Bank of America Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
January 13, 2023

There are 13 speakers on the call.

Operator

Good day, everyone, and welcome to today's Bank of America Earnings Announcement. At this time, all participants are in a listen only mode. It is now my pleasure to turn today's program over to Lee McIntyre. Please go ahead.

Speaker 1

Thank you. Good morning. Welcome. Thank you for joining the call to review the 4th quarter results. I know it's a busy day with lots of banks reporting and we appreciate your interest.

Speaker 1

I trust everybody has 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 going to first turn the call over to our CEO, Brian Moynihan for some opening comments and then ask Alistair 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.

Speaker 1

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 to U. S. GAAP can also be found in our earnings materials that are available on the website. So with that, take it away, Brian.

Speaker 2

Thank you, Lee, and 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 $7,100,000,000 of 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.

Speaker 2

And 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 29% improvement in net interest income, coupled with a strong 27% growth in sales and trading results by Jimmy Demar and the team.

Speaker 2

This growth will exceed the impacts of lower investment banking fees and the impact of bond and equity market valuations On asset management fees and 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 in quarter 4% to 11.2% and we achieved that without changing our business strategies. We're well above 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 while both growing loans and reducing outstanding shares 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 and also quarter, but asset quality remains strong.

Speaker 2

Charge offs are well below both the beginning of the pandemic as well as longer term historical levels. And again, I'll touch on this in a few pages. All that being said, the simple way to think about is pretax pre provision income, which neutralizes Grew 23% year over year. Let's turn to Slide 4. Slide 4 shows the year over year annualized results.

Speaker 2

And Quarter 4 results were a nice finish to a successful year in which we produced $27,500,000,000 of 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 $370,000,000 And by contrast, last year in 2021, we released $6,800,000,000 of 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 has helped by our years of responsible growth.

Speaker 2

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 We show digital trends and 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 $1,000,000 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 and the average opening balance, not the average balance, but the average opening balance of these new accounts It's over $5,000 We also produced more than 1,000,000 new credit cards, the 6th consecutive quarter of doing that bring us back to levels that we generate pre pandemic.

Speaker 2

Quite a call that you can see on appendix slides 28 for consumer remains very high on new originations. Verified digital users grew to 56,000,000 73% of our consumer households fully digitally active. We have more than 1,000,000,000 logins to our digital platforms each month and that's been going on for some time now. Digital sales are also growing and they now represent half of our sales in the consumer business. Eric, our virtual digital assistant is now handling 145,000,000 interactions this past quarter and has passed 1,000,000,000 interactions since its introduction just a few years ago.

Speaker 2

This saves a lot of work for our team. When you move to the G WIM 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 of markets. By the way, during 2022, our average Merrell household opened with the balances of $1,600,000 Again, very high quality account openings.

Speaker 2

Unflows, When consigned across all our investment platforms in our Consumer Wealth Management business, we saw $125,000,000,000 of net client flows this year. Additionally, we continue to see increased activity around both investments and our G1 business and our banking products. Diversified bank element adds a Strong differentiator for us as a company. It also supports the healthy pre tax margin. This helped the G WIM business deliver strong operating leverage for the year And they grew net revenue and net income to records.

Speaker 2

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 continue to deepen and expand 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 quarter 4th quarter sales and trading performance on record, growing 27% from last year, ex DVA. This Let's move to Slide 6 and talk about operating leverage.

Speaker 2

As I've said to you for many years, one of the primary goals of this company 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 of operating leverage as you can see leading up to the pandemic. Beginning last year in Q3 of 2021, I told you that we've now started achieving operating leverage and got back on streak, 6 quarters of operating leverage despite all the things that are going on out there The team continues to drive towards that for 2023. So I thought I'd spend a few minutes on a discussion of topics. It's been important to as we've talked about investors over the last couple of months, deposits and credit.

Speaker 2

So 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 impressive period, A surge in deposits from the pandemic related stimulus, the impact of monetary unprecedented monetary easing, the impact of high inflation The reversal of that was unprecedented pace and size of rate hikes and monetary tightening. But on a year on year basis, average deposits Of $1,930,000,000,000 are down 5%.

Speaker 2

This reflects the market trends and in fact reflects high tax payments to the governments in quarter 2022. In addition, as we move forward through 2022, customers with Excess cash, investment oriented cash saw 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%. Noninterest 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.

Speaker 2

Corporate treasurers manage $500,000,000,000 of deposits they have with us. The impact of their activities has a change in the mix. On the personal side, you can see the checking account balance is floating down a little bit from core expenses and spending, While more affluent customers put money into high yearly deposits in the market, we do manage all these products differentially. And the discussion is deposits by business segment, You can see on Slide 8 and we'll talk through that. So this breaks down our deposits in a more near term trend.

