Bank of America Corporation (BAC)

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Bank of America Corporation (BAC)

Q3 2010 Earnings Call Transcript

October 19, 2010 8:30 pm ET


Kevin Stitt – IR

Brian Moynihan – President and CEO

Chuck Noski – CFO

Neil Cotty – SVP and ACO

David Darnell – President, Global Commercial Banking


John McDonald – Sanford Bernstein

Glenn Schorr – Nomura

Nancy Bush – NAB Research LLC

Moshe Orenbuch – Credit Suisse

Matthew O'Connor – Deutsche Bank

Betsy Graseck – Morgan Stanley

Edward Najarian – ISI Group

Michael Mayo – CLSA

Christopher Kotowski – Oppenheimer



Good day, everyone, and welcome to Bank of America’s third quarter earnings announcement conference call. At this time, all participants are in a listen-only mode. (Operator Instructions) Please note this call may be recorded and I will be standing by if you should need any assistance.

It is now my pleasure to hand the call over to Kevin Stitt. Please go ahead.

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, as he did last quarter, will be Neil Cotty, our Chief Accounting Officer. With that, let me turn it over to Brian.

Brian Moynihan

Good morning, everyone, thank you for joining. Today we’re going to talk about the third quarter earnings results. The part of the documents as you see today are based on the conversations that we had with many of you over the last few months and especially obviously the mortgage discussions occurred at the last few weeks. So, we try to put some data in the package that will help frame some of those issues, so and we’ll go through that.

As we told you many times, we committed, that we would provide you additional data on our runoff portfolios which we’ve done. Chuck will take you through some data on reps and warranties and I’ll take you through some of the portfolio discussion.

We’ve also included our preliminary Basel III view. In addition, we included information on what we were doing in the consumer franchise including the outline of how we’re trying to mitigate the impacts of regulatory changes. We know these are key issues that are on your mind and on our mind as shareholders and what our franchise faces.

So let’s dive into the document. On page four you can see the headlines for the quarter. Excluding goodwill, the goodwill write-off which Chuck will cover later, earnings were $3.1 billion and it’s consistent with the past few quarters as the continued credit improvement has offset some of the impacts of low rates, higher rep and warranties cost in other matters. But as we look across the business units, just to frame how we think we did this quarter, let me hit them from the high level.

I think Tom Montag and his team in global capital markets had a nice recovery as the sales and trading revenue there increased to $4.5 billion. Once again for the second quarter, our last three, we made every trading day. We continued to hold the risk RWA relatively flat and continue to drive that business off the core customer franchise it represents.

When we move into Tom’s corporate banking side and David Darnell’s commercial banking side, the good news this quarter, we’ve seen stabilization in our C&I loan book. We’ve had good investment banking results and good Treasury management results.

In our commercial customer side, the credit quality continues to improve across the board, nonperforming assets and have decreased, the charge-offs are better and even in CRE, we’ve seen the charge-offs fall pretty strongly over the last several quarters.

Sallie Krawcheck’s and the global wealth and investment management team had another solid quarter. This business is going through the transition. In earnest, we saw First Republic this quarter, they converted millions of customer accounts in billions of customer balances. But all during the last few quarter, we’ve had continuous growth in financial advisors and wealth managers and private bankers through the period.

We continue to see strong deposit capture, stable loan balances and improving net customer flows over these last few quarters.

Let me get to our consumer businesses. Our card business continues to recover. Its net charge-offs continued to go down as Joe and the team, worked hard to get that portfolio into shape. Interesting enough, this is the first quarter in many quarters were the actual yield in our portfolio exceed the charge-off and that’s a good sign as we move back to core profitability.

Joe and the team also sold more cards in the United States this quarter and last quarter and will continue to see recovery in our origination capabilities. As we move to Joe’s deposit side, we continue to make good customer progress there. Our customer scores were up. Our account closures are down.

During the quarter, Joe and the team implemented some of the mitigation plans, the e-account, which, as you know, it basically charges fees if customers don’t use our lowest cost delivery mechanisms, an ATM emergency cash, which allows the customer make the choice to withdraw cash in emergency and pay an overdraft fee, and then other items including new account structure, which I’ll talk about later. These will ultimately mitigate the cost of regulatory reform over time.

In the mortgage area, there’s been a lot of discussion about this business and I’m sure we’ll talk a lot about it today, but we’re continuing to make progress. The operating loss continues to move forward, and Barbara and her team continue to make progress on driving that business back to profitability, integration volumes have been strong in that business.

And frankly, will only get stronger going forward as a market share and a percent of the market because as we went through integration we had the hold back volume because of our need to get the integration done.

We’ve seen the delinquencies and charge-offs in the mortgage products stabilize also. We’re going to provide you a lot of data later in the presentation to help you assess the future cost from reps and warranties, but the one thing that we want to be clear is that when we look at the rep and warranty claims and the claims by the various investors, we’re not going to just put this behind us to make us feel good. We’re protecting your money.

We’re protecting the shareholders’ money and we’re going to make sure that we’ll pay when due, but not just do a settlement to move that matter behind us.

The thing I want to be clear about is how we’ll reposition the company. We started the year and said we deliver a fortuitous balance sheet from a company that had a balance sheet that needed repair. We’ve increased capital levels. We increased reserve coverage. We shed non-core activities. This quarter we continue to make good progress. Capital ratios were up, RWA was down.

We had developed clear in how we’re going to manage through the Basel accord changes. In addition, due to the fact that the capital levels in our industry are going to be higher, we have intense focus on tangible book value per share growth and we continue to grow that this quarter.

So if you flip to page five, you can see how those figures roll out. From the beginning of the year, our RWA is down $87 billion. We’ve taken a snapshot from January 1 here because of the impact of 1.66, 1.67 we wanted to show you. The long-term debt, which is something we don’t talk a lot about, is down $44 billion this year.

We inherited a lot of high cost debt in the prior transactions that we took over the company and we’re restructuring that. Mark Linsz and the team under Chuck have done a good job. We think over the next several years we can take that down by another $150 billion to $200 billion, which helps our margin.

You can see the dollar amounts of tangible common, Tier 1 common and the ratios that result from that common are all been increased during the year due to earnings, and importantly, by our willingness and desire to streamline as franchise and remove capital from non-core and capital-intensive activities.

The asset quality improvements you can see are strong, and as you move to page six, you can see the capital ratios.

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