Bank of America (BAC) Q4 2022 Earnings Call Transcript

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Bank of America (BAC 2.21%)
Q4 2022 Earnings Call
Jan 13, 2023, 9:30 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good day, everyone, and welcome to today’s Bank of America earnings announcement. [Operator instructions] Please note, this call will be recorded, and I am standing by if you should need any assistance. It is now my pleasure to turn today’s program over to Lee McEntire. Please go ahead.

Lee McEntireSenior Vice President, Investor Relations

Thank you. Good morning. Welcome. Thank you for joining the call to review the fourth quarter results.

I know it’s a busy day with lots of banks reporting, and we appreciate your interest. I trust everybody has had a chance to review our earnings release documents. They’re available, including the earnings presentation that we’ll be referring to during the call, on the investor relations section of the website. I’m going to first turn the call over to our CEO, Brian Moynihan, for some opening comments; and then ask Alastair Borthwick, our CFO, to cover some other elements of the quarter.

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Before I turn the call over to Brian, let me remind you that we may make forward-looking statements and refer to non-GAAP financial measures during the call. Forward-looking statements are based on management’s current expectations and assumptions that are subject to risks and uncertainties. Factors that may cause actual results to materially differ from expectations are detailed in our earnings materials and SEC filings available on our website. Information about our non-GAAP financial measures, including reconciliations to U.S.

GAAP, can also be found in our earnings materials that are available on the website. So, with that, take it away, Brian.

Brian MoynihanChief Executive Officer

Thank you, Lee, and thank all of you for joining us this morning. I am starting on Slide 2 of the earnings presentation. During the fourth quarter of 2022, our team once again delivered responsible growth for our shareholders. We reported $7.1 billion in net income after tax or $0.85 per diluted share.

We grew revenue 11% year over year and delivered our sixth straight quarter of operating leverage. And again, we delivered a strong 16% return on tangible common equity. If you move to Slide 3, we list the highlights of the quarter, which have been pretty consistent throughout the year. We drove good organic customer activity and saw significant increases in net interest income, which all helped drive operating leverage.

Revenue increased year over year 11%. It was led by a 29% improvement in net interest income, coupled with a strong 27% growth in sales and trading results by Jimmy DeMare and the team. This growth will exceed the impacts of lower investment banking fees and the impact of bond and equity market valuations on asset management fees in our wealth management business. The positive contributions of NII in sales and trading were also enough to overcome the decline in service charges driven by the fully implemented changes in NSF and overdraft fees in our consumer business.

Importantly, we improved our common equity Tier 1 ratio by 25 basis in Quarter 4 to 11.2%, and we achieved that without changing our business strategies. We were well above our both our current 10.4% minimum CET1 requirement and above the requirement that we’ll have beginning next year in January of 10.9%. We added to our buffer while both growing loans and reducing outstanding shares in the quarter. On a year-over-year comparative basis, both net income and EPS are up modestly, with strong operating leverage more than offsetting higher provision expense.

The higher provision expense is driven primarily by reserve builds this quarter result of loan growth in our portfolios and also our conservative weighting on a reserve study methodology, which I’ll touch on later. Last year, we had large reserve releases. Net charge-offs increased this quarter, but asset quality remains strong. Charge-offs were well below both the beginning of the pandemic, as well as longer-term historical levels.

And again, I’ll touch on this in a few pages. All that being said, the simple way to think about it is pre-tax, pre-provision income, which neutralized these reserve actions, grew 23% year over year. Let’s turn to Slide 4. Slide 4 shows the year-over-year annualized results.

And Quarter 4 results were a nice finish to a successful year in which we produced $27.5 billion in net income on 7% revenue growth and a 4% operating leverage. While the year was strong, full year earnings declined as a result of loan loss reserve actions. For the full year of 2022, again, we built about $370 million reserves. And by contrast, last year, in ’21, we released 6.8 billion of reserves.

