Bank of America Q3 results
CET1: up 0.5%
Net charge-offs improved
Efficiency ratio: down to 62% in Q3 from 67# in Q2. We run the bank with fewer people than in 2015.
Consumer banking is increasing (number of accounts).
Significant organic growth with the bank.
Merrill Lynch accounts are moving digital.
Sales and trading (global markets) up 13% YoY, with no trading loss days in Q3. Wow.
Consumers continue to spend more, strong spending.
Consumer deposits are very strong, up 2x to 5x over pre-pandemic levels.
Payments on credit cards are up significantly.
YTD spending of $3.1T is up 12% YoY, with growth in Gas (23%), Travel & Entertainment (20%), Food (10%), Services (9%) and Retail (3%).
Early to late stage card delinquencies are at decade level lows. 1.38% 30+ days past due. However, the last quarter is up in all categories. Is this the beginning of the trend higher for credit card past due amounts?
This is a strong quarter. They even bought back $450M of common stock.
I notice that assets and investments both declined about $50B in Q3.
Shareholder equity is constant at $240B
Stress capital buffer increased the requirement from 9.5% to 10.5% for CET1. They are at 11.0%, which is 0.5% above required level. 11.4% by January 2024 is the increased requirement.
Significant hedges in place protect the bank:
AOCI declines on AFS investments down $1.1B.
Overall AOCI declined $4.4B due to increased interest rates.
Significant loss from derivatives (~$3.1B) to protect AOCI losses. Delayed SWAP starts.
Forward-starting SWAPs, which should pay in Q4 and a little in Q1/23.
Good commercial loan demand.
Sold / syndicated some of their business loans and mortgages (~$1.1B) to reduce their RWA. This looks like good stewardship. Confirmed, not big but a step in the right direction to reduce RWA. Rolling off corporate bonds / loans and replace with UST, which further improves RWA and increases yields too.
Consumer deposits up 7% YoY. $1.1T
Total Corporation deposits down 3%, to $1.96T.
Global Wealth Management and Global Banking declined in deposits.
NII (GAAP) $13.9B
Net interest yield: 2.06%
Customer cost of deposits: 0.03%
Consumer credit card risk-adjusted margin 10.07%
Excluding global markets, net interest yield 2.51%.
Mortgage rate yields are up even higher than deposits.
100bps up in interest rate across yield curve benefits $4.2B over 12 months.
This assumes market based rates, deposits down slightly, and activity adjusting as expected.
$1.3B rise in NII in Q3, supports the expected growth in profitability.
Efficiency Ratio 62% for the bank
Efficiency ratio for the consumer bank: 51% (which is more in line with a monoline retail bank).
Headcount up 5,000 this quarter.Non-interest expenses are flat since 1Q/22. Wow, why are non-interest expenses flat? No inflation impact.
Mgmt stated it was discipline around expenses, and modest investments in the company.
Consumer bank expenses up 11% in non-interest expenses, including bank renovations. Biggest impact of inflation. Digital banking and operational process improvements help.
Net charge offs 0.20% for a total of $520MM.
Provision for credit losses $898MM, which increases the cushion.
Consumer delinquencies are lower than normal.
Commercial net charge offs are flat, 0.04%, which is almost zero.
This is the first time since 1976 that both bonds and equities markets were down for the year at the same time, assuming markets end where they are now. (34 minutes).
Earnings of $1.2B is strong given the weakness of the overall market.
Earnings are down 20%, but still strong at 2.03B. Bank rates #3 in global banking.
Adding to the reserves here of $144MM.
Global Markets, excluding DVA.
Earnings: Sales and trading were strong, FICC was strong, equities weaker, and global markets investment banking down almost 50%.
10% return on allocated capital for this business.
Inflation reduction act:
Solar energy investments to select production tax credits vs. old way. There was $150M in tax claw-backs in the short term, but should increase tax credits over the life of the solar investments. Tax rate would have been 24% ignoring special items like solar and ESG.
Securities run-off at about $15B/quarter. This quarter ran off a little faster, and there were profitable offsets in Q3.
Expense growth, single digits and will see better operating leverage (at some point, a 1% to 2% rise). Non interest expenses have been running $15.3B / Q for the past three quarters with a little 'stuff' in each one. That run rate will hold.
Consumer deposit strength based on the value proposition for clients to be their full service operational / transaction provider. This is why we see so many non-interest accounts. The services are the value proposition.
UST duration between 4-5 years
MBS 7-8 year duration
Derivatives: some of those
It will be faster for any securities that get repaid earlier.
What about recent rises in credit costs?
Origination backward-looking looks good.
Normalization to pre-pandemic levels occuring.
Auto business down 1/2 on a monthly basis.
They built a durable consumer book. Lower risk lending.
Commercial book upgrades and downgrades.
$400M in reserves, and the Net charge offs are about level. Reserves baking in a recession, but the numbers are so low, squinting to see a change here in credit quality. "Squinting" Second best numbers all-time.
Good morning...our bank earnings call reviews continue.
Slowing global growth. Rolling, country-level recessions starting in this quarter.
Inflation causing global reduction in consumer demand.