Speaker 2

In the upper left, you can see the full year across the 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 2nd quarter. Then we saw the acceleration of rate hikes in deposits that move to product seeking yield in certain customer segments. But in large part, what you've seen over the course of the quarter 4 has been stabilization and more normal client activity. Simply put, we ended quarter 4 of 2022 With $1,930,000,000,000 in deposits, roughly the overall level as we added in quarter 3 ending deposit balances.

Speaker 2

So 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 saving accounts and a limited portion of CDs. Across the quarter, We saw a $24,000,000,000 decline in total, down 2%. We have seen small declines in customers' continued higher levels Spending paid down debt and also move money to the brokerage accounts even in this business. Higher wages have offset this While we saw a decline in quarter 4 deposits in consumer, correspondingly also saw brokerage levels of consumer investments increase $11,000,000,000 capturing a good portion of those deposits.

Speaker 2

In general, think of these consumer deposits as being very sticky of $1,000,000,000,000 That stickiness along with net checking account growth reflect And the value proposition of a relationship transactional account with our company. It also has it reflects industry leading digital capabilities we offer It also reflects that the customers in our mass market segments have fewer excess cash investment style cash balances. 56 percent of the $1,000,000,000,000 in consumer deposits remain in low and no interest checking accounts. And 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 $300,000,000,000 of deposits Have became more stable across the Q4.

Speaker 2

They also here you also witnessed a shift to higher yielding preferred deposits as you can see on the from lower yielding transaction 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, but November's rate hikes began to slow and the probability of future rate hikes became less. People have moved their money and we saw an uptick in balances as we move 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.

Speaker 2

Our global banking deposit movement moves across $500,000,000,000 in customer deposits. The shift here is what drives the mix total for the company. It's pretty typical with the exception that happened very quickly in quarter 4, driven by the pace of rate hikes. In a rising rate environment where company's operational funds are more expensive, we anticipate these changes, Particularly in high liquidity environments, these clients use both cash for inventory yield, pay down debt or manage their cash For investment yield, we have seen the mix of gold banking interest bearing deposits move from 35% last quarter to 45% in quarter 4. And obviously, we're paying higher rates on those deposits to retain them.

Speaker 2

Customer pricing here is customer to customer by on a customer to customer basis based The debt to relationship, the product usage and many other factors. So overall, deposits rates paid as a percent of Fed funds increases Are still very favorable to last cycle, even as rates are rising much faster in the life cycle last cycle. I would note, well, to the last cycle The Fed increases have been rapid and we'd expect to pay higher rates as we continue to move through the end of the interest rate cycle. So just remember, while we're paying more for deposits, We also get that on our asset side. That is simply why the NII's net interest income is up 29% from quarter 4 2022 Now let's move to the second topic I want to touch on specifically, which is credit.

Speaker 2

And this begins on Slide 9. First, it is an intellectual truth that our asset quality of our customers remains very healthy. On the other hand, it's Impossible to gainsay that the net charge offs are moving to pre pandemic levels. So in the Q4, we saw net charge offs of 680 $9,000,000 increased $160,000,000 from quarter 3. The increase was driven by both higher commercial and credit card losses.

Speaker 2

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 broad trends in the portfolio. These were already reserved for in prior periods and based on our methodologies, once we charge off in quarter 4. Credit card charge offs increased in quarter 4 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 and delinquencies to still very low pre pandemic levels.

Speaker 2

Provision expense was $1,100,000,000 in quarter 4. In addition to higher charge offs, provision included roughly $400,000,000 reserve build. This was higher than quarter 3 reflecting good credit card and other loan growth combined with the reserve setting scenario. So let's just stop on the reserve setting scenario. Our scenario our baseline scenario contemplates a mild recession.

Speaker 2

That's the base case of the economic assumptions Towards a recession 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 scenario. Now to be clear, To give you a sense of how that scenario plays out, it contemplates a rapid rise in unemployment, a peak of 5.5% early this year in 2023 They 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 3637 to highlight differences in our credit portfolios between pre financial, pre pandemic and current status.

Speaker 2

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 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.

Speaker 2

So that gives you a long term perspective, which I think keeps in context the idea that we're moving off the bottom in Credit cost towards a level which is normalized into pre pandemic, but that level is very low in the grand context of banking. So before I move to Alistair, I want to just 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. These balances are drifting down, but they still have plenty of cushion left. And while their spending remains healthy, We continue to see the pace of that year over year growth slow.

Speaker 2

In the aggregate, in 2022, our consumers spent $4,200,000,000,000 Which outpaced 2021 by 10%. You can see that on Slide 35. Two things to note on that consumer spending pace. Continues to be a slowdown. Year over year growth percentage earlier in 2022 were 14% year over year.

Speaker 2

They've now moved to 5% So what does this mean? Well, that level of growth in year over year spending is consistent with the low inflation 2% growth economy we saw pre pandemic. They're also moving from services to experience 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 Alistair to go through the rest of the quarter.

Speaker 2

Alistair?