Isolating those changes again, you’ll see that PPNR grew a strong 14% over 2021. As I said earlier, the themes were characterized by good organic customer activity, strong NII, and all these helped by years of responsible growth. Slide 5 highlights some of the attributes of organic growth for the quarter and the year. This, plus the slides, will be included in each earnings materials in our appendix will show digital trends in organic growth highlights across all the businesses.

Our investments over the past several years and our people, tools, and resources for our customers and our teammates, as well as renovating our facilities, have allowed us to continue to enhance the customer experience to record high levels and fuel organic growth. In the fourth quarter of 2022, we added 195,000 net new checking accounts, bringing the total for the year to more than 1 million. This is twice the rate of additions that we had in 2019 and periods before the pandemic. This net growth has led to a 10% increase in our customer checking accounts since the pandemic while keeping that 92% of our accounts or primary checking accounts of the household in the average opening balance, not the average balance, but the average opening balance for these new accounts is over $5,000.

We also produced more than 1 million new credit cards, the sixth consecutive quarter of doing that, bringing us back to levels that we generate pre-pandemic. Credit quality, you can see on Appendix Slide 28, for consumer remains very high in new originations. Verified digital users grew to 56 million, with 73% of our consumer households fully digitally active. We have more than 1 billion logins to our digital platforms each month.

And that’s been going on for some time now. Digital sales are also growing, and they now represent half of our sales in the consumer business. Erica, our virtual digital assistant, is now handling 145 million interactions this past quarter and has passed a billion interactions since its introduction just a few years ago. This saves a lot of work for our team.

When you move to the GWIM business, the wealth management business, our advisors grew by 800 in the second half of the year. Our team added 28,000 net new households across Merrill and the Private Bank in 2022. We experienced solid net flows despite the turbulence in markets. By the way, during 2022, our average Merrill household opened with a balances of $1.6 million.

We get very high-quality account openings. On flows, when combined across all our investment platforms in our consumer wealth management business, we saw 125 billion of net client flows this year. Additionally, we continue to see increased activity around both investments in our GWIM business and our banking products. Diversified banking element is a strong differentiator for us as a company.

It also supports the healthy pre-tax margin. This helped the GWIM business deliver strong operating leverage for the year, and it grew net revenue and net income to records. In our global banking business, we saw solid loan production and growing use for our digital platforms throughout the year and added new clients to our portfolio. As you well know, the overall investment banking fee pull was down.

However, we continued to deepen and expand client relationships with our build-out of commercial bankers. Our global treasury services business also grew revenue 38% year over year as a result of both rates, as well as fees for service on cash management. In global markets, we had our highest quarter — fourth quarter sales and trading performance on record, growing 27% from last year, ex DVA. This was led by strong performance on our macro FICC businesses, where we made continuous investments for the past 18 months.

Equities had a record Quarter 4 performance as well. Let’s move to Slide 6 and talk about operating leverage. As I’ve said to you for many years, one of the primary goals this company was an important part of our shareholder return model has been to drive operating leverage. Those efforts, including investments made for the future, coupled with revenue growth, produced 18 straight quarters of operating leverage, as you can see, leading up to the pandemic.

Beginning last year and in the third quarter of ’21 — 2021, I told you that we’ve now started achieving operating leverage and got back on streak six — and we’re six quarters of operating leverage despite all the things that are going on out there, and the team continues to drive toward that for 2023. So, I thought I’d spend a few minutes on a discussion of topics that’s been important as we’ve talked about investors over the last couple of months, deposits and credit. So, let’s go to Slide 7. First on deposits, there are several factors impacting deposits: as our industry works through — our economy works through an impressive period, a surge in deposits from the pandemic-related stimulus, the impact of monetary — an unprecedented monetary easing, impact of high inflation, and then the reversal of that was unprecedented pace and size of rate hikes, and monetary tightening.

But on a year-on-year basis, average deposits of 1.93 trillion are down 5%. This reflects the market trends and, in fact, reflects high tax payments to the governments in Quarter 2 2022. In addition, as we move forward through 2022, customers with excess cash investment or in cash saw yield as rates increase for money market funds, direct treasuries, and other products. It’s probably more relevant to discuss the more near-term trends.

