Bank of America Corporation (BAC)
2023 BofA Securities Financial Services Conference
February 14, 2023 08:00 AM ET
Company Participants
Brian Moynihan - Chairman and Chief Executive Officer
Conference Call Participants
Ebrahim Poonawala - BofA Global Research
Presentation
Ebrahim Poonawala
Good morning. I’m Ebrahim Poonawala, Head of North America Bank’s Research of Bank of America. On behalf of my colleagues in research, Craig Siegenthaler, Josh Shanker, [Meer] (PH) Bhatia, Brandon Berman. I would like to welcome you all to Bank of America’s 2023 Financial Services Conference.
We have over 100 corporates attending over the next three days. So it will be an interesting time to just get their outlook in terms of the economy, key industry trends that all of us should be watching for.
We also have a full slate of thematic panels from electronification of strict trading , to the health of the commercial real estate market to discussing with the outlook for monetary policy and its impact on bank funding. So hopefully, you will find it productive three days.
And without further ado, I would like to introduce our first speaker to kick off the conference. My big boss and also the Chairman and CEO of Bank of America, Brian Moynihan. Thanks for being here.
Brian Moynihan
It is my pleasure.
Ebrahim Poonawala
Maybe I think just to kick it off, Brian, on the macro outlook, obviously all of us came into the year, expectation for a mild recession time-to-time, then thing did take a downturn and then you get a very, very strong job print last month. You are an amazing vantage point talking to our clients both on commercial and consumer side. Give us a sense of what customers are thinking and what is driving business decisions, hiring with a lot of focus in jobs.
Brian Moynihan
Well, so let’s start with the macro and thank all of our clients for attending and thank you for the business you do with our company. We don’t take it lightly and we are here to support you.
If you think about what we are hearing from clients and customers and what we see and we can divide that up. In terms of commercial customers, what you are hearing is the same thing you read in the press. They are trying to be careful. They are trying to make sure they can maintain margins. They are trying to make sure that they don’t see a change in final demand, Ed.
But most of them honestly, when you ask them, they are saying, I thought I would be in worse condition right now. I thought I would be facing more pressures and things are still fine and so that is a conundrum because at the end of the day, they are trying to be careful on hiring and things like that in the general sense, yet they are seeing the final demand of their products and services strong.
And there are differences in that. There are negative cash flow, raise equity capital and lose money and have a business that stop calling, because the markets aren’t receptive that the private - the investors aren’t receptive that, but that is a narrow group of what goes on in the U.S. economy. So for that, on that side, you take the investment in the new energy just through the roof and so you see different industries, different outcomes.
So I think overall, midsized companies with a group of last week and they are all kind of don’t want to say that loud, obviously, that they are fine. They are doing fine and the whole margins are better than they thought. But they are also making sure they understand where the dynamic goes.
And then if you look on the wealthy side client, you are all in the markets investing their money. They are basically invested and cash balances aren’t excessive. They are not worried about things and they move it around and think about it. But it is not like they are afraid of the market and seeing the market respond.
And then if you look at the consumer, they keep spending money and at the end of the day, where large economy in the world, the consumer driven part of it, the consumption part of it is as big as any other economy on its own. And those consumers have money. They are employed, and they are spending money, and they have a lot of capacity to borrow.
And that is what makes whatever we are going through different is that, the consumer is that strong and that is a conundrum for the Fed to slow it down. And it is a good thing. It is best thing about the U.S. it is a consumption by economy by U.S. consumers who spend money very well is a nice place to be and that is the tension that is going on. And, yes, so can talk about our consumers when we see the balance and stuff. But in general, consumers remain very solid and continue to spend money.
Ebrahim Poonawala
Right. Maybe just on that front of consumer. Obviously, job market is strong. There has been a lot of focus on the excess teams that were built up during the pandemic. And I know you cited checking account balances and such, but what are at the center. This is the health of the consumer. Are we at the risk of, like, things falling off of cliff at some point this year?
Brian Moynihan
Well, I think one of the points that we follow in the company when you think about future risk for lack of better term is, a new claim from employment. And those numbers now are running - they peaked in the last summer, if I remember exactly, and then they came down again.