Europe is the highest warning. US market looks strong. Inflation fighting will take time and strong actions, through second half of 2023.
Asia: concerned with COVID lockdowns.
Geopolitical risks and rates dominate client discussions. Counterparty risk vs. credit risk.
Impressive reserves of about 2.5% funded loans.
CET1 equity levels are equal to regulatory requirements, at 12.2%.
Citigroup benefits from spinning off global consumer business.
Stock buybacks at 13%? Asked by an analyst. Mile-markers:
Net interest income is strong (seems in line or slightly lower than other banks in Q3.
Non-interest revenue is down significantly.
BETA levels are increasing, but lower than expected. This is driven by mix of business towards institutional and operational / corporate, as opposed to retail BETAs which are lower.
Interesting to see that average loans and deposits are both down 2%.
Also surprising to see cost of interest-bearing deposits up in Q2/22 0.53% to Q3/22 1.21%. This is a significant gain.
Reducing (slightly) risk-weighted assets (RWA) by exits and asks for greater collateral from investors. Interesting to see this massive bank look to reduce market exposure. Should be confirmed, as this is material.
Net-Net, in Q4, Citigroup expects net interest income to rise, non-interest income to fall, and non-interest expenses to increase by 9%.
When will revenue growth exceed expense growth? These are multi-year investments, and in years, we should get to an operating ratio below 60%. No direct answer, but it will take years to see revenue growth cover expense growth.
PNC Q3 Earnings Call Highlights
As we listen to the earnings call, here is what we are learning.
Net interest margin increased 32 basis points, which is a record for many years. Credit quality is unchanged over the quarter. Capital strong, and returned $1.7B to shareholders through common dividends and share buy-backs.
PNC, a national, main-street bank.
They borrowed more from the Federal Home Loan Bank, up by $8B in the quarter.
CET1 ratio is 9.3%.
Higher mortgage loans and credit card balances, offset by automotive loan decreases (overall up $1.5B of consumer loans). Credit cards usage is up. That is good for them. They just raise prices as risk raises, but don't change credit availability. They lend to the higher levels of credit (investment grade for corporates and prime for consumer).
Consumer deposits down 2%, or -$4.3B. 68% interest bearing. Commercial deposits grew at the end of the quarter. So far in Q4, deposits are increasing but expect stable to down a bit.
Stable to down in consumer, and consumers are spending more. Inflationary pressures.
Interest costs increased.
Cumulative BETA Q3 is 22%, will rise to 30% by year-end. Deposit BETAs.
Securities grew and yield increased to 2.21% or 21 bp. 80% of purchases directly into HTM, 66.4% overall HTM. AFS is 33.6%. AOCI -$10.5B. They expect those values to fully accrete back per year, or 5% per quarter. Ouch.
They use derivatives, and made $13M this quarter, but lost $16m last quarters.
They are reducing operating costs to fund internal investments (e.g., technology).
Provision for credit losses: $241M to account for uncertain economic outlooks.
Delinquencies increased by 8%, but many are being resolved. Net charge offs, 15 bps, are at historical lows. Very strong credit quality metrics. Total reserves are 1.67% of total loans.
They expect 125bps raise by the FED FOMC, 75bps in October and 50bps in December.
Buybacks came in higher than the $750M planned for Q3. Active repurchase event underway. Following BBVA acquisition, they are expecting to average $700M to $750M in Q4 share buybacks.
NII: It is somewhat self-evident. NII goes up as interest rates are raised by the FED. Loans will earn more, and deposits cost more too. When the FED is done, they increase rates on deposits (BETA). The roll-down of securities (as they mature), and we can reinvest at higher yields.
What about swaps on rates? What happens to the high end of the rates schedule (as they grow)?
Can NII continue to grow in Q4? Capital dropped $4B to $5B. Flat to more asset sensitive due to rates. We let things roll off, replaced them, but not added. Letting things roll-down (4.6 year duration). Duration of the swap book is 2.3 years.
Current investments: 4.6 year duration. Rates from one handle to 4.5 plus. We are much more exposed to 'down rates' than we are to 'up rates.' They limited investments with swaps and bonds. They are more worried about down rates, because they make more money as rates rise. They have capacity to buy more assets, but are not yet. Waiting to see what happens. More asset sensitive.
Why go asset sensitive for the last 6 months? Arguments with the economics team. We would need much higher rates to fight inflation. Don't buy anything when you know rates are rising. It's obvious.
Consumer money is stickier than expected is the answer to why are deposit BETAs better than everyone modeled? Corporate and money markets are doing what is expected, but consumer money is sticky. Repricing is stickier and slower than everyone assumes.
Back of the curve will sell off. They go negative in 3 months on rates. If the FED stops, and inflation keeps going (low 3s and sticks there), then the long bonds will sell off more. Deposits gathered through Covid sticky? Following the flood of liquidity into the system, we will see it recede. They see the shift towards interest-bearing. 33% non-interest bearing and 66% interest-bearing.
Bank executives perplexed why the FED would want to add additional 'too big to fail' oversight to the US regional banks. Not necessary, these are not systemically risky companies.
Investment advisor representative & father of six.