Bank of America Corporation (BAC)

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Bank of America Corporation (BAC)

Q3 2012 Earnings Call

October 17, 2012, 08:30 am ET

Executives

Kevin Stitt - IR

Brian Moynihan - CEO

Bruce Thompson - CFO

Analysts

Moshe Orenbuch - Credit Suisse

John McDonald - Sanford Bernstein

Chris Kotowski - Oppenheimer & Company

Matt O'Connor - Deutsche Bank

Ed Najarian - ISI Group

Betsy Graseck - Morgan Stanley

Nancy Bush - NAB Research LLC

Mike Mayo - CLSA

Paul Miller - FBR

Glenn Schorr - Nomura

Vivek Juneja - JPMorgan

Brennan Hawken - UBS

Jefferson Harralson - KBW

Presentation

Operator

And welcome to today’s third quarter earnings review program. At this time, all participants are in listen-only mode. (Operator Instructions) We’ll take questions in turn during our Q&A session. And please note, today’s call is being recorded.

It's now my pleasure to turn the program over to Kevin Stitt. Please begin sir.

Kevin Stitt

Good morning. Before Brian and Bruce 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. For additional factors, please see our press release and SEC documents.

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

Bruce Thompson

Thanks Kevin, and good morning, everyone. I am going to start the presentation on slide four. And as I am sure you’ve all seen for the third quarter of 2012 we reported net revenue of $20.6 billion. Importantly, that number was reduced by about $1.9 billion for FVO and DVA and if we adjust for that you get to a revenue net of interest expense of $22.5 billion for the quarter. Net income was $340 million or $0.00 a share after preferred dividends.

The results reflect the previously announced charges in late September that relate to $1.9 billion for the combination of FVO adjustments as well as DVA resulting from the significant tightening that we saw in our credit spreads during the quarter.

In addition, we had $1.6 billion of pre-tax of total litigation expense including the charge for the Merrill Lynch Class Action Settlement. Lastly, we had about $800 million of tax expense related to the reduction in the UK tax rate. In the aggregate, these items negatively impacted EPS by approximately $0.28.

We turn to slide five, the results in the third quarter demonstrated ongoing momentum on several fronts. Period-end deposits across the company grew $28 billion, or 2.7% versus the second quarter which is an 11% annualized rate, and we accomplished that as the rates on the deposits declined slightly from 20 basis points to 18 basis points. The net interest yield increased by 11 basis points as our liability management actions continue to benefit net interest income.

Our Mortgage business home loans had its most profitable quarter excluding asset sales since we started reporting its results separately with first-lien production up by 13%. Wealth and Investment Management showed growth in long-term assets under management, deposits and record loan levels while maintaining solid margins.

Ending loans in our Global Banking segment increased 2.5% from the second quarter or 10% on an annualized basis. Results in the capital markets area reflected strong performances both on a quarter-over-quarter as well as a year ago basis.

We continue to invest in growth areas of our company such as mortgage lending, small business banking and financial advisors. Our 60 plus day delinquent loans serviced out in a Legacy Servicing business declined 12% from second quarter levels, and we’ll spend sometime later in the presentation talking about what that means going forward. And our number of full time equivalent employees declined approximately 3,000 from the end of the second quarter related to a different New BAC initiatives.

If you turn to slide six, a lot of information on the balance sheet highlight area, I just want to draw your attention to three of the line items. The first, our tangible common equity ratio improved by 12 basis points to 6.95%. If you move down the tangible book-value, it grew by $0.26 in the quarter, up to $13.48 and if you look at our adjusted loan coverage where we look at the allowance for loans over annualized charge-offs, it improved during the quarter to 2.2 times.

If you turn to slide seven; as we’ve seen all year, regulatory capital continued to strengthen. Our Basel 1 Tier 1 common capital ratio was up 17 basis points to 11.41%. Remember, FVO in the tax charge do not impact regulatory capital.

As we near the 2013 implementation period for Basel 3, we’ve estimated our Tier 1 common equity ratio and it's components to provide a better understanding of where we are relative to the expected 2019 Basel 3 requirements. Our estimate as per the final U.S. market risk rules in the U.S. Basel 3 NPRs.

As of the end of the third quarter, on a fully phased-in basis, we estimate that that Basel 3 Tier 1 capital ratio would have been 8.97%. Recall last quarter, we estimated Basel 3 under BIS Basel 3 guidelines to be approximately 8.1% and 7.95% applying the U.S. Basel 3 NPRs. If we look at the components of the ratio, our Tier 1 common equity was $134.6 billion, while our risk weighted assets would have been $1.501 trillion.

A couple points I would like to make before we leave this slide. If we look at the improvement in the numerator of roughly $8 billion, we did benefit during the quarter given the reduction that we saw in the rate environment where our OCI, which flows through the balance sheet, not the income statement, was up about $3.2 billion and contributed 21 basis points to that ratio. We also benefited on the denominator, in portion of the increase due to the tightening credit spreads that we saw across the market that did benefit the denominator.

We turn to the slide eight, and look at liquidity. Global Excess Liquidity sources increased modestly from $378 billion to $380 billion during the quarter. That was accomplished while we reduced the long-term debt footprint across the entire enterprise by about $15 billion.

A couple of actions of note during the third quarter; we had $6.2 billion of liability management actions which consisted primarily of parent redemptions of trust preferred securities as well as sub debt and in addition to that we had $12 billion of maturities that were repaid at the parent.

We took an additional action during the first quarter of October of calling $5.1 billion of additional trust preferred securities that will benefit NII by about $50 million in the fourth quarter of this year and on a go forward basis about $300 million. And as we noted before, there will be a loss upon the redemption that we’ll take in the fourth quarter of about $100 million.

If we focus on the parent company for just a moment, parent company remained very strong at $102 billion. And if you look at the reduction and liquidity combined or compared to the reduction in the debt footprint, liquidity at the parent declined by $9 billion when the overall debt footprint at the parent shrink by $18 billion as we continue to move money from our bank subsidiaries up to the parent.

Time to required funding at the end of the quarter was at 35 months and as we move forward and continue to shrink the debt footprint and smooth out the maturity profile, we would expect over the next six to eight quarters that you will see that time required funding migrate down to a targeted range in the 21 to 24 month timeframe.

On slide nine, if we look at net interest income. Net interest income on a reported basis increased from $9.8 billion or a yield of 2.21% in the second quarter to $10.2 billion or 2.32% during the third quarter. If we adjust those numbers for market related hedge ineffectiveness as well as market related premium amortization or FAS 91, our net interest income increased from $10.3 billion or 2.32% up to $10.5 billion or 2.39% during the quarter.

If we look at the activity within the quarter, we benefited during the quarter from the reduction of long-term debt driven by both our liability management actions as well as debt repayment. In addition, our trading related net interest income improved during the quarter. Partially offsetting these improvements were lower consumer loan balances and yields as well as lower investment security yields.

Near-term, if we look at where we are at the end of the third quarter and given existing rate levels, we estimate that quarterly net interest income will start at the base of approximately $10.5 billion. The impact of our liability management actions in our long-term debt maturities are expected to offset any headwinds that we see from continued pressure on both consumer loan balances, as well as investment security portfolio repricing.

In general, as you consider the rate environment, if rates increased from the end of September, we would look to see benefits in our net interest income. And on the other side to the extent that the rates declined, you could see reductions.

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