Comparing third quarter of ’22 to fourth quarter of ’22, average deposits were down 1.9%. Noninterest-bearing deposits are down 8%, while interest-bearing deposits are up 2%. The mix shift is especially pronounced in treasury services in the global banking business. Corporate treasuries managed $500 billion deposits they have with us.

The impact of their activities has a change in the mix. On a personal side, you can see the checking account balances floating down a little bit from core expenses and spending. But more affluent customers put money into higher-yield deposits in the market. We do manage all these products differentially, and the discussion of these deposits by business segment, you can see on Slide 8, and we’ll talk through that.

So, this breaks down our deposits in a more near-term trend. In the upper left, you can see the full year across — for the whole company going across the page in the upper left-hand chart. We also put in the rate hikes that you can see. On the chart, you can see the heavy tax payment outflows in second quarter.

Then we saw the accelerated rate hikes and deposits moved to products seeking yield in certain customer segments. But in large part, what we’ve seen in the course of Quarter 4 has been stabilization and more normal client activity. Simply put, we ended Quarter 4 of ’22 with $1.93 trillion in deposits, roughly the overall level as we added in Quarter 3 and in deposit balances. So, let’s look at those differentiated by business.

In consumer, looking at the upper right chart, we showed the difference between the movement through the quarter, between the balance of low- to no-interest checking accounts to somewhat higher-yielding nonchecking accounts, money market and savings accounts and a limited portion of CDs. Across the quarter, we saw a $24 billion decline in total, down 2%. We have seen small declines in customers’ continued higher levels of spending, pay down debt, and also moved money to their brokerage accounts even in this business. Higher wages have offset this.

We saw a decline in Quarter 4 deposits in consumer. Correspondently, we also saw brokerage levels of consumer investments increase 11 billion, capturing a good portion of those deposits. In general, think of these consumer deposits are being very sticky of $1 trillion. That stickiness, along with net checking account growth, reflect the recognition and the value proposition of the relationship of transactional account with our company.

It also has — it reflects the industry-leading digital capabilities we offer and the convenience of a nationwide franchise. It also reflects the customers, our mass market segments, have fewer excess cash investment-style cash balances. Fifty-six percent of the $1 trillion in consumer deposits remain in low- and no-interest checking accounts. And because of all that, overall rate paid in the segment remains low of six basis points.

In wealth management, which you can see at the bottom left of the chart, more than 300 billion of deposits have become — became more stable across the fourth quarter. They also — you also hear — you also witnessed a shift to higher-yielding preferred deposits, as you can see on this label, from lower-yielding transaction deposits, as these customers have more excess cash and move them to seek higher yields. Early in the quarter, we saw modest declines in balances, but November’s rate hikes began to slow and the probability of future rate hikes became less, people moved their money. And we saw an uptick in balances as we move through the quarter.

This reflects the seasonal inflows that happened in the fourth quarter for wealth management clients. At the bottom right chart, you can see the most dynamic part of this equation. Our global banking deposit movement moves across $500 billion in customer deposits. This — the shift here is what drives the mix total for the company.

It’s pretty typical, with the exception that happened very quickly in Quarter 4, driven by the pace of rate hikes. In a rising rate environment where companies’ operational funds are more expensive, we anticipate these changes, particularly the high liquidity environment as clients use both cash inventory yield to pay down debt or manage their cash for investment yield. We have seen a mix of global banking interest-bearing deposits move from 35% last quarter to 45% in Quarter 4. And obviously, we’re paying higher rates on those deposits to retain them.

Customer pricing here is the customer-customer — on a per customer-customer basis based on the depth of relationship, the product usage, and many other factors. So, overall, deposit rates paid as a percent of Fed funds increases are still very favorable to last cycle, even as rates are rising much faster last cycle. I would note, well to the last cycle, that the Fed increases have been rapid, and we’d expect to pay higher rates as we continue to move through the end of the interest rate cycle. So, just remember, what we’re paying more for depositors, we also get that on our asset side.