But the nominal number of them is 50-years when the workforce was half the size. In the late 60’s, 80 million Americans worked, now a 160 million Americans work. So when you hear these numbers are 50-years old or 60, you got to step back and realize that they are nominal numbers against twice the size work for us. So there is just no slowdown in employment prospects and that is why the unemployment number sits there. So that is good news.
If you look at the balance of us, we have been citing for a long time and part of was to get people’s mind around what was going on with the consumer. So we took our balances in frozen in January 2020 and we layered it in by dollar denominated cohorts and said take those balance, those customers, and run that customer in those cohorts out, when we have given this time.
If you look today for the $2,000 to $5000, one which is the one I cite the most and said the $2,000 to $5,000 of cleared balances in people’s accounts, that sort of median coming up household. They had about $3500 pre-pandemic, and they are sitting on $12,800 and $12,900 a day.
It peaked at $13,400 in April of 2022 and then it drifted down and it is basically been relatively stable for the last few months. And year-over-year, it is actually up a little bit, believe it or not. And so you would say, well, what is that? That is the core part of America. You go to the next tranche above $5,000 to $10,000 originally $7,500 sitting with 20-odd thousand in the balances and checking savings and sort of related balance.
And so that means they are spending the money down. Yes. But it is a very slow rate of spend. And what would change that will really be one thing, because they don’t have cash flow coming in. If you look at the cash flow in the institute side, we will put more of that out. The cash flow is still pretty strong on a relative sense. And the way they are spending money is back to pre-pandemic to put between necessary and discretionary nothing unusual there.
So we feel pretty good about that. Then the question is, do they have a capacity to borrow? The answer is yes. The equity value and the home is high. It uses under lines of credit from credit card borrowing is still way below the pandemic as a percentage. The pay rate is 30% every month 30% of credit card balance and payout in the 23, 24. Those are major differences in terms of behavior.
So they have capacity in the home. They have capacity on our credit cards that have capacity to borrow, because they are working and pay. And so you are seeing parts where you see some weakness, not the parts that we play in actually subprime and some of your other clients or companies will talk about that and have more articulation. But, you really don’t see it overall, and that is because, people employed and get paid more.
If you look at our teammates, anybody, a $100,000 of salaries and wages year-over-year will have at least 10% increases from 2021 to 2022. 10% and not - then this year we will see that happens. So it is across the board, that is 10,000 plus people. So that is not different than a lot of or -.
So I think all that bodes well, balances are strong, their credit availability is strong and the spending activity in January actually picked up a little bit, just right around 5% year-over-year across almost $400 billion of movement of money from cheques written, ATM cash usage, debit and credit cards, et cetera. And that number is more consistent with the growing economy, quite frankly, than a recessionary economy.
It is consistent with the 2% growth economy. If you look back in 2017, 2018, 2019 when the economies bounced around that 5% would be the number. It is a little fast than economy. If you look now, it came down from 14% type growth rate in early 2022 over 2021 ran down to 5% at year end. It is actually come up a little bit and a little stronger through the year-to-date through February. So that means it is not slowing down.
Ebrahim Poonawala
Saw some of the gloom and boom that is throughout the marketing.
Brian Moynihan
Your team still has a recession particularly starting and they moved that out a quarter. Every time I speak, they moved out another quarter. So if you want to guess what Michael and Candace and how the team’s going to do tomorrow. They are going to move it out a quarter because that is what they do.
But that is what they do to - in fact so they have got started third, fourth quarter, first quarter. But that is really the thing. And by the way, if you look at the blue chip estimates from last fall, nobody had a recession predict. They are all talking about it, but nobody actually had in their numbers. Then now there is a fair amount of numbers, but if you just look at what happened over the last three months, it is all moved out.
And that is just because of this dynamic they can’t see the consumer slowing down and the consumer’s employed and delinquencies and credit are low and sort of sitting and saying, I know it is got to come. The Fed can’t tighten this aggressively and not pause and I understand that, but they don’t see it, then that is why I keep seeing just move out a little bit and get a little less severe each time our team comes out.
Ebrahim Poonawala
I blame our team concern. But I think maybe just pivoting to the bank, Brian. I know in one of the past conversations, we talked about Bank of America is a growth company. I know we all get caught up in the next quarter’s I know it expands, but just take a step back and remind us about the franchise, your outlook in terms of your confidence in the growth outlook, as you look across the these kinds of businesses.