Speaker 3

Okay. Thanks, Brian. And let me start with the balance sheet and I'll use Slide 13 for this. During the quarter, our balance sheet declined $23,000,000,000 to $3,050,000,000,000 driven by modestly lower global markets balances. Our average liquidity portfolio declined in the quarter, reflecting the decrease in deposits and securities levels.

Speaker 3

And at $868,000,000,000 It still remains $300,000,000,000 above our pre pandemic levels. Shareholders' equity increased $3,700,000,000 from the 3rd quarter as earnings were only partially offset by capital we distributed to shareholders And roughly $700,000,000 in redemption of some preferred securities. We paid out $1,800,000,000 in common dividends And we bought back a 1,000,000,000 of shares, which was $600,000,000 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% And that obviously leaves capacity for balance sheet growth and our TLAC ratio remains comfortably above our requirements.

Speaker 3

Okay. 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 $180,000,000,000 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 43 basis points, common dividends used 11 basis points and gross share repurchases uses 6 basis points. And while the balance sheet was down, loan growth drove a modest increase in RWA using 3 basis points of CET1. So we were able to support our loan growth and return capital and add to our capital buffer in the same quarter.

Speaker 3

Let's spend a minute on the loan growth by focusing on average loans on Slide 15. And 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 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.

Speaker 3

Turning to Slide 16 and net interest income. On a GAAP non FTE basis, NII in Q4 was $14,700,000,000 and the FTE NII number was 14,800,000,000 Focusing on FTE, net interest income increased $3,300,000,000 from Q4 of 2021 or 29% driven by a few notable components. First, nearly $3,600,000,000 of the year over year improvement in NII was driven by interest rates. Year over year, the average Fed funds rate has increased 3 59 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.

Speaker 3

And focusing just on interest bearing deposit rates paid, the increase is 91. So even while Fed Funds rates 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 $1,000,000,000 improvement in the quarterly securities premium amortization.

Speaker 3

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 pay downs and that's added nearly $400,000,000 to the year over year improvement. And 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 lines. So it's revenue neutral to both sales and trading and to total revenue.

Speaker 3

And as you can see in our material, global markets NII is down $660,000,000 year over year. Okay. Turning to a linked quarter discussion. NII is up $933,000,000 from the 3rd quarter, Driven largely by interest rates, that $933,000,000 increase included a 3.7 $2,000,000 decline in our global markets NII. The net interest yield was 2 point 2 2% and that improved 55 basis points from the Q4 of 2021.

Speaker 3

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 We expect a seasonal decline in global banking deposits and that the other deposit mix shifts experienced in Q4 to continue to increase based on higher rates.

Speaker 3

And as noted, the impact of that is recognized and offset in non interest income, so it's revenue neutral. So starting with the 4th quarter NII of $14,800,000,000 and assuming a decline Of roughly $300,000,000 of Global Markets NII in Q1, which would be similar to the 4th quarter decline. That would get us to a Q1 number around $14,500,000,000 In addition, we have to factor in 2 less days of interest, which is about $250,000,000 So that would lower our starting point to $14,250,000,000 We believe the core banking book We'll continue to show the benefit of rates and other elements and can offset most of the day count. So we're expecting Q1 NII to be somewhere around $14,400,000,000 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. Okay.

Speaker 3

Let's turn to expense and we'll use Slide 17 for the discussion. Q4 expenses were $15,500,000,000 And they were up $240,000,000 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.

Speaker 3

Our headcount this quarter increased by 3,600 from Q3. And 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 $400,000,000 to $500,000,000 in seasonally elevated payroll taxes. And Q1 will also be the Q1 to include the costs of the late October announcement by regulators of higher FDIC insurance costs.

Speaker 3

And as a result of holding the leadership share in U. S. Retail deposits, that will add $125,000,000 to each of our quarterly costs On asset quality, we highlight credit quality metrics on Slide 18 For both our consumer and commercial portfolios and since Brian already covered much of the topics on asset quality, I'm going to move to a discussion Our line of business results starting with Consumer on Slide 19. Brian noted the earlier organic growth this point, we have the leading retail deposit market share. We have leadership positions among the most important products for consumers At this point, customer satisfaction is now at all time highs.

Speaker 3

And we produced another strong quarter of results in consumer banking that resulted in $12,500,000,000 in net income in For the quarter, consumer banking earned $3,600,000,000 on good organic growth And delivered its 7th consecutive quarter of operating leverage, while we continue to invest for the future. Note that our top line grew 21%, while expense grew 8%. The earnings impact of 21 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.

Speaker 3

So 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 $335,000,000 year over year As our insufficient funds and overdraft policy changes were in full effect by the end of Q2 of this year. And 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.

Speaker 3

And remember, much of the company's minimum wage hikes And quarter 2 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. And 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.

Speaker 3

And you can see some of the stats on Slide 17 in the appendix. We can best summarize by noting we've got $318,000,000,000 more in deposits, 10% more checking customers, 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 This led to full year records for both revenue and net income of $21,700,000,000 $4,700,000,000 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.