That is simply why the NII — net interest income is up 29% from Quarter 4 2022 versus Quarter 4 2021. Now, let’s move to the second topic I want to touch on specifically, which is credit, and this begins on Slide 9. First, it is an intellectible truth that our asset quality of our customers remains very healthy. On the other hand, it’s impossible to gainsay that the net charge-offs are moving to pre-pandemic levels.

So, in the fourth quarter, we saw net charge-offs of $689 million, increased $169 million from Quarter 3. The increase was driven by both higher commercial and credit card losses. But as these charts show, they’re still very low in the overall context. In commercial, we had a few of older company-specific loans were not related or not predictive of any broad trends in the portfolio.

These were already reserved for prior periods, and based on our methodologies, went through charge-off in Quarter 4. Credit card charge-offs increased in Quarter 4 as a result of the flow through of modest increase in last quarter’s late-stage delinquencies. This should continue as we transition off the historic lows in delinquencies to still very low pre-pandemic levels. Provision expense was 1.1 billion in Quarter 4.

In addition to higher charge-offs, provision included roughly $400 million reserve build. This was higher than Quarter 3, reflecting good credit card and other loan growth, combined with the reserve-setting scenario. So, let’s just stop on the reserve-setting scenario. Our scenario — our baseline scenario contemplates a mild recession.

That’s the base case, the economic assumptions and the blue chip and other methods we use. But we also add to that a downside scenario. And what this result — results in is 95% of our reserve methodologies are weighted toward a recession environment in 2023. That includes higher expectations of inflation leading to depressed GDP and higher unemployment expectations.

This scenario is more conservative than last quarter’s scenario. Now, to be clear, just to give you a sense of how that scenario plays out, it contemplates a rapid rise in unemployment, to peak at 5.5% early this year in 2023, and remain at 5% or above all the way through the end of ’24. Obviously, much more conservative than the economic estimates that are out there. We included again the updated slides in the appendix, Pages 36 and 37, to highlight differences in our credit portfolios between pre-financial, pre-pandemic, and current status.

We also again gave you the new origination statistics for consumer credit on Page 28. The work the team has done on responsible growth continues to show strong results. From an outsider’s view, you don’t have to look any further than the Fed’s stress test results. We’ve had the lowest net charge-offs for peer banks in 10 of the last 11 stress tests.

On Slides 10 to 12, we included some long-term perspective. We showed long-term trends for commercial net charge-offs, total consumer charge-off rates, and more specifically, credit card charge-off rates. This compares those ratios to pre-financial crisis, during the recovery after the financial crisis, pre-pandemic, and then through the pandemic. So, that gives you a long-term perspective, which keeps in context the idea that we’re moving off the bottom in credit costs toward a level which is normalized and to pre-pandemic, but that level was very low in the grand context of banking.

So, before I move to Alastair, I want to just update a few comments on our consumer behavior. Consumer deposit balances continue to show strong liquidity, with the lower cohorts of our consumers continue to hold several multiples of balances they have as the pandemic began. These balances are drifting down, but they still have plenty of cushion left. And while their spending remains healthy, we continue to see the pace of that year-over-year growth slow.

In the aggregate, in 2022, our consumers spent $4.2 trillion, which outpaced 2021 by 10%. You can see that on Slide 35. Two things to note on that consumer spending pace. There continues to be a slowdown.

Year-over-year growth percent is earlier this — earlier in 2022 were 14% year over year. They’ve now moved to 5% year over year in the fourth quarter. So, what does this mean? That level of growth in year-over-year spending is consistent with the low inflation 2% growth economy we saw pre-pandemic. They’re also moving from services to experience — from goods to service and experience and spend more money on travel, vacations, and eating out, and things like that.