Brian Moynihan
It was fine with me if we are not caught up in the next quarter because that is not how you run a company. But that is unfortunately, all your colleagues want to load their models and you too. So if you think - we have our senior leaders over the next couple days in the company and so we have been laying out sort of this post pandemic going back and driving the same set of principles that we drove in the 2015 to 2019 up to the pandemic.
And when we talked about responsible growth the first time publicly in 2015, if you look from that time forward, we had this loans group, and we are outgrowing the runoff of bad loans in the company deposits group.
Fees were relatively flat, but what went away was we, people forget, we had a big mortgage servicing book that was still running off, and we sold some stuff and took that and replaced by core investment banking, brokerage, wealth management related fees, consumer fees, and even on consumer fees, we kept dialing down the penalty aspects, so they are relatively flat.
But what we really went on in there is we also were able to have expenses continue to come down and have operating leverage for 20 quarters in a row. And so that is the - we are starting to see again. So we are six quarters into that.
The real challenge, the real thought process is, so last year we grew a million checking accounts. 90 plus percent of those are core, average starting balance, 7,000. You know that in the core mass market, mass affluent America that is 1% of households came in the company. And so, net, not gross net. And that is now happened. And that is a big share gain, because sometime overtime those clients will do a lot of different things in life and their - and if you have their primary account you are the - and the drivers -.
If you look on the wealth management side, I think we had, record, we had a hundred odd billion dollars of flows in the business, but also we had new household formation at the highest level we have had in long time. And that is the core organic growth engine kicking back in post pandemic.
And then if you go to the market side, we put $200 billion more to serve all of U.S. customers into the balance sheet having more size and scale and you saw that rewarded and Jimmy and the team have done a good job there.
Investment banking is, you know, we are following the market and we are still, third or fourth, depending on investment banking fees is just the fees pool went from X to half of X. And that makes it a little interesting. That is not that different than it was 2017, 2018, 2019, honestly. It is, we are running a billion a quarter not it was 1.2 billion or 1.4 billion a quarter back then, maybe. So what happens? You had this explosion and that -.
But again, just working with the corporate bank, developing more clients, more logos as they call it in the commercial banking system, the GTF, the global transaction franchise. So the growth across the households, the growth across new households, people doing more with this, you know, that is the growth engine, that is been going on.
In 2020 it slowed down because everybody just pulled back, but as soon as you came out 2021, we started getting back on the core organic growth, and that is the power of the franchise, which is the, across these lines of business. And then how they work together it is pretty amazing. So Merrill Ledge, I think had 400,000 new clients with an average starting balance of 60,000.
And if you compare that against, a lot of people talk about what is going on in those types of - and you will have some - you know, that is multiples of their opening balances. And so that is a good core mass affluent customer bringing their relationship. They are starting a relationship with us.
And in there, there is accounts starting with 5,000, so don’t - but the average of 60 that showed you the [indiscernible] there and account growth was 400,000, round of 4.25 or something like that on a base of 3.5 million. And so that is a big account growth. And then that compounds up.
So we are just driving that customer growth and penetration current customers across the four or five key products in segment. And then we link them together with lot of work and that is what is going on and that then translates into operating leverage. We will see where rates go and we will see what deposit balances end up and all the happy stuff. But if I have more customers doing more with us, I think we would be fine.
Ebrahim Poonawala
Fine. It is remarkable though, one million net checking accounts from the bank. Our size, I guess tied to that, I want the consumer banking, a lot of focus on just what the move towards digital away from branches. So would love to hear one year your perspective on branches, because it feels like as much as people want to push branches aside, they are not going away. But talk to us the importance of the digital delivery for the consumer, both for our acquisition and servicing and where is the bank investing when you think about digital.
Brian Moynihan
Yes. So I think, let’s come out at first is state-of-state in terms of activity, half the sales in the consumer business go digital front to back in every - I mean, other way that we used to talk about sales of digital and mortgage or something like that. It was started digitally, but it didn’t end up - you know it fell - now it is front to back.
So you can actually, every product in that 2017, 2018, 2019, we were basic ensuring every single product that was a 100% digitally deliverable or not. And the ones that weren’t fine but don’t make it half and so taken. So the card and the home equity line and the mortgage and the car loan checking account, we just Merrill edge front to back. And that then allows you to have this sort of infinite leverage.