Speaker 3

But what helps differentiate Merrill and the private bank is a strong banking business at scale With $324,000,000,000 of deposits and $224,000,000,000 of loans, so 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 Merrell in the 4th quarter, 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 $20,000,000,000 of loans in this business since Q4 of 2021, growing 10% and 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, And you can see the business earned $2,500,000,000 in the 4th quarter on record revenues of $6,400,000,000 Pretty remarkable given the decline in investment banking fees during this year.

Speaker 3

Lower investment banking fees, higher credit costs And a modest increase in expenses were mostly offset by stronger NII and other fees. So 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 $1,100,000,000 in Q4, Declining $1,300,000,000 year over year in a continued tough market. Still, we increased our ranking In overall fees for the full year 2022 to number 3 as we've continued to invest in the business. The $612,000,000 increase in provision expense reflected a modest reserve build of $37,000,000 in the 4th quarter compared to a 4 35,000,000 released in the year ago period and pre tax pre provision income grew 13% year over year.

Speaker 3

Expense increased 4% year over year and that was driven by strategic investments in the business, including hiring and technology. Switching to Global Markets on Slide 22 and as we usually do, I'll talk about the segment results excluding PVA. You can see our 4th quarter record results were a very strong finish to a good year. The continued themes of inflation, geopolitical tensions and central banks 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. 4th quarter net income of $650,000,000 reflects a good quarter sales and trading revenue, partially offset by lower Shares of Investment Banking revenue and it's worth noting that this net income excludes $193,000,000 of DVA losses this quarter as a result of our own credit spread movements.

Speaker 3

Reported net income was 504,000,000 Focusing on year over year, sales and trading contributed $3,700,000,000 to revenue and that was improved 27%. That's a new 4th quarter record for this business, besting the previous one by 21% and at $16,500,000,000 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 quarter a year ago and the FICC improvement was primarily driven by growth in our macro products, while credit products Also improved from a weaker Q4 2021 environment. We've been investing continuously over the past year in our macro businesses. Increased about 10%, primarily driven by investments in the business.

Speaker 3

Finally, on Slide 23, we show all other, Which reported a loss of $689,000,000 and 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

Operator

We'll take our first question from Glenn Schorr with Evercore. Your line is open.

Speaker 4

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 On starting point on the quarter, and your words were less variability in NII for the rest of 2023. So I guess my question is, you got a lot of loan growth, You have a few more rate hikes hopefully coming through and I understand the opposite. The flip side of that is deposit migration, some outflows and betas.

Speaker 4

But could you fill in those blanks because I think I won't speak for everybody else. I know I am we're still expecting some growth in NII For the calendar year, so maybe you could talk through some of those pieces and maybe the outflow in Global Banking non interest bearing is a big piece Thank you.

Speaker 3

Glenn, I'll start with just by way of context, obviously. We're coming off a period with historic inflows for pandemic deposits. And now in Q4, we're beginning to see the impact of quantitative tightening And a number of sharp rate rises. So that obviously creates some uncertainty. We don't necessarily have a playbook for that.

Speaker 3

We just got to see how actual balances perform and we've got to see how the rotation and the rate paid Developed. So it's dynamic, it's evolving and we manage and we forecast that weekly. So when we lay out for you the actuals on Page 78 of the earnings presentation, we're trying to show you what we're seeing in real time around Balances and mix. So 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 and we'll get that back obviously in Q2 and Q3.

Speaker 3

And then we highlighted the global markets NII impact. It's always been there. The last couple of quarters, it's been around $300,000,000 It is revenue neutral to shareholders as we point out because we pass that along clients and we capture elsewhere in sales and trading, but it does obviously impact the NII. That's why we're highlighting it. But as it relates to the forecast, Look, we feel like the modest balance declines are kind of in there that may continue.

Speaker 3

And this continued rotation from some of the Non interest bearing to interest bearing, we got some pricing and rate pressure. So that's in the back of our mind too. And the only final thing I'll just say is We're reluctant to go a whole lot further out. 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.

Speaker 3

So I will say this, this is the final point. We just got to I think we got to stay patient because we got to see how rates and balances And rotation shake out and as rates return to more normal and as customer behavior and you can sort of see it, It's behaving maybe a little more normally, then we should be able to resume our upward path over time, but we got to see how this shakes out and that's why we don't want to go out beyond Q1 at this stage.

Speaker 4

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. But can you talk through the big the $1,600,000,000 sequential pickup in criticized books from last quarter, what's driving that and how you feel about reserves against that?

Speaker 4

Thanks.

Speaker 3

Yes. So you're aware, the main driver there is commercial real estate and it's specifically around about a And what we've chosen to do is as rates are rising here, we're pushing that through the models. And just with the debt service coverage, it comes down. We pushed through the downgrade. So we've chosen to do that.