That is good for unemployment but continuously maintains service-side inflation pressure. With that, let me pass the mic over to Alastair to go through the rest of the quarter. Alastair.

Alastair BorthwickChief Financial Officer

OK. Thanks, Brian. And let me start with the balance sheet, and I’ll use Slide 13 for this. During the quarter, our balance sheet declined 23 billion to 3.05 trillion, driven by modestly lower global markets balances.

Our average liquidity portfolio declined in the quarter, reflecting the decrease in deposits and securities levels. And at 868 billion, it still remains 300 billion above our pre-pandemic levels. Shareholder’s equity increased 3.7 billion from the third quarter as earnings were only partially offset by capital we distributed to shareholders and roughly 700 million in redemption of some preferred securities. We paid out 1.8 billion in common dividends, and we bought back 1 billion of shares, which was 600 million above those issued for employees in the quarter.

AOCI was little changed in the quarter as a small benefit from lower mortgage rates was more than offset by change in our annual pension revaluation. With regard to regulatory capital, our supplementary leverage ratio increased to 5.9% versus our minimum requirement of 5%. And that obviously leaves capacity for balance sheet growth. And our TLAC ratio remains comfortably above our requirements.

OK, let’s turn to Slide 14 and talk about CET1, where, as you can see, our capital remains strong as our CET1 level improved to 180 billion and our CET1 ratio improved 25 basis points to 11.2%. That means in the past two quarters, we’ve improved our CET1 ratio by 74 basis points as we’ve added to our management buffer on top of both our current and 2024 requirements. So, we can walk through the drivers of the CET1 ratio this quarter, and you can see earnings net of preferred dividends generated 43 basis points, common dividends used 11 basis points, and gross share repurchases used 6 basis points. And while the balance sheet was down, loan growth drove a modest increase in RWA using 3 basis points of CET1.

So, we were able to support our loan growth and return capital and add to our capital buffer in the same quarter. Let’s spend a minute on the loan growth by focusing on average loans on Slide 15. And here, you can see average loans grew 10% year over year, driven by credit card and commercial loan improvement. On a more near-term linked quarter basis, loans grew at a slower 2% annualized pace, just driven by credit card.

Credit card growth reflects increased marketing, enhanced offers, and reopening of our financial centers, delivering higher levels of account openings. Mortgage balances were up modestly year over year, and linked quarter were driven by slower prepayments. Commercial growth reflects a good balance of global markets lending, as well as commercial real estate, and to a lesser degree, custom lending in our Private Bank and Merrill businesses. Turning to Slide 16, net interest income.

On a GAAP non-FTE basis, NII in Q4 was 14.7 billion and the FTE NII number was 14.8 billion. Focusing on FTE, net interest income increased 3.3 billion from Q4 of ’21, or 29%, driven by a few notable components. First, nearly 3.6 billion of the year-over-year improvement in NII was driven by interest rates. Year over year, the average Fed funds rates has increased 359 basis points, driving up the interest earned on our variable rate assets.

Relative to that Fed funds move, the rate paid on our total deposits increased 59 basis points to 62. And focusing just on interest-bearing deposit rates paid, the increase is 91. So, even while Fed funds rates have increased 140 basis points more than the last cycle, at this point, our cumulative pass-through percentage rates still remain lower in this cycle. That includes an increase in the pass-through rates in the past 90 days due to the unprecedented period of rate hikes.

Included in the rate benefit was 1 billion improvement in the quarterly securities premium amortization. Long-term interest rates on mortgages have increased 345 basis points from the fourth quarter of ’21, which has driven down refinancing of mortgage assets and, therefore, slowed the recognition of premium amortization expense recognized in our securities portfolio. The second contributor is loan growth, net of securities paydowns, and that’s added nearly 400 million to the year-over-year improvement. And lastly, partially offsetting the banking book NII growth just described was higher funding costs for our global markets inventory.

Now, that is passed on to clients through our noninterest market-making line. So, it’s revenue neutral to both sales and trading and to total revenue. And as you can see in our material, global markets NII is down 660 million year over year. OK.