And during the pandemic, we went for about a 1.5 billion of market at two billion marketing across the whole platform driving that digital acquisition. So that is a different strategy, that we had in sort of 2015, 2016, 2017. Because we didn’t have the capabilities actually delivered digitally.
So you saw another move in terms of need to have physical sales, let’s just say that. So physical sales were depressed in 2020 and then came back up. And so, what has happened is originally you saw the digital percentage go down and now it is back up over 50%. And that shows you are getting the balance back in system. That is kind of where we were.
So what happened also is 400 branches that we started the pandemic with went away and we actually put on a few 100 new ones. And even in that 400 to 4,000 you had a few hundred to change underneath that. And so that is what we have been doing.
So you are massively changed in the retail capabilities. It is critically important to have those great teammates out there serving customers in all those physical locations, because people come in a quarter million times a day to talk to them. And you don’t want to be not there. So you do that.
But on the other hand, what goes on at those-branch is tremendously different, because it is less and less transactions. Cheques deposited, branches year-over-year down 7% or 8% since pre pandemic, they are probably down 25% or 30%. That goes out of the system. That is one of the longest transactions honestly.
I hand this cheque, they got to physically key it in, I got to do it all the stuff. I got to hand you the receipt. That is one of the longest service transactions in the branch. Honestly, other than accounts, somebody is confused and there had been a complaint, but it is just a standard.
So the idea is think about that 7% a year for last several years going down and down and down allows you to take that capacity with flat headcount at the branches and flat branch and dedicated towards sales and service capability of a higher order.
In other word, that is what - so there is Salesforce, in the grand scheme, we went from 6,000 branches, a 100,000 people in the consumer business to now 4,000 branches, about 55,000 - 60,000 people across the last 10-years, 12-years.
And the number of customers, the amount of activity, the amount of sales, and all that stuff went up. And so that is the digital trans -. What enables that is the digital capacity across all the different dynamics. It is not only sales and service, it is inquiries.
And then you think about everybody’s running around and rightfully so, because it is an important concept [indiscernible] and then the various things. Eric is out there going through a billion interactions, which is an artificial intelligence, voice or text activated natural language processing engine that goes for our systems and finds answers and we have been learning on it.
And we are up to 150 million interactions a quarter and we are past a billion in this new product, but 18 million people use. So that is what enables you to start moving, the capacity around between today and tomorrow. A quarter $1 billion will go out to the ATMs in 20s and hundreds. And why is that? Because people do use cash.
And so the ability to - and cash is readily available, the ability to keep managing that down, checks written down, checks deposited down, largely create capacity by engineering the capacity and that is the magic of just being disciplined on OpEx as we go.
Ebrahim Poonawala
Bob in my town still uses cash, someone who is on a good -.
Brian Moynihan
Yes. Now the instant thing is the customer scores the highest they ever been and so that is because also you are engineering out complexity in the states that could be made. Look, we are not perfect. But the customer scores rose all during that period, we had this massive change going on in the physical way we delivered services - to be physically, physical and also physically even the mobile bank.
Think about that, we are changing that thing all the time and you that ain’t one of them could go bump in a night because obviously, the customer scores keep going up. The teammate scores are strong, and that dynamic then sets you up for a million new checking accounts coming here for a thousand - Merrill Edge accounts et cetera, that you then can compound up.
Ebrahim Poonawala
And all of that, so I think that is a great point regarding I think BAC was earlier in the cycle in terms of AI. When you think about digital investments, like, a lot of peers do a lot of M&A. Like, what would geologically, how do you think about investing in digital. Where is the bank really, like, top three areas of the bank’s investing in today?
Brian Moynihan
Well, we bought a company in the GTS area, the medical payments and something like that. So there is some stuff that goes on and we invest with companies that provided services like in the trading platforms, there is a lot of business have gone up to, I think you said earlier, sort of digitized fixed income trading, things like that.
We are and our peers are investors in those companies and Zelle would be a big example of that, right. We all basically took EWS and change and revamped it into Zelle and things like that. So those are all investments we make. But by and large, it is not homegrown software, software that we can acquire and integrate and then also homegrown software.
And we have got $3.5 billion of technology development a year and now have $3.7 billion this year, up from $3.4 billion last year. It goes in all different directions. But a big part of that is integrating products and services that are out there from the best companies in the world and then figuring out how to make them work better.
