. The first is, Brian, did you, in response to Mike's question on NII, bless $57.6 billion in NII for 2023, right? He was saying 14.4 times 4% or 9% NII growth. You seem to be going with it. I just wanted to confirm that. I think there's a bit of confusion, given that you guys were saying you don't want to go beyond the Q1. The second question is also for you, Brian. I think that, you've done an unbelievable job at transforming the company. I think the one thing that remains is that the investor base still thinks you as mostly a bank to invest in when rates are going up, right?

Clearly there's a lot of uncertainty over the NII outlook, but could you sort of give us, you know, what we should be, you know, potentially excited about that you can control with regards to the revenue trajectory from here? Also you spent so much time on deposits. I'm just kind of confused on the message in terms of, you know, deposit declines from here because you laid out this case that you have this very resilient deposit base, and it seems like a lot of attrition has already happened. Sorry, that was actually three questions in one. I apologize, that's it.

Brian Moynihan (CEO)

I think I'll put all those questions together in one answer. If you go to the page that's in the report where we sort of say, look at the difference between the consumer business, you know, in 2019 and now. it's something to be excited about because we have, during a period of time where, you know, we were completely shut down in branches to like 2,000 open back up. We actually went down from 4,300 branches to 3,900 branches. We built out in a lot of new cities. We did a lot of work. We have 10% more checking accounts. The customer favorability is an all-time high. Our small business part of that business is the biggest in the country and growing.

You know, you look at that, and that provides a great anchor, which provides that great stable deposit base. We show you on the slide where we show that base. It also provides a lot of, you know, very low-cost deposits. As rate rise and materialize that, and then if you think what happened last cycle for a year when rates did not move up, we continued to grow deposits in the consumer business in the mid-single digits, which just is infinite leverage. So that's something to be excited about from not only the customer side, where we're digitized and, you know, you know, Zelle usage is going up. Erica usage is going up. Erica meaning our Erica, not you, Erica.

The, you know, the balance of the consumer investments open up 7% more accounts in a year where investment world was choppy. Then you pair that into the wealth management business, same thing. One of the biggest deposit franchise in the country. Biggest, you know, $3 point something trillion, high $3 trillion of, you know, assets. Growing net households at the fastest rate it's grown in a long, long time, maybe history. Growing advisors. Those are things to get excited. That's the organic growth engine of the company.

You got to put that against a backdrop of a plateauing of NII, which is basically what Alastair said, sort of think about a less variability around the 14.4 starting number, which Mike, Dan, Elijah did math, so he did the math and made it out. That provides us a good base of which to drive forward. You really got to get through the economic uncertainty, and then all those things will start to bear. Meanwhile, the trading business, which we invested in a couple years ago, now is at its best Q4 ever, and Jimmy and the team are doing in good shape. We, you know, we just feel good about the overall franchise.

More customers, more with each customer, and then that provides a big stable base, which as rate increases slow down, the marginal impact of it will slow down until we see the good core loan and deposit growth, which you saw after the last rate rising increase stopped and produced the, you know, the 20 quarters of operating leverage and things like that. That's pretty good to be excited about. Biggest bank growing its franchise in a bit, and the only growing solid economy in the world at a faster rate than anybody else is pretty interesting.

Erika Najarian (Equity Research Analyst)

Just to clarify, Brian, you mentioned, you know, the plateauing of NII and then hopefully all the investments in the business would drive growth from there. Is that still possible if, you know, we have a, you know, continued rate cuts through 2024?

Brian Moynihan (CEO)

That, you know, the scenario of rate cuts and rate rises, you know, we basically use Blue Chip, so I, I'm not sure. You know, it depends on what's causing that, you know. If so, if it's a normalization of the rate curve back to, you know, you know, to say 3% on the front end, 4.5% on the back end or something like that, you know, that's different than what you saw when they had to cut rates for the pandemic or after the financial crisis and left them there for years to get the engine of the United States economy restarted.

What's different this time, frankly, and that's what we're talking about the consumer data, is even with, you know, a strong rise in interest rates, you know, a less tight labor market, and, you know, inflation and what people are being told to worry about, you're actually seeing consumer spending consistent with, you know, a good, you know, 2% growth environment, a low inflation environment, which is good because the consumer's being, you know, being appropriately conservative right now.