Speaker 3

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. So we're not alarmed there. We're just following our own process with

Speaker 2

Just remember that we're talking about office with very high quality underwriting characteristics, all A class, etcetera. And so we just have a conservative rating process frankly. It's well viewed out there and well looked at by many people. But Remember, our office is $14,000,000,000 to $15,000,000,000 of the total portfolio, so we feel very comfortable we are. And then obviously, we've built reserves Again, some portfolios across the board that are strong and reflect the as I said earlier, basically a mild recession in the base case and a worse recession in the adverse case That we wait 40%.

Operator

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

Speaker 5

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

Speaker 2

Don't disclose that, but you might assume that there's a fair amount there are 3 components to this. 1 is what the model say. 2 is Basically, uncertain and precision and other things we overlay and then a judgmental and you might think that there's a fair amount out right now with the uncertainty. But So, we the model piece of that would be a portion of it.

Speaker 5

Very good, Brian. And then when you look at your deposit behavior of the consumer to past cycles, Is there any material differences in the way they're moving money around or not moving money around from their checking

Speaker 2

I think when you look at the Higher end consumer, not really. They move to when the rate in the market yields money market funds, we move them to it and that's part of what we do. And that sort of Investment cash, Gerard, as we call it, moves the checking accounts don't move. The difference frankly is that there was a lot of stimulus That was in addition to the earnings power of consumer. So we've never had that in history.

Speaker 2

But and so that amount of stimulus Median income households or so and the general consumer business, I'll give you an example that cohort that was $2,000 to $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. So they're drifting down, but Still multiples. The big question was, will they end up spending that down? If they're employed, probably not.

Speaker 2

But if the unemployment rate changes in our models assume the unemployment rate changes. So 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 that was where we got to. We have very low CD Volumes and things have a fair amount of money markets, but most of it's checking. That's why we showed you that differential on checking.

Speaker 2

So is it different yet probably in the mass consumer business just because they We're sitting on more cash and may use that cash in certain scenarios, but the rest of the behavior is Largely the same, including in the corporate business where people can have less balances and the effective credit rate generates bigger number to cover their fees, so they tend to pull the balances out.

Speaker 5

Just quickly, Brian, just when you look at the high net worth in corporate, Did that move from 0% to 3% Fed Funds, for example, versus 3% of 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?

Speaker 2

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 And Wealth Management in the 4th quarter, dollars 300 odd 1000000000 and $300,000,000,000 basically they're flat if you look across the last several weeks. So, there's always a little bit of migration To the preferred deposit, which is a market for a higher yielding sort of money market account. But the big shift in that was Yes. Frankly, in the Q2 of 2022, when I think we had $50,000,000,000 odd numbers of tax payments, which was a 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. So what we're seeing is the last 4 or 5 weeks we're seeing relatively Stable in deposit balances.

Speaker 2

Quarter end 3, quarter end 4 basically flat, a little bit of movement among the categories, but in that business frankly A fairly sort of stable place right now. And so I think the long answer, you realize the short answer, if they move the money, they kind of already moved it.

Speaker 5

Right. Thank you very much.

Operator

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

Speaker 6

Hi. I guess, Alistair, I guess, no good deed goes unpunished. I mean, NII did grow 21% The year 2022, it did grow 7% linked quarter in the 4th quarter, up $900,000,000 but 6 weeks after you gave Guidance last quarter, you lowered that guidance by $300,000,000 And it just raised some questions about the quality of your modeling or if you had your arms Completely around the asset liability management. So 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.

Speaker 3

Yes. So, Mike, if I go back to 6 months ago, Quarter 2 earnings. What we said at the time was we thought over the course of the next 6 months, NII might go up by 1,800,000,000 In actual fact, it's gone up 2.25. So that's the actuals. Remember, we're forecasting as best we can at any given time, Up 2.25.

Speaker 3

Q3 was more favorable than I think we had thought and Q4 was less favorable. And the Q4 was less favorable in large part because the balances behaved just a little bit differently and the rate paid just a little bit differently And the mix or rotation, if you like, that behaved a little differently. And it kind of makes sense because Q4 is where QT kind of kicked in. So look, we don't have a great deal of precedent. It's obviously a historic period.

Speaker 3

It's difficult to forecast Quarter to quarter and it's our models are just a lot more sensitive right now. So, I think we're going to 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.

Speaker 6

It's like the First half of your round of golf, you played well. You should have just stopped after then, I guess. But I guess As we look so in other words, that $400,000,000 extra that you got, you're kind of giving back here from the 4th to the Q1. So 14.4 $1,000,000,000 NII guide. If you annualize that, that would be still 9% NII growth in 2023.