So Erica was not homegrown and that we went to people who got them to do the natural language processing and analytical capabilities and build it for us with us, that we built together. There wasn’t a product like we take off the shelf, and - there are other, similar capabilities and we changed that. But it wasn’t there. So that is one that you bought it. You have got some and built some and that is what you do.
But you let the team as our experts in it, the tens of thousands of developers we have out there. They got to figure out the answer to business. People have to get the requirements and they have to figure out the answer and you can’t do it. Making acquisitions is just not the way we have done it largely just because it is just hard to get something out of those because in the size of our company, to stop and do.
So we acquired the Merchant Services business and take control of it. We acquired the half and didn’t have. We spent $300 million or $400 million in the system and now we are out selling it. That was a little different. We already - we have owned half of it, so wasn’t that remarkable thing I can bring in half and retool it. Other things is a little harder than a great because of just the cultural differences and all that stuff and you know we are always looking and thinking about it.
Ebrahim Poonawala
Maybe spending a minute on the Merrill and wealth management. Results have been extremely strong. Like, when you think about the business, any product gaps that come up, stick out that you feel like we should be addressing and then how do you see, like, the bank position relative to competitors, which are all of different shape and kinds?
Brian Moynihan
Well, the wealth management business broadly, we are U.S. based business and are just tremendous opportunity because I would argue that we probably own one of the biggest business in the world and we only do business in the U.S. that makes us one of the biggest in the U.S. and I think market share is 7% to 8% It is not like it is an aggregated business or a consolidated business.
So there is plenty of opportunity. Then you, the way we build it starting 20 plus years ago was we wanted to have a continuum from person - you know, take one of our teammates, come to workforce in one of your firms, that gets a job and starts their first investing and you know, et cetera, et cetera. You wanted to have a first investment product and then you wanted to build through their life that they would ever have to change companies.
And so if you go back to traditional banking, you know, I came out of the fleet side. We bought a company called Quicken Riley, if you remember those days and bought it. They are probably old enough to remember, but, we bought that to start to fill in this gap that the banks typically had something going on at the branches and then the customer disappear and then show back up in a private bank.
Merrill changed that dynamic at Bank of America, completely because you ended up with the best financial advisor force in the business to fill that gap. Everybody’s trying to develop it. So everybody is, doing a thousand financial advisors, 2000.
So we now have, you have 3,000 or 4,000 people in the branch still doing that. But we have, you know, this wonderful franchise with Merrill and the private bank that is, you know, tens of thousands of people now handling wealth management and that continuum is a key.
So if it is a business entrepreneur and they sell their company, you already have them on the business platform. If it is a person open our account and then you move along, you have them on the personal platform and then you bring that together through how you go after the business and what we do in the local markets execution, and our company, we will just reward our top markets, seven million referrals going across the businesses and local markets up from 300,000 a number of years ago.
Those teammates largely dominate in the field by what consumer teammates, Merrill teammates, private banking teammates and business banking, commercial banking. And they are playing in every market around the 90 odd markets we serve, they are in Asheville, North Carolina, which has come out wellness or Orange County. They are integrating that attack. And that is kind of interesting.
So that continuum is critical and that is why the wealth management business will continue to do better than anybody else because you are bringing in 400,000 new investor clients into the Merrill Lynch platform. And that is, some of those people will get wealthier and want right advice and some people continue their whole life without advice.
So you can do it even become a multi millionaire or any number, you can continue to do, self-oriented products that manage themselves maybe and automated rebalancing platforms and very efficient or you can go to advisors or you can have, and you can have a trust capability and you can borrow and those are interesting things.
So it is the holistic nature of the continuum combined with having all the capabilities. We have the biggest, one of the biggest trust business in the world, one of the biggest lending businesses, the wealthy people in the world and the investment business.
Now are we always pushing around? Yes. On our alternatives we keep improving our platform on things like that. Bringing clients, things they might not always see, you are always improving the product set, but the core piece of it is unique is that having that continuum, and I’m not sure anybody else is close.
Ebrahim Poonawala
Maybe guess just maybe moving to top of the house in terms of expenses clearly a big focus for the industry. I think our guidance is about 2% expense growth for the year. So two things, one, how do you have that controlled expense messaging, at the same time have your line of business heads go out, make the investments, do the right hires, like how do you message balance those dual investments?
