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Bank of America Corporation (BAC)
Q2 2010 Earnings Call Transcript
July 16, 2010 8:30 am ET
Kevin Stitt – IR
Brian Moynihan – CEO & President
Chuck Noski – EVP & CFO
Matt O’Connor – Deutsche Bank
Betsy Graseck – Morgan Stanley
Edward Najarian – ISI Group
Mike Mayo – CLSA
Nancy Bush – NAB Research
Moshe Orenbuch – Credit Suisse
Jefferson Harralson – KBW
Chris Mutascio – Stifel Nicolaus
Carole Berger – Soleil Securities
Chris Kotowski – Oppenheimer & Co.
Matt Burnell – Wells Fargo
Previous Statements by BAC
» Bank of America Corporation Q1 2010 Earnings Call Transcript
» Bank of America Corporation Q4 2009 Earnings Call Transcript
» Bank of America Corporation Q3 2009 Earnings Call Transcript
I would now like to turn the conference over to Mr. Kevin Stitt.
Good morning. Before Brian Moynihan and Chuck Noski begin their comments, let me remind you that this presentation does contain some forward-looking statements regarding both our financial condition and financial results and that these statements involve certain risks that may cause actual results in the future to be different from our current expectations.
These factors include, among other things, changes in economic conditions, changes in interest rates, competitive pressures within the financial services industry and legislative or regulatory requirements that may affect our businesses. For additional factors, please see our press release and SEC documents.
Also joining us this morning will be Neil Cotty, our Chief Accounting Officer, who served as our Interim CFO prior to Chuck arriving here. Neil did much of the presentation last quarter.
So, with that, let me turn it over to Brian.
Good morning and thank all of you for joining us as we discuss our second quarter earnings. I welcome Chuck to his first call as CFO and as Kevin said, Neil is with us.
Just to start us off here, on Slide #4, in general I’m just going to give a couple points of my perspective on the quarter. We did make $3.1 billion in net income for the quarter, but importantly, even with the earnings, we are continuing to move our core franchise forward. Our credit quality continues to improve, in some cases faster than we anticipated as we came into this year.
As the management team and I have put together the principles we’re going to operate under to make sure that we can position this company now and in the future in the way it needs to be positioned, one of the principles we’ve been focused on is the continued strength in our balance sheet.
We strengthened our capital this quarter and our reserve coverage ratios even with the release, so we have a stronger balance sheet. Also, the team has continued to work through reductions in legacy positions whether that’s in commercial real estate, capital markets, the former countrywide franchise or some of the loan products and card services.
Another principle that we’ve been focused on is narrowing the focus of our franchise, ensuring that every activity we have at Bank of America is consumers, companies and institutional investors. Along that line this quarter, we sold our interest in Itau in Santander Mexico. We sold the MasterCard shares we had and today, we announced that we’re selling Balboa Insurance consistent with this strategy.
Additional principles that we’ve been managing to is to get ahead of the impact of new capital requirements and we’ve been doing that this quarter by continuing to reduce positions with some of the positions I just spoke about and bringing up capital whenever we can to build our capital ratios in anticipation of the new Basel rules. In addition, this quarter we also sold some private equity positions to help us in this regard.
Another principle is as we look back at the cycle of what went right and what went wrong is we have to be much stronger risk managers. I think this quarter shows that even though we’ve had revenue in our capital markets business go down, it was a nimble way in which Tom Montag and Bruce Thompson and the team adjusted our trading positions, reducing the VAR and basically getting out of the way of the euro crisis and sovereign debt crisis this quarter.
So we made progress on these core operating principles, but as we look ahead, we’re well aware that the headwinds we’re going to continue to face and we need to deal with to produce the revenue and profits this company needs to produce. First, we continue to see an economy which our experts don’t believe will be a double dip. They think that’s a low probability. But we see an economy that’s going to grow in the 2.5% range in the second half, which continues to be below trend.
Unemployment remained at high levels and as we look at the consumer, we’re seeing even though the consumer spending has been up consistently quarter-on-quarter, we’re worried about slowing momentum as the year-over-year comparisons get harder as the second half of the year was strong for the consumer. Again, we continue to watch the housing market carefully and it stays in our focus.
As we look up on the loan demand side, it continues to remain weak as the consumers continues to de-lever. On the commercial side, the commercial customers remain conservative by holding large amounts of cash, while awaiting signs of sustained demand for the products before they need capital growth. Another area that is hitting our revenue and earnings is impact of sustained low rate environment on this core franchise and it continues to impact the net interest margin.
Another major area and I’m sure you have lots of questions about this later and Chuck will talk about the area, is the impact in new regulation. As I look at the new regulation, a lot of people are focused on the Dodd-Frank bill, which you got to put in the context of all the different things going on, whether it’s the Reg E, the CARD Act and then the areas that will be affected by Dodd-Frank.
The most recent, the Durbin Amendment in the interchange area, this is going to cause a significant reduction of revenue in the future and a carrying value change in our asset in the credit card business and Chuck will address that later.
So, as you think about the quarter, its more noise than we would have liked, but some of that is inevitable as we continue to reposition this company and as we continue to hit some turbulent markets that we did during this quarter. That said, we continue to make progress in positioning our company now for the future.
On Page 5, you can see the progress we made in the various customer groups in our customer-driven model. We told you and we’ll continue to tell you in the way we manage this franchise is take advantage of these very strong businesses that had superior positions in every part and every capability they bring to the customer.
I’m not going to go through all the points in this page, but I want to touch on a couple of areas just to give you my perspective. Obviously, Joe Price’s consumer team has the core challenge to adopt the retail banking model in United States to the new consumer bank in reality to mitigate the loss revenue and adjust the operating costs to meet the return goals we have in that business.
In our home loans and insurance business, it lost money this quarter less than it lost last quarter, but sort of a tale of two cities. On the one hand, our productions were number one or two in a given month or quarter with about 20% market share on the production side.
At the same time, we’re devoting a ton of effort and expense to working through the defaults, short sales and modifications and we’re attempting to help every customer we can. In spite of all that hard work, we’ll continue to see alleviated foreclosures, short sales and other liquidations for the next several quarters as we clean up the legacy countrywide portfolio.
Moving to the commercial side of the business, domestic commercial loan demand remains muted as companies continue to generate solid earnings and cash flow, but tell us that they are reluctant to expand due to the uncertainty they see in the future.
Importantly, as the company has a global commercial franchise that does match companies in Asia and Latin America and companies in the U.S. that do business in those markets are demanding capital and are business wins, especially in the corporate investment banking area show that. That’s why we continue even during these times to invest in our international growth and global capital markets business and the global corporate investment banking business.
The third area I want to touch on is the sales and trading area. Tom Montag’s team experienced a drop from a very, very strong first quarter. However, we still earned over $1 billion in global banking markets and the global markets segment produced about a third of those earnings.