Turning to a linked quarter discussion. NII is up 933 million from the third quarter, driven largely by interest rates. That 933 million increase included a 372 million decline in our global markets NII. The net interest yield was 2.22%, and that improved 55 basis points from the fourth quarter of ’21.

Nearly 30% of that improvement occurred in the most recent quarter, with the primary driver being the benefit from higher interest rates, which includes a 13-basis-point benefit from lower premium amortization. As you will note, excluding global markets, our net interest yield was up 89 basis points to 2.81%. Looking forward, I would make a couple of comments. As I do every quarter, let me provide the important caveats regarding our NII guidance.

Our caveats include assumptions that interest rates in the forward curve materialize, and we anticipate card loans will decline seasonally from holiday spend paydowns. And otherwise, we expect modest loan growth. We expect a seasonal decline in global banking deposits, and that the other deposit mix shifts experienced in Q4 may continue into the first quarter in the face of more rate hikes. We also expect the funding costs for global markets to continue to increase based on higher rates.

And as noted, the impact of that is recognized and offset in noninterest income. So, it’s revenue neutral. So, starting with the fourth quarter NII of 14.8 billion and assuming a decline of roughly 300 million of global markets NII in Q1, which would be similar to the fourth quarter decline, that would get us to a Q1 number around 14.5 billion. In addition, we have to factor in two last days of interest, which is about 250 million.

So, that would lower our starting point to 14.25 billion. We believe the core banking book will continue to show the benefit of rates and other elements and can offset most of the day count. So, we’re expecting Q1 NII to be somewhere around 14.4 billion. Beyond Q1, with increases in rates slowing and if balances continue their recent stabilization trends, we expect less variability in NII for the balance of 2023.

OK, let’s turn to expense, and we’ll use Slide 17 for the discussion. Q4 expenses were 15.5 billion, and they were up 240 million from Q3, driven by an increase in our people and technology costs. In addition, we also saw higher costs from our continued return to work and travel and costs of client engagement. We’ve seen pent-up demand for our teams gathering back together in person to drive collaboration and to spend more time with our clients.

Inflationary pressures continued, but our operational excellence improvements, as well as the benefits of a more digitized customer base, helped offset those pressures. Our headcount this quarter increased by 3,600 from Q3. And as we faced increased attrition in 2022, our teams were quite successful in their hiring efforts to continue to support customers. As the attrition slowed in the fall, our accelerated pace of hiring outpaced attrition, leaving us with growth in our headcount.

As we look forward to next quarter, I would just remind everyone that Q1 typically includes 400 million to 500 million in seasonally elevated payroll taxes. And Q1 will also be the first quarter to include the costs of the late October announcement by regulators of higher FDIC insurance costs. And as a result of holding the leadership share in U.S. retail deposits, that will add 125 million to each of our quarterly costs or a total of 500 million for the year.

We expect these things will put expenses around 16 billion in the first quarter before expectations that they should trend back down again over the course of 2023. On asset quality, we highlight credit quality metrics on Slide 18 for both our consumer and commercial portfolios. And since Brian already covered much of the topics on asset quality, I’m going to move to a discussion of our line of business results, starting with consumer on Slide 19. Brian noted the earlier organic growth across checking accounts, card accounts, and investments was strong again this quarter, and that’s as a result of many years of retooling and continuous investments in the business.

So, let me offer some highlights. At this point, we have the leading retail deposit market share. We have leadership positions among the most important products for consumers, and we’re the leading digital bank, with convenient capabilities for consumer and small business clients. We also have a leading online consumer investment platform and a great small business platform offering for our clients.

And importantly, when you combine all these capabilities with improved service, at this point, customer satisfaction is now at an all-time highs. And we produced another strong quarter of results in consumer banking that resulted in 12.5 billion in net income in 2022. For the quarter, consumer banking earned 3.6 billion on good organic growth and delivered its seventh consecutive quarter of operating leverage, while we continue to invest for the future. Note that our top line grew 21%, while expense grew 8%.