Brian Moynihan
Well, at the end of day, it is not something we haven’t done before. So, so all the way leading up to pandemic, we were managing headcount down and then activity rose and that was by doing all the [indiscernible] out, what happened in the pandemic cause of some specialized programs we had to increase headcount because of just the flurry of activity and the way you did work and then some investments. So we have going to - now got to bring that back down.
And so yes, we are doing our as we speak. How do you do that? You just slow down the hiring. So our attrition rate from last year, this time this year has fallen in half. And so that was from 14% to 7%. So think about that, across 200 plus thousand people, that is a lot less people have to hire. So you had to pull that break, immediately.
And we did. And now you are seeing the headcount back down, because it wasn’t that we needed the people, it was that we couldn’t think this as we went through the summer last year, the great resignation, et cetera, you are afraid you couldn’t hire enough. And the engine started cranking. And when we decided to do something, we are pretty good at it. So suddenly, we were filling all the jobs and we hired net 3000 people increase in the fourth quarter.
If you look at it by months it was much more loaded. Then we had people scheduled to start after year end and are on. And now we are seeing the head count tip back down. Because at the end of the day, either way you control expenses in a big enterprise like ours is the work, you have to engineer the workout.
You can’t not do a great job for your clients. You can’t not do a great job for the risk and control and everything. You have to engineer the workout, and then let the headcount drift into it. And that is what we have been doing for years.
So when I became CEO, then the management team came together we had 285,000 people. We went to a high of 305,000 people reached a lower 204,000 people. Now we are running 217,000, 218,000 people. And we got to bring that back down.
Now embedded in that is massive and change in what the people are. So just an example I used in the branch before going back a 100,000 people, I would say maybe 15,000 to 20,000 were involved in the sales - client sales process and now twice that amount and the rest in the service side coming way down, and that is by engineering out all that activity.
There is checks deposited, those cash at the ATMs that the methodology, the payment, the Zelle replaced, Zelle - there is more Zelle transactions sent by our customers our checks written by that crossed over about three or four quarters and is growing a much faster rate and ultimately replaces all small balances checks.
So the dollar volume of checks written is no different. It is the number checks is down 25% of the last few years. So all that engineering, you take out work, but it is all about heads. I mean, at the end of the day, we have a wonderfully talented group of people.
We have a bunch of computers and data that they operate on, and we have the buildings to keep them dry and that is our business and so I don’t have like geez, let’s buy less inventory here and not sell that is not what you do. So, the question is 36 billion of our expense base human beings, and talented human beings. And how do you control it as you actually, you want to pay them more and you want to have better benefits.
How do you do that? We keep engine out to work, and bring the head count down. And that is allowed us what you hear from the $15 and $22 an hour. We haven’t raised the employee premium on people who make 50,000 since 2011.
We have never moved. We dropped it in half that year, and we never changed it. Not nominal dollars. They pay the same as they paid in 2000. You get it more. Well, you can engineer the expense down, you get less people in it. The benefits cost comes down. That is how you do it.
And then, so you always work in that. But it is all comes down to people make a mistake that people cost you money. The work costs your money, people do it. And the work can be done by people, by machines or by the customer.
And how do you engineer that? And you have to engineer the workout, and then the boxes will fill back up with the people you need. And so immediate is just slowing down the hiring, because we were over-hired, and we will come back down.
We should be about two in September we were 213, 214. We should be back down to that relatively quickly over the next three, four months. We will start to engineer that down. Because that was sort of, we didn’t need that. But then the way then you make sure they don’t make a mistake is we keep hiring the teammates to sell, the financial advisors, the private bankers, the global commission.
Right now, we are basically hunkered down, no managers, you know people in sort of functions that don’t face the customer, and or core producers call center agents and things like that. You got to keep your staffing levels there. But that is easily managed.
Ebrahim Poonawala
Got it. And just maybe I’m not going to talk topic on just on deposits, right? So I think people did a lot of details that you are learning in terms of deposit plans. I think the challenge when you talk to investors is, you have not been in a 5% Fed funds for so long. And so that that is the uncertainty. I think more than, like, anyone having a snow view. Like, what are your thoughts mean, I guess, even year-to-date? How deposit mix grew and how are leasing expanding?
