Q1 2024 Earnings Summary
- Strong Capital Position and Potential for Increased Capital Returns: Bank of America has a CET1 ratio of 11.8%, with $30 billion above the old regulatory requirements. Once regulatory uncertainties around Basel III are resolved, the bank expects to return capital at a strong rate.
- Improving Net Interest Income and Margin: Net Interest Income (NII) exceeded expectations, reaching $14.2 billion, an increase of $100 million from the fourth quarter. The bank anticipates further NII improvement due to higher-yielding assets, loan repricing, and benefits from a higher-for-longer interest rate environment.
- Effective Expense Management and Investment in Growth: Expenses are expected to trend down over the course of the year. Despite expense reductions, the bank continues to invest in technology and growth initiatives, increasing annual technology investments from $3 billion to $3.8 billion over the past few years.
- Uncertainty around Basel III endgame may impact capital returns to shareholders, as the timing and final requirements remain unclear.
- Net Interest Margin faces challenges in the near term, with expectations of lower NII in Q2 and limited sensitivity to higher rates due to narrowed interest rate sensitivity corridor.
- Efficiency ratio remains high at 64%, with minimal improvements despite technological investments, and expenses may not decline significantly as expected.
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NII Outlook
Q: What's the year-on-year NII trajectory for 2024?
A: Management expects Net Interest Income (NII) to grow in the second half of the year, with Q2 being the low point. Stability in pricing and deposits supports this outlook, and fewer rate cuts would further benefit NII in the third and fourth quarters. -
Capital Returns
Q: What's your CET1 target and 100%+ payout timing?
A: The bank aims to maintain a buffer of 50 to 100 basis points above regulatory requirements for CET1 capital. Excess capital beyond this buffer will be used to grow the company or returned to shareholders. Currently, they are sitting on $30 billion under old rules and have sufficient funds under the proposed new rules. Expect continued strong capital returns as clarity on Basel III rules emerges. -
Loan Growth Outlook
Q: When will loan growth pick up?
A: Loan growth is anticipated to increase in the future. While credit card growth is strong, higher rates have reduced securities-based lending and suppressed revolver utilization. However, commercial loan growth is seen in middle market and business banking segments, and overall line utilization is stabilizing and improving. -
Deposit Stability
Q: How do you see deposit mix shift amid higher rates?
A: Deposit rate changes are slowing and stabilizing, with expectations for deposits to grow and the deposit structure to remain relatively stable. Most rate-sensitive customers have already moved, and consumer deposits are stable month-to-month. -
Expense Management
Q: What are your thoughts on expense growth ahead?
A: Expenses are expected to trend down over the course of the year. While Q1 expenses were inflated by $100 million due to payroll taxes and seasonality, similar increases are expected each quarter if the current environment continues. These expenses are associated with revenue growth. -
Asset-Liability Strategy
Q: How are you managing duration and swaps amid rate changes?
A: The bank maintains a balanced portfolio of short and long-dated, fixed and floating assets to lock in value and monetize deposits in any rate environment. Repricing of securities and loans provides underlying resilience. -
Investment Banking Growth
Q: Is higher IB revenue sustainable?
A: Management believes the bank is fundamentally stronger in market position and expects to continue gaining share. The current revenue level is seen as more normalized, with opportunities to build further, especially in middle market and international segments. -
Basel III Timing
Q: When will Basel III final rules be released?
A: There is no update on the timing of the Basel III final rules; the bank is waiting for the regulations to be published. They have enough CET1 capital ($197 billion) to meet proposed requirements, and any changes are likely to be positive. -
Wealth Management Cash
Q: How are wealth clients allocating between cash and investments?
A: Clients currently hold elevated levels of cash, with flows going into money market funds and short-dated treasuries. This high cash position supports potential growth in assets under management as clients may invest more in the future. -
AOCI Impact
Q: Is AOCI less of a concern now?
A: The bank has a strong hedging program for fixed-rate securities, with most treasuries swapped, minimizing Accumulated Other Comprehensive Income (AOCI) impact. They expect very little AOCI impact going forward. -
Capital Deployment
Q: How will you deploy excess capital if Basel III rules ease?
A: The primary focus is to use capital to support customer businesses, including investing in the markets business, trading operations, systems, technology, and risk management. Loan growth alone doesn't consume much capital, so excess capital may be returned to shareholders or invested in technology and branch expansion.