The earnings impact of 21% year-over-year revenue growth was partially offset by an increase in provision expense. And that provision increase reflects reserve builds this period compared to a reserve release in the fourth quarter of 2021. Net charge-offs increased as a result of the card charge-offs that Brian noted earlier. While this quarter’s reported earnings were up 15% year over year, pre-tax, pre-provision income grew an even stronger 36% year over year.

So, that highlights the earnings improvement without the impact of the reserve actions. Revenue improvement reflects the fuller value of our deposit base, as well as deepening with our deposit relationships. I’d note the growth also includes a decline in service charges of 335 million year over year as our insufficient funds and overdraft policy changes were in full effect by the end of Q2 of this year. And as a result of those policy changes, we continue to benefit from the better overall customer satisfaction and the corresponding lower attrition and the lower costs associated with fewer customer complaint calls, obviously, as a result of fewer fees.

The 8% increase in expenses reflects business investments for growth, including people and technology, along with costs related to reopening the business to fuller capacity. And remember, much of the company’s minimum wage hikes and Quarter 2 increased salary and wage moves impacts consumer banking the most of our lines of business and, therefore, impacts most the year-over-year comparisons. We also continued our investment in financial centers. For the year, we opened 58 and we renovated 784 more.

And against all of that, both digital banking and operational excellence helped us to pay for investments, and that allowed us to improve the efficiency ratio to 47%, an impressive 600-basis-point improvement over the year-ago period. Before moving away from consumer banking, I want to note some differences that highlight just how much more effectively and efficiently this business is running since even just before the pandemic. It’s easy to lose sight of how well this business is operating from an already strong position in 2019. And you can see some of the stats on Slide 17 in the appendix.

We can best summarize by noting we’ve got 318 billion more in deposits; 10% more checking customers, 92% of whom are primary; 28% more investment accounts; and absent the card divestitures, we’ve increased the amount of new card accounts by 4%; and our payment volumes are 36% higher. We’re servicing those customers with 387 fewer financial centers because of our digital capabilities, and it’s allowed us to need 10% fewer people to run the business. Our combined credit and debit spend was up 35%. Digital sales increased 77%.

And we sent and received three times the number of Zelle transactions. All of this allowed us to run the business with fewer employees and lower our cost of deposits ratio below 120 basis points. Moving to Slide 20, wealth management produced strong results, earning 1.2 billion on good revenue and 29% profit margin. This led to full year records for both revenue and net income of 21.7 billion and 4.7 billion, respectively.

This was an especially good result given the nearly unprecedented negative returns of both the equity and the bond markets at the same time this year. The volatility and generally lower market levels put pressure on certain revenues in this business, again, in Q4. But what helps differentiate Merrill and the Private Bank is a strong banking business at scale, with 324 billion of deposits and 224 billion of loans. So, despite a 14% decline in assets under management and brokerage fees year over year, we saw revenues hold flat with the fourth quarter of ’21.

Our talented group of wealth advisors, coupled with powerful digital capabilities, generated 8,500 net new households in Merrill in the fourth quarter, while the Private Bank gained an impressive 550 net new high-net-worth relationships in the quarter. Both were up nicely from net household generation in 2021. We added 20 billion of loans in this business since Q4 of ’21, growing 10% and marking the 51st consecutive quarter of average loan growth in the business despite securities-based lending reductions related to the current market environment. That’s consistent and sustained performance by the teams.

Our expenses declined 1%, driven by lower revenue-related incentives, partially offset by investments in our business. Moving to global banking on Slide 21, and you can see the business earned 2.5 billion in the fourth quarter on record revenues of 6.4 billion. Pretty remarkable given the decline in investment banking fees during this year. Lower investment banking fees, higher credit costs, and a modest increase in expenses were mostly offset by stronger NII and other fees.