Brian Moynihan
I think not only is the rate environment, it is been inverted curve and nominal amount higher that is different. That is also how the deposits got here. And the classic, economic analysis and M2 and all that stuff, you and your colleagues spent so much time analyzing.
The reality is something different happen here, the Fed printing money. Now the U.S. government went out and issued trillions of dollars that turn around hand into individuals, that is the dynamic that is very, very different.
And so what happens then? The expectations people would spend it down, it is not happened. Why? Because people are working in cash deposit. That money was given the people rightfully so in a period of extreme uncertainty to help to make sure that they wouldn’t change their behavior during the pandemic.
Well guess what the pandemic - U.S. opened up, the economy grew past where it was, 12-months in. It was growing again and two or three more amounts came. And so there is not only a dynamic of the rate structures, also a dynamic of that extra couple of trillion dollars have floated in early 2021.
If you listen to economists it was not clearly not needed to handle the thing that handled the pandemic damage. And then by the way, you have state level funding, state delay remittances and things like that. So that is overdue.
So our deposits are behaving as actually predicted they would have done. And that is a series of dynamics around corporations that tie their cash up and got more when they see that kind of rate, the higher investment cash moved.
So when I gave this statistics before about the person before the pandemic and after, if you look at the higher people, it would be about $1 million in balances. They have $750,000 in balances of pre-pandemic. They are down 25%.
But they were pre-pandemic because and they went up and then they came down because they deployed the cash because it is not cash in need for the daily cash flow need. So it really comes down to what the depositor for? Who has them? And what they are doing? But also behaving like we thought not a hell of a lot different than the data and then because, we have got a big customer base, but it is exactly what predictive we made the NII predictions.
There is a mind bender for everybody because it is you are trying to figure out these dynamics in a world where common view would be this would happen, that happened, now that is happened. A common view would be those deposits would be spent down. That hasn’t happened.
Common view would be as a Fed raise rates, but you see this massive sucking sound on those things that happened not much. And so that is where I think this question of where the money came from and how it was created, so to speak, and how it was delivered is different.
And then, the rowdy is that, in times that, the Fed has, when they raised rates since 2017, 2018, 2019, are because it was smoother and slower deposits grew the entire time. Because there wasn’t this excess amount I can cast it now to and so we grew.
And so in the last year where rates got up to 2% and whatever it was and stayed there for a year with a total all in cost of deposits of like 40 basis points against 2.5% of what it was, that is two plus, our deposits grew during that, and we didn’t change, no rates moved. And that is more than normalized behavior effect.
So what we are seeing is transactional deposits, not a lot of change. There are ebbs and flows by people paying their taxes, and bonuses coming in and out and pay monthly payroll - biweekly payrolls, corporates are moving at high end balances in the consumer side have moved, already moved, because four, four and a half to five is not that much difference in moving.
And then they will settle in and then you will have to grind out that core growth. Then that million new checking household has to come through and deliver through that. And that is what happened, you know, in the last rate raising cycle.
So, we watched it every day. We predicted the team I make the team predict 12-weeks ahead every week. And I make them compare how it came out versus said, because we are learning. And that is, I don’t make the team, the team does it, but I ask them to do it. The start, now they do it.
But you are trying to get them to learn the differences because a lot of the - this is the way it should happen. Stuff isn’t on the table because the dollar denominated the amount of money of one of the people’s accounts, look, six or seven or 12 states are giving rebates and taxes now and payments and things.
Now the snap stuff’s stops and stuff that will cut, you know, so there is a lot of stuff going on that will play out. But they are behaving like we thought they would.
Ebrahim Poonawala
Got it, we have very five moments left. One, just capital deployment mean they think last year was interesting. We built a fair amount of capital over the back half of the year, following the stress test. Just remind us in terms of capital deployment priorities and when you think about potential for changes in regulations, like how do you approach capital management, capital return in that backdrop.
Brian Moynihan
So our basic principles we made about, maintain a 50 basis point buffer to the binding minimum. Sure. And that binding minimum can change based on different attributes. And so that is kind of the strategy.
Now, why we used to have a hundred, we went down to 50, largely as you get bigger and bigger numbers, that volatility around that is to get higher, capital levels is less honestly. And so, you know, look, they have got to finish Basel, et cetera, you got to get through another stress test with a set of criteria that look in some cases pretty much the same in other case is the GDP drop would be more quick, et cetera.