Alastair Borthwick (CFO)

Erica, the other thing I'd just say is, you think about why we've got a slowdown in some of our fee-based businesses right now. It's because rates have risen so quickly. That's created a lot of volatility, and it's created, you know, the asset management business, it's at a big sell-off in bonds and stocks. We're poised now in a lower base where we can grow from here. Same thing, you look at our net income, we've really outrun a pretty historic decline in investment banking fees. We've got a diversified set of businesses where as some normalcy returns, we can see some pickup in those fee lines as well.

Erika Najarian (Equity Research Analyst)

Thank you very much.

Operator (participant)

We'll go next to Ken Usdin with Jefferies. Your line is open.

Ken Usdin (Equity Analyst)

Thank you. Good morning. I wanted to follow up, Alastair. You had about $800 million of incremental interest income from the securities book. I'm just wondering if you can help us understand how much of that was attributed to the continued benefit from the swap portfolio. Also then, you know, how would you expect that to impact your outlook for the 14.4 in the Q1 guide? Thank you.

Alastair Borthwick (CFO)

Yeah. Most of the increase in securities portfolio, we're not really reinvesting in there at this point. As the securities portfolio is sort of declining, we're using the money that's throwing off to put it into loans. That's always our first preferred place. You're picking up on the right thing. It's mainly the treasuries that are in there. They're swapped to floating. That way, we don't have any capital impact from rising rates. You're gonna see the securities yield just continue to pick up, number one, based off of the treasuries swap to floating as floating rates go higher. Number two, as the securities come due, there'll be fewer and fewer of them at lower rates. You're gonna see the pickup over time.

Ken Usdin (Equity Analyst)

Just as a follow-up, what's our best benchmark rate to kind of watch that trajectory for, you know, how we can understand that help or from that swap portfolio?

Alastair Borthwick (CFO)

Normally it's SOFR, Secured Overnight Financing Rate.

Ken Usdin (Equity Analyst)

Okay, great. Second quick one just on capital. You had 20 basis points increase in your CET1. You did $1 billion or so of the buyback. Just wondering how you're thinking about capital return with the Barr package of rules still ahead of us going forward. Thanks.

Alastair Borthwick (CFO)

Well, I think, you know, Brian said the right things. The, the strategy hasn't changed. We've got to, number one, support our clients. We're gonna, number two, invest in our growth. Then we plan to just sustain and grow our dividend. Over time, we'll balance building capital and buying back shares. I think the difficult part with Basel III Endgame right now is we don't have the rules. We gotta wait, I think, until we see those.

They'll go through a comment period. At that point we'll offer much more perspective. You know, I'll say the obvious, banks have got plenty of capital. We were asked to take 90 basis points more in June. There's a lot of procyclicality already in things like the stress test and stress capital buffer and in CECL. I think, look, we've shown our ability to perform and build capital. In this case, 75 basis points in 2 quarters. We'll deal with whatever the ultimate rules come out with.

Ken Usdin (Equity Analyst)

Great. Thank you, Alastair.

Operator (participant)

Our next question comes from Matt O'Connor with Deutsche Bank. Your line is open.

Matt O'Connor (Managing Director)

Good morning. Have you guys thought about, you know, how to better insulate yourself against potentially lower rates and not just kind of a little bit of a decline, but if we get something unusual and rates drop a lot? I know it's easier for some of the smaller banks to do it, but, you know, we have seen some regional banks essentially trying to lock in a corridor of the NIM so that, you know, kind of medium term, it's more about growing the balance sheet versus the rate moves up and down. You know, clearly with their deposit rates low, you know, if we do get Fed cuts, there's just not much leverage to bring down those rates.

Alastair Borthwick (CFO)

Yeah. I don't know that we've thought about it in terms of like a corridor of NIM, but we definitely think about balancing earnings and capital and liquidity through the cycle. I don't see us making significant changes to our core. We're trying to make sure that we operate and deliver in all rate environments. That can be high, or two years ago it can be zero rate environment. You can sort of see our changes at the margin. You can see we're taking securities out and replacing them with loans. You can see everything restriking higher. We've got a smaller, more efficient balance sheet.