Speaker 6

Is that a fair starting point? Can you give us not big confidence, but a little confidence given that Deposits have stabilized, the day count cards are seasonally lower. So again, you analyze that at 9% NII growth. And then, Brian, still on Vince, is there any change there or are you going to keep it to just like 1.5%

Speaker 2

growth? So, on the first thing, Mike, it was something I was going to pick up on earlier to the first You picked up going to the point, we will have growth at NII year over year in the range you talked about if you take 14.4 percent, as Alistair said, we expect it to sort of be less variability and annualize that and compare that to 22 9% as you said, so you're exactly right. So that's good growth. And I think you'll see as you move through the year of 'twenty three, leave aside the economic scenario Playing out, but you'll see you'll move from where we are today, which is uncertainty 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, etcetera. So you've got it right.

Speaker 2

There'll be nice NII growth year over year. On expenses, Yes. If you look at your guys' estimates for us, 62.5%, which is what we sort of said earlier this In the Q4, we're comfortable with that. That's what the average of the Street analysts are and that takes a lot of good management to get there and We'll continue to work on it and let the headcount drift back down and continuing to invest in things that provide efficiency. So you've got And key to that is the 6 quarters of operating leverage and the idea of continuing that going.

Speaker 6

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

Speaker 2

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

Speaker 6

All right. Thank

Operator

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

Speaker 7

Good morning. Alistair, 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?

Speaker 3

Yes. So we're not going to look too far into the future, John. But 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. So 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.

Speaker 3

So that's number 1. Number 2, with respect to commercial, this quarter was a little unusual. We had Three deals that we ended up having to charge off, not correlated in any way. They're in totally different businesses. And they've been hanging around for a while, but it was 2 of them are fully reserved.

Speaker 3

So it didn't come as a surprise. But I think that because The commercial stuff was so close to 0, it immediately looks like 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, but the commercial portfolio continues to look very strong.

Speaker 7

Okay. And 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? And 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 4th, 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.

Speaker 3

Yes. So we said we're wide open for business in the Q4, and that remains the case. Ryan covered the capital point. We had to do what we had to do in the 3rd quarter. We did it.

Speaker 3

We've added 75 basis points of capital in the last two quarters, puts us in a great place. So Mainly what you're seeing in Q4 is just it was a slower environment for loan growth. A year ago, we were talking about the fact we anticipated that loan growth might be High single digits and we grew 10. This year, we feel like it's going to be mid single digits. It's going to be slower and it's going to be led by commercial.

Speaker 3

It It'll be led by card, but things like securities based lending, that's just quieter now. We've got balances being paid down there. Mortgage is quieter this year. And then in our base case, you look at the economic blue chip consensus, you can see The forecast is for recession. So it will be a quieter loan growth year this year, I suspect, but we're open for business to support our clients.

Speaker 7

Okay. That's helpful. Thank you.

Operator

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

Speaker 8

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 $57,600,000,000 in NII for 2023, Right. He was saying 14.4x4 or 9 percent NII growth, you seem to be going with it.

Speaker 8

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? And the second question is also for you, Brian. I think that You've done an unbelievable job at transforming the company. And 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.

Speaker 8

And clearly, there's a lot of uncertainty over the NII outlook. But could you sort of give us What we should be potentially excited about that you can control with regards to the revenue trajectory from here And also you spent so much time on deposits. I'm just kind of confused on the message in terms of deposit declines from 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 3 questions in one. I apologize, but that's it.

Speaker 2

I think I'll put all those questions together in one answer. If you go to the page, it's in the report where we sort of say look at the difference between the Consumer business, in 2019 and now. And it's something to be excited about because we have During a period of time where we were completely shut down in branches like 2,000 opened back up, we actually went down from 4,300 branches to 3,900 branches. We We have 10% more checking accounts. The customer favorability is an all time high.

Speaker 2

Our Small business, part of that business is the biggest in the country and growing. And you look at that and that provides a great anchor, which That great stable deposit base we show you on the slide where we show that base. It also provides a lot of very low cost deposits and 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 continue to grow deposits in the business in the mid single digits, which just is infinite leverage. And so that's something to be excited about from not only customer side, where we're digitized and The Observe usage is going up, Erica usage is going up, Erica meaning our Erica, not you Erica, but And 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 3 point something trillion high $3,000,000,000,000 of Assets growing net households at the fastest rate it's grown in a long, long time, maybe history, growing advisors, those are things that get excited.

Speaker 2

That's the organic growth engine of the company. You got to put that against the backdrop of a plateauing of NII, which is basically what Alistair said, sort of think about Less variability around the 14.4% starting number, which Mike analyzed and did math. And so he did the math and made it out. But That provides us a good base of which to drive forward. And so you really got to get through the economic uncertainty and then all those things will start to bear.

Speaker 2

Meanwhile, the trading business, which we invested Couple of years ago now had its best Q4 ever and Jimmy and the team are doing a good shape. And so we just feel good about the overall franchise, more customers, more of each customer and then that provides a big stable base, which is 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 rate last rate rising increase stopped and produced the 20 quarters of operating leverage And things like that. So that's pretty good to be excited about. Biggest bank growing its franchise and the only growing solid economy in the world At a faster rate than anybody else is pretty interesting.