So we will see how that play’s through and it is not even our models, you know, it is the, it is the Fed models and we don’t know what those models, they have never allowed us to look at those models. So we can, we could try to predict them. Everybody can look at them.
But at the end of the day it is our models would show that our portfolios handle those types of scenarios pretty well. But we will see what the Fed model show and we will see what they do. But the basic principle is 50 basis point buffer.
Maintain capital to grow the business. So loans are growing and RWAs going up. We maintain capital, they do that, or the investment made in the markets business. We have RWA targets by each of the businesses.
And basically then they hit those targets and you have the capital ratios. We remain about 20, 11.2, we got to get to 11.4 to be 50 basis points above the new GC buffer coming in at next year. We are doing 40 basis points, earned capital quarter to payout on our [14.50] (Ph) base points and dividends and then the rest is there to you finish up that growth. So you would expect us to cross over that level relatively shortly. Not this quarter, but probably next quarter the chunk of this quarter.
We are buying back stock as we speak today because the trajectory is strong. And that is how we run it. In terms of last year that we got to surprise the high side, you know, we will see what happens this year, but you just absorb that and go on. But the number one priority for capital is to grow the business organically where there are WA demands and are needed.
The number two is to, you know, is to continue the dividend and grow it, you know, sort of modest modestly. And the number three is to buy back stock. And we are always doing all of them, honestly. It is not like you do one and then the other and the other.
It is all three of you going on literally as we speak, you know, we increase the dividend a little bit each year. We, you know, to push it up, keep the payout ratio, you know, in a 30% or below level, importantly to make sure you never have to cut it. That is a principle we talked to you about 15-years ago, and it is still true. And we basically walked it up to stay.
We basically walked it up to stay at that level. You have 70% left. What do you need to grow the business? What do you need to - and then everything else goes back to shareholders, because at the end of the day, we don’t need - we don’t want the capital sitting around the balance sheet, awaiting and you just keep adjusting to it. And look, our industry is well capitalized. There is no question. The industry has tremendous liquidity, there is no question.
During the pandemic, this industry actually ran to the fire as opposed to had it was forced to run away from it. The idea that - you have had administrations, two administrations go one administration go. Even this say, the industry has plenty of capital. So we got to be careful, because what seems like an easy decision to keep raising capital levels, you forget this reality.
So when I talked, told Congress, when we got all the chance to talk to him last year, and somebody said, what does a 100 basis points mean? And you basically, what sounds small, you got to realize there is a 10% increase in nominal capital, which is 16 billion of capital, which you multiplied times 10 again. So it is $160 billion lending capacity.
You are going to see a lot of companies in the next three days, ask how many of them have $160 billion loan book. It is a massive change. And that is just us. And you take it across to what the industry could be doing lending wise and sporting growth. And that is where you have to have a balance in this. And so you can always say, if out here it would be safer, but that is an easy decision. So, I think, but usually cooler heads prevail and things could work too.
Ebrahim Poonawala
Do you think there is a good appreciation of that within person?
Brian Moynihan
I think, there are - there is. And I think it is becoming more, plus there is a competitiveness question for us versus other countries. If you look at the proforma largest banks in the U.S. and look at their assets to equity assets ratio and a common equity assets ratio and look across the world, you are saying, wait a second, you can have institutions the same size and half the capital meets the requirements in other countries are saying that can, you can’t be counting the beans the same way. So, the gold plating and the standard, all that stuff really changed. America’s capital bases are much bigger as a percentage of size, and then other countries.
And that that is one of the things you got to square before you adopt a standard that and that is otherwise the industry becomes uncompetitive. And this is one of the most competitive industry to have in the country. You want believe in America, you got to remember that this industry is strong is and that is why we are sitting here looking at economy, which is bigger than anybody else’s.
Actually pre-financial crisis now the U.S. economy has gone on 13 trillion, 14 trillion to 20 trillion. European economy is basically flattish and so I always say, which do you want outcome? You have - you want banks and things that can support that kind economic growth. And that is why banks are big, because economy -.
Ebrahim Poonawala
We have run out of time. So I would like to end there. So Brian, thank you so much.
Brian Moynihan
Thank you.
Question-and-Answer Session
End of Q&A
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Bank of America Corporation (BAC) Presents at 2023 BofA Securities Financial Services Conference (Transcript)