We at the margin may consider fixing some rates here depending on how things develop over the quarter. It's, you know, we've had a pretty, I'd say good strategy that's allowed us to drive net interest yields. You can see those on page 16. They're up 46% over the course of the past year. Drive the NII, that's up $3.3 billion year-over-year. You know, we feel like we struck that balance. That's what responsible growth means to us. At the margin, we'll probably still maintain a little bit of asset sensitivity.

Matt O'Connor (Managing Director)

Okay, thank you. That's it for me.

Operator (participant)

We'll take our next question from Betsy Graseck with Morgan Stanley. Your line is open.

Betsy Graseck (Head of Banks and Diversified Finance Research)

Hi, good morning. Can you hear me?

Alastair Borthwick (CFO)

Yes, we can.

Betsy Graseck (Head of Banks and Diversified Finance Research)

Oh, okay, great. Two questions. One, just a little more color on the loan growth outlook. I heard you on expecting that loan growth will be slowing as you go through the year. I just wanted to get an understanding of, you know, is that more, you know, just demand slowing base effects? Or is there also anything in there from you on, you know, proactive credit decisioning as normalization, you know, come through the rest of the year?

Alastair Borthwick (CFO)

That's a couple things. If you look in the Q4, you can see the cards come up which, you know, seasonal and that's gonna come down and that's one of the things that people tend to pay those down. The usage of those card frankly are still at low levels. The pay rate, the other way to think about that, is still in the 2030s. That's, that's sort of one thing that's been kind of consistent through the pandemic. Customers are paying down the card balances. You'd expect at some point those will get back to more normalized pay down rate in the mid-2020s. The second is line usage, frankly, has also come back down.

It's not gotten ever back to where it was pre-pandemic. It moved up and it dropped by 100 or so basis points which across a lot of lines is a fair amount of loans. That you saw. We, you know, how corporates manage, you know, their borrowing and cash and demand cycle, you know, seems to be flattening out a little bit. You know, obviously acquisitions and things are way slowed down, so there wasn't much activity there. I think you put it together, then you have in the securities-based business, customers, you know, took down leverage, paid off a fair amount of loans in the wealth management business, even though they've grown, I think for 50 some quarters in a row now or something like that in loan balances. It happens.

Mortgages obviously are low. What we think is as the rate environment settles in, you'll see that normalize and it will we'll be back on the mid-single digits. We just won't have, you know, the 10% loan growth year-over-year because that is faster than economy and faster than we do. We have not changed credit underwriting standards. And you can see that in the consistency of the origination standards back in the.

Pages, the appendix where we show sort of our cars and home equity and things like that. It's just the demand side's a little softer because people are reading the same headlines we're all reading about a recession's coming and they should be careful.

Betsy Graseck (Head of Banks and Diversified Finance Research)

Okay, got it. On the expense side, I know we talked a lot about the NII and, you know, the puts and takes, as you go through the year that you're looking for. What about stability on the expense line to manage through any, you know, worse than expected outcomes on the NII? What, what kind of levers do you think you have to pull there, Brian?

Brian Moynihan (CEO)

Well, we always have, you know. The variable compensation stuff will drop because, like, assuming that the reason why rates are being cut is because economic activity is worse than people thought. Then you have the general just efficiency movements in the house that we've been pretty good at. Then you have to remember, we try to get people to go off of nominal expense to operating leverage. We have 6 quarters of operating leverage. As the NII growth slows down, we have to manage a company to produce operating leverage. We'd expect that fees might stabilize and, you know, absorb the $1 billion downdraft in quarterly investment banking fees, you know, and start to work up from there in other types of things.

I think we feel very good about the ability to find ways to manage expenses. Always have. We, you know, slowed down hiring as we came into the Q4, not because, you know, because frankly, we'd gotten our hiring to match the great resignation earlier in the year, and it was sort of overachieving, so we slowed that down, and that will allow us to get back in line and start to bring the headcount back down to where we want it to be. Those are frankly positions that are relatively have a relatively high movement rate and only because of the nature of the job. We feel good about between variable rate compensation, between continuing to reduce headcount for efficiency and frankly, you know, just activity levels.