Speaker 8

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

Speaker 2

The scenario of rate cuts and rate rises, we basically use blue chip. So I'm not sure. It depends on what's causing that. So if it's a normalization of the rate curve back to Yes. To say 3% on the front end, 4.5% on the back end or something like that, that's different than what you saw When they had to cut rates for the pandemic or after the financial crisis and left in there for years to get the engine of the United States economy restarted.

Speaker 2

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

Speaker 3

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 and that's created a lot of volatility and it's created the asset management business, it's had a big sell off in bonds and stocks. So, we're poised now in a lower base where we can grow from here. Same thing, if you look at our net income, we've really outrun A pretty historic decline in investment banking fees. So we got a diversified set of businesses where as some normalcy returns, We can see some pickup in those, felines as well.

Speaker 8

Thank you very much.

Operator

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

Speaker 9

Thank you. Good morning. I wanted to follow-up, Alastair. You had about $800,000,000 of incremental interest income from the And I'm just wondering if you can help us understand how much of that was attributed to the continued benefit from the Swap portfolio and also then how would you expect that to impact your outlook for the 14.4% in the Q1 guide? Thank you.

Speaker 3

Yes. So 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. So you're picking up on the right thing. It's mainly the treasuries That are in there, they're swapped to floating.

Speaker 3

That way we don't have any capital impact from rising rates. And so you're going to see the securities yield just continue to Pickup, number 1, based off of the treasuries swap to floating as floating rates go higher. And number 2, As the securities come due, there'll be fewer and fewer of them at lower rates. And so you're going to see the pickup over time.

Speaker 9

And just as a follow-up, what's our best benchmark rate to kind of watch that trajectory for how we can understand that helper from that swap portfolio?

Speaker 3

Normally, it's SOFR, secured overnight financing rate.

Speaker 9

Okay, great. 2nd quick one just on capital. Yes, 20 basis points increase in your CET1. You did $1,000,000,000 or so of the buyback. Just wondering how you're thinking about capital return with the bar package of rule Still ahead of us going forward?

Speaker 9

Thanks.

Speaker 3

Well, I think Brian said the right things. The strategy hasn't changed. We've got to, 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. So we got to wait, I think, until we see those.

Speaker 3

They'll go through a comment period. At that point, we'll offer much more perspective. But 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 pro cyclicality already in things like the stress test and stress capital buffer and in CECL.

Speaker 3

And I think, look, we've shown our ability to perform and build capital, in this case, 75 basis points in 2 quarters. So We'll deal with whatever the ultimate rules come out with.

Speaker 9

Great. Thank you, Oscar.

Operator

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

Speaker 10

Good morning. Have you guys thought about how to better insulate yourself against 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, we have seen some regional banks essentially trying to lock in a corridor of the NIM so that Okay. Median term, it's more about growing the balance sheet versus the rate moves up and down. And clearly, with your deposit rates If we do get fed cuts, there's just not much leverage to bring down those rates.

Speaker 3

Yes. So I don't know that we've thought about it in terms of like 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 2 years ago can be zero rate environment. So the changes where you can sort of see our changes at the margin.

Speaker 3

You can see we're Taking securities out and replacing them with loans, and you can see everything restriking higher. So 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, but It's 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 And drive the NII, that's up $3,300,000,000 year over year. So we feel like we struck that balance.

Speaker 3

That's what responsible growth means to us. And at the margin, we'll probably still maintain a little bit of asset sensitivity.

Speaker 10

Okay. Thank you. That's it for me.

Operator

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

Speaker 11

Hi, good morning.

Speaker 8

Can you hear me?

Speaker 3

Yes, we can.

Speaker 11

Okay, great. Two questions. 1, 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. And I just wanted to get an understanding of Is that more just demand slowing, base effects or is there also anything in there From you on proactive credit decisioning as normalization comes through the rest of the year?

Speaker 2

That's a couple of things. If you look in the 4th quarter, you could see the cards come up, which is seasonal and that's going to come down and that's one of the things that People tend to pay those down. The usage of those cards frankly are still at low levels of pay rate. The other way to think about that still So that's sort of one thing that's been kind of consistent through the pandemic. The customers are paying down the card balances.

Speaker 2

And you We expect at some point those will get back to more normalized pay down rate in the mid-20s. The second is line usage frankly has also come back down. It's not gotten ever back to where it was pre pandemic and it moved up and it dropped by 100 or so basis points, which across a lot of lines is a fair amount of loans. So that you saw. And so How corporates manage their borrowing and cash and demand cycle seems to be flattening out a little bit.

