Bank of America Corporation (BAC)

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Bank of America (BAC)

Q4 2011 Earnings Call

January 19, 2012 8:30 am ET


Bruce R. Thompson - Chief Financial Officer

Kevin Stitt -

Brian T. Moynihan - Chief Executive Officer, President, Director and Member of Executive Committee


Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division

Nancy A. Bush - NAB Research, LLC, Research Division

John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division

Glenn Schorr - Nomura Securities Co. Ltd., Research Division

Moshe Orenbuch - Crédit Suisse AG, Research Division

Andrew Marquardt - Evercore Partners Inc., Research Division

Matthew D. O'Connor - Deutsche Bank AG, Research Division

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Edward R. Najarian - ISI Group Inc., Research Division

Brennan Hawken - UBS Investment Bank, Research Division

Paul J. Miller - FBR Capital Markets & Co., Research Division

Betsy Graseck - Morgan Stanley, Research Division



Good day, and welcome to today's program. [Operator Instructions] Please note this call is being recorded. [Operator Instructions] It is now my pleasure to turn the conference over to Mr. Kevin Stitt. Please go ahead, sir.

Kevin Stitt

Good morning. Before Brian Moynihan and Bruce Thompson 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. And for additional factors, please see our press release and SEC documents.

And with that, let me turn it over to Brian.

Brian T. Moynihan

Thanks, Kevin. Before Bruce begins, and good morning to everybody. Before Bruce begins his portion of the presentation on the slide, I thought I'd make a few comments about 2011 and what we are focused on for 2012. The last 2 years, we've been executing on a huge transformation here at Bank of America. After 6 large acquisitions in 6 years during the mid-2000s, then the economic crisis and its aftermath, we set on a course to simplify the company, to streamline the company, to reduce the size of the company, to lower our risk and build a fortress balance sheet. During that, we set goals to have 9% Basel I Tier 1 common and 6% tangible common at year-end 2011.

We set goals to reduce our non-core assets. We set goals to bring our credit risk down and to address the mortgage risk related to the Countrywide acquisition. At the same time, we also set goals to continue to invest in areas where our company can grow and has its competitive advantage. Areas like our Wealth Management area, areas like our Preferred Small Business areas, where we've added Preferred Bankers and Small Business Bankers, areas like our Commercial Corporate and Investment Banking areas, especially in large corporate investment banking outside the United States.

Along the way, we had to address the issues that came up in mortgage; the slow recovering economy, which isn't moving -- which is moving forward but not as fast as we all like; the European crisis, a muted interest rate outlook and the revenue loss to the new regulations that have been passed. These then result in our focus on cost, and we announced late -- early last fall our New BAC program and the goals that we had for it.

So as we think about 2011, we saw the following. First, on capital and liquidity. This quarter, our Tier 1 common equity ratio ended at 9.86%. Our tangible common equity ratio ended at 6.64%. In the case of each of these ratios, they are dramatic improvement from the beginning of the year. And we made these improvements while absorbing significant mortgage-related costs during the year.

We have ratios that are in line with our peers, and we expect further improvement due to continued work on our balance sheet we'll make during 2012. In addition, our liquidity is and remains at record levels even after the downgrades we experienced in the fall.

Moving from capital and liquidity to our core businesses. On Slide 3, you can see, we continue to do what we're here for. We simply serve our clients and customers and we do it very well.

Our core business activity continues to move forward. During 2011, we continue to grow our deposits and our investment assets for our corporate and personal customers. We originated 20% more in small business loans this year, in 2011, than we did in 2010. This met our internal goals we had for that unit, but importantly, also met our $1 billion incremental goal we committed to the White House and the Small Business Administration a few months back.

For our commercial clients and our corporate clients, we did what we're here to do. We provided more loans, more capital and more market access here in the U.S. and around the world. For example, in the fourth quarter, you can see strong growth in our loan balances in our corporate area.

And for our investor clients, we achieved the #1 Institutional Investor Overall Research ranking. Evidenced in the quality of ideas to match our capital to help them make their investments. In our Mortgage business, we continue to reshape our operations to focus solely on origination of mortgages for our customers and to do it well.

And importantly, we continue to help those who have difficulty making their payments in mortgages. We've now crossed over $1 million modified loans in our servicing portfolios. The third area we focus on, after capital liquidity and the core businesses, was costs. It's clear that we're going to grind forward with the recovery in this country. Our clients continue to push forward and we're seeing the activity continue to move forward, but a full recovery to what we would call normal may take some time. So with that in mind, we begin to focus on bringing our cost down across the company.

Our cost structure for Bank of America has 2 broad elements today. First, the cost we incur to deal with the mortgage issues. And second, the remaining cost to run the rest of the company for the benefit of our customers. Overall, cost were down from 2010 to 2011, and we expect substantial cost savings in 2012. This quarter, you can see that starting to take hold. We made significant progress towards our overall FTE reduction goals. Our period-end FTE is down about 7,000 people in the fourth quarter compared to the third quarter. This is over and above the 2,500 people we added in this quarter for our Legacy Asset Services. There's 2 things about this. One, this shows that our New BAC implementation has begun in earnest. And second, the good news is, that we expect that LAS is at and near its peak staffing.

The fourth area we've been concentrating on in 2011 was trading. Trading was strong in the first part of the year, but with the issues in Europe, the down -- U.S. downgrades, the downgrades of our company and changes in client risk appetite, results were weak in the second half, especially in the third quarter. However, during the fourth quarter, we partially recovered as Bruce will talk about later. Yet, we still reduced risk during the quarter to ensure we were well positioned to handle what might have come up. We still have work to do in trading, but the team got active this quarter as the quarter unfolded, and we saw a stronger results.

From a credit risk perspective, you can see that our charge-offs and cover ratios continued to improve. We ended the year with strong ratios. And we'll also end the year with $15.9 billion in rep and warranty liability reserves. We built significant litigation and other reserves in this area also. So the 4 areas of 2011 was all about raising capital and liquidity, driving the core businesses, managing the cost and risk management.

As we look at 2012, these seems the same. First on capital and liquidity. Bruce will talk to you later about our targets as we look forward, but the focus in this company is to continue to move through the 10% level in Basel I Tier 1 common and drive towards a Basel III implementation. Liquidity will remain high, even as we continue to reduce our long-term debt footprint. And the second area is cost. As I said earlier, we expect that operating cost at LAS are nearing peak. As we finished the foreclosure look back and we continue to reduce the delinquent units serviced by this group, we expect its cost to come down during 2012. Just for clarity, in this quarter, in the fourth quarter of 2011, LAS costs were $3.5 billion of our total cost, $1.5 billion of that was litigation in LAS. The remaining were operating costs.

For the rest of the company, we had expenses of about $16 billion in the fourth quarter, including $0.5 billion in goodwill write-downs. We expect to see in 2012 strong cost improvement consistent with our New BAC goals. Bruce will discuss these goals later.

New BAC is doing what we expected, and the Phase 2 evaluation is going well. As you know, headcount drives our costs. We saw a significant improvement in the fourth quarter, and we expect to see that as we move through 2012.

As we move to the core businesses in 2012, for 2012, we can now really focus on our retail strategy. In this quarter, you'll see the last part of the regulatory cost coming through, that's the Durbin interchange changes. We've now absorbed the Durbin, the Reg E, the CARD Act and all the changes that occurred over the last couple of years. The focus here in consumer is to balance our customer and shareholder return needs and to continue to work on our cost structure reducing branches as we've done this year.

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