In a down scenario, we'll be able to pull the expenses down. Meanwhile, you know, we're going to invest $3.7 billion in technology development in 2023 versus $3.4 billion in 2022. We continue to add bankers. We added 800 wealth management advisors in the second half of last year. Our training program for those across, you know, all our wealth management businesses and other training programs. We continue to hire young talented people. We're trying to maintain that balance of continuing to invest in the growth, opening in new cities.

You know, we're averaging, you know, these branches that we're opening are extremely successful when you look at the size of them relative to anybody else's opening practice. Why would you stop that? Yet the total number of branches comes down because we're managing expense side. We're paying for this stuff as we go, but, and so you could slow some of that down and get leverage out of it. The question would be, as we're in that scenario, is that the right decision for long-term value creation?

Betsy Graseck (Head of Banks and Diversified Finance Research)

All right. Thank you.

Operator (participant)

We'll go next to Vivek Juneja with JPMorgan. Your line is open.

Vivek Juneja (Banking Analyst)

Thank you. A couple of clarifications on the same NII question. I just want to understand, in your assumption about the staying at $14.4 billion through the year, on a quarterly basis, are you assuming deposits to continue growing or shrinking, number one? Are you expecting further rotation out of non-interest bearing to interest bearing? Do you expect the $14.4 billion number even if there are rate cuts, you know, towards the end of the year? Is that number doable even with that? What is it that you're assuming? Is it even with rate cuts?

Brian Moynihan (CEO)

Vivek, we just said less, you know, there'd be less variability around that number due to the fact the market stuff has gone to zero. That, you know, has no impact on it, that you saw over the last few quarters have impact. Less variability. All the things you cited are the reasons why we tend to say you have to be careful about saying what's going to happen in the Q4 of 2023 with great clarity. We did say is if at this level with less variability, you'll have nice growth over this year to next year.

I think everything you point out, whether it's, whether it's, rates going up faster than people think because inflation does get under control or come down because people think that they've done a good job and they wanna get behind the economy. You know, we base our modeling on, you know, the Blue Chip economic assumptions out there and then looking at our balances and stuff. You know, I think that's a reluctance. All your points are great points, and they're always why we are reluctant to say, I can tell you to the, you know, 3 decimal places what it's gonna be 3 quarters out because it can move around on you.

To Mike Mayo's earlier point, we grew $1.2 billion and $900 million in the linked quarter, somehow people thought that wasn't good enough because, you know, there's math that would have gotten you different. Stay tuned. We'll tell you what we know when we know it. It's good organic customer growth. You know, 1 million net new checking accounts starting at $5,000 balances, growth in wealth management and loans and deposits. These are things that stick with you and be good no matter what the scenario.

Vivek Juneja (Banking Analyst)

Okay. another, a different question slightly. You gave the 2,000-5,000 deposit cohort, Brian, in terms of where they are in the deposit balances. In the past, you've also given a cohort below that, like a $1,000-type cohort. How is that doing? Can you give any numbers on that?

Brian Moynihan (CEO)

It's similar. They're all moving down very slightly, that average balance, that same group of customers taken out. I'd say it's in the same sort of different sizing, but it's the same thing. It's, I don't have it right in front of me, but I'll have Lee get it to you. It's moving down slightly. The interesting part of that, Vivek, honestly, is in the highest average balances, you actually have seen them down from pre-pandemic, which means you saw them reposition that in the market. Going to the earlier question, we may have seen a lot of that already take place. I did think of it as being down slightly quarter over quarter in that cohort.

Vivek Juneja (Banking Analyst)

Thank you.

Operator (participant)

We have no further questions in queue at this time. I'd like to turn the program back over to Brian Moynihan for any additional or closing remarks.

Brian Moynihan (CEO)

Thank all of you. Good quarter to finish 2022. Thank you to our teammates for producing it. We continue to grow earnings year-over-year. We have good organic growth and operating leverage for the 6th straight quarter. Those will continue to 2023. The asset quality in the company continues to remain at historic lows, relative to any normalized time period in the company's history, including the strong credit performance we had leading into the pandemic. Our job is now to drive what we can control, which is the organic growth of the franchise, the investments that we make are bearing fruit, and also to keep the expenses in good control, and we plan to do that in 2023. Thank you. We look forward to talking to you next quarter.

Operator (participant)

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