Speaker 2

Then obviously acquisitions and things are way slowed down, so there wasn't much activity there. So I think you put it together, then you have in the securities based business, customers 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 an hour or something like that And loan balances, it happens mortgages obviously are low. So but what we think is as a rate environment settles in, you'll see That normalizes and we'll get we'll be back on the mid single digits. We just won't have the 10% loan growth year over year because that is Faster in economy and faster we do it. We have not changed credit underwriting standards.

Speaker 2

And you can see that in the consistency of the origination standards back in the And pages of the appendix where we show sort of our cars and home equity and things like that, it's just the demand side is a little softer because people are Reading the same headlines, we're all reading about a recession is coming and what should and they should be careful.

Speaker 11

Okay, got it. And then On the expense side, I know we talked a lot about the NII and 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 worse than expected comes on the NII, what kind of levers do you think you have to pull there, Brian?

Speaker 2

Well, we always have The variable compensation stuff will drop because assuming that the reason why Rates are going being cut is because economic activity is worse than people thought. And then you have the general just efficiency movements in the house that we are we've been pretty good at. And then you have to remember, we tried to get people to go off of nominal expense to operating leverage. And so we have 6 quarters operating leverage. As Yes, as growth slows down, we have to manage the company to produce operating leverage.

Speaker 2

And so we'd expect that fees might stabilize and absorb the $1,000,000,000 downdraft in quarterly Investment banking fees can start to work up from there in other types of things. So I think we feel very good about the ability To find ways to manage expenses, always have slowed down hiring, as we came into the 4th quarter, not because Yes, we're trying because frankly we are hired we've 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 would let us get back in line and start to bring the headcount back down to where we want it to be. But those are frankly positions that are relatively have a relatively High movement rate and only because of the nature of the job. So we feel good about between very rate compensation, between continuing to reduce head For efficiency and frankly, just activity levels, hit a down scenario, we'll be able to pull the expenses down.

Speaker 2

But Yes. Meanwhile, we're going to invest $3,700,000,000 in technology development in 2023 versus 3 point 4 in 2022, we continue to add bankers. We had 800 wealth management advisors in the second half of last year, Our training program for those across wealth management, all our wealth management businesses and other training programs, we continue to hire young talented people. So we're trying to maintain that balance of continuing to invest in the growth, opening in new cities. We're averaging these branches we're opening are extremely successful When you look at the size of them relative to anybody else's opening practice and so why we just stop that.

Speaker 2

And yet the total number of branches comes down because we're managing So 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, but the question would be as we're in that scenario, is that the right decision for long term value creation?

Speaker 11

Thank you.

Operator

We'll go next to Vivek Janesh with JPMorgan, your line is open.

Speaker 12

Thank you. A couple of clarifications on the same NII question. I just want to understand In your assumption about the staying at $14,400,000,000 through the year on a quarterly basis, are you assuming Deposits continue growing or shrinking? Number 1, are you expecting Further rotation out of non interest bearing to interest bearing? And do you expect the $14,400,000,000 number Even if there are rate cuts towards the end of the year, is that number doable even with that?

Speaker 12

What is it that you're assuming? Is it even with rate cuts?

Speaker 2

Vivek, we just said less there'd be less variability around that number due to the fact the market stuff has gone to 0 that has no impact on it That you saw over the last few quarters have impact, so less variability. All the things you cited are the reasons why we tend to say you have to be careful about Same what's going to happen in the Q4 of 2023 with great clarity. What we did say is, if at this level With less variability, you'll have nice growth over this year to next year. But I think everything you point out, Whether it's rates going up faster than people think because inflation doesn't go or come down because people think that they've done a good job and they want to get behind the economy. We base our Modeling on the blue chip economic assumptions out there and then looking at our balances and stuff.

Speaker 2

And so, Yes, I think that's reluctant. So all your points are great points and they're always why we are reluctant to say, I can tell you So, yes, 3 decimal places, but it's going to be 3 quarters out because it can move around on you. And to Mike's earlier point, we grew $1,200,000,000 in linked quarter and somehow people thought that wasn't good enough because there's math that could have would have gotten a difference. So Stay tuned. We'll tell you what we know when we know it and that it's good organic customer growth.

Speaker 2

1,000,000 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.

Speaker 12

Another a different question slightly. You gave the 2,000 to 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 $1,000 type cohort. Where does how is that doing? Can you give any numbers on that?

Speaker 2

It's similar. They're all moving down very slightly, that average balance, same group of customers taken out. I'd say, so it's in the same sort of different sizing, but it's the same thing. I don't have it right in front of me, but I'll have Lee get it to you, but 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.

Speaker 2

So going to the earlier question, we may have seen a lot of that already take place. But I did think of it as being down slightly quarter over quarter in that cohort.

Speaker 12

Thank you.

Operator

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.

Speaker 2

Thank all of you. Good quarter to finish 2022 and 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 in 2023.

Speaker 2

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 just leading into the pandemic. So 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. You and we look forward to talking to you next quarter.

Operator

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

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Earnings Conference Call
Bank of America Q4 2022
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