So, overall, revenue grew 9%, reflecting the value of our global transaction service business to our clients and our associated revenue growth, while investment banking fees declined a little more than 50%. The company’s overall investment banking fees were 1.1 billion in Q4, declining 1.3 billion year over year in a continued tough market. Still, we increased our ranking in overall fees for the full year 2022 to No. 3 as we’ve continued to invest in the business.

The 612 million increase in provision expense reflected a modest reserve build of 37 million in the fourth quarter, compared to a 435 million released in the year-ago period. And pre-tax, pre-provision income grew 13% year over year. Expense increased 4% year over year, and that was driven by strategic investments in the business, including hiring and technology. Switching to global markets on Slide 22, and as we usually do, I’ll talk about the segment results, excluding DVA.

You can see our fourth quarter record results were a very strong finish to a good year. The continued themes of inflation, geopolitical tensions, and central banks changing monetary policies around the globe continue to drive volatility in both the bond and equity markets and repositioning from our clients. And as a result, it was another quarter that favored macro trading, while our credit trading businesses improved. Also, spreads fared better than the prior year.

Fourth quarter net income of 650 million reflects a good quarter of sales and trading revenue, partially offset by lower shares of investment banking revenue. And it’s worth noting that this net income excludes 193 million of DVA losses this quarter as a result of our own credit spread movements. Reported net income was 504 million. Focusing on year over year, sales and trading contributed 3.7 billion to revenue, and that improved to 27%.

That’s a new fourth quarter record for this business, besting the previous one by 21%. And at 16.5 billion in sales and trading for the year, it marked the best in more than a decade. FICC improved 49%, while equities was up 1% compared to the quarter a year ago. And the FICC improvement was primarily driven by growth in our macro products, while credit products also improved from a weaker Q4 ’21 environment.

We’ve been investing continuously over the past year in our macro businesses. We’ve identified those as opportunities for us. And again, we’ve been rewarded for that this quarter. Year-over-year expense increased about 10%, primarily driven by investments in the business.

Finally, on Slide 23, we show all other, which reported a loss of 689 million, and that was consistent with the year-ago period. For the quarter, the effective tax rate was approximately 10%, benefiting from ESG investment tax credits and certain discrete tax benefits. Excluding those discrete items, our tax rate would have been 12.5%. And further adjusting for the tax credits, it would have been 25%.

Our full year GAAP tax rate was 11%, and we would not expect 2023 to be a lot different. So, with that, we’ll stop here, and we’ll open it up, please, for Q&A.

Questions & Answers:


[Operator instructions] We’ll take our first question from Glenn Schorr with Evercore. Your line is open.

Glenn SchorrEvercore ISI — Analyst

Hi. Thanks very much. Need a little more help. You gave a lot, but I need a little more help on NII for 2023.

I — you walked us to the 14.4 on starting point on the quarter, and your words were less variability in NII for the rest of ’23. So, I guess my question is, you got a lot of loan growth. We have a few more rate hikes hopefully coming through. And I understand the opposite.

The flip side of that is deposit migration, some outflows and betas. But could you fill in those blanks? Because I think — I won’t speak for everybody. I know I am — we’re still expecting some growth in NII for the calendar year. So, maybe you could talk through some of those pieces and maybe the outflow on global banking noninterest-bearing as a big piece of it.

So, thank you.

Alastair BorthwickChief Financial Officer

Glenn, I’ll start with just, you know, just by way of context, obviously. We’re coming off a period with historic inflows for pandemic deposits. And now, in Q4, we’re beginning to see the impact of quantitative tightening and a number of sharp rate rises. So, that obviously creates some uncertainty.

We don’t necessarily have a playbook for that. We’ve just got to see how actual balances perform, and we’ve got to see how the rotation and the rate paid develop. So, it’s dynamic, it’s evolving, and we manage and we forecast that weekly. So, when we lay out for you the actuals on Page 7 and 8 of the earnings presentation, we’re trying to show you what we’re seeing in real time around balances and mix.

So, what we’ve said with respect to this quarter coming up is we’ve got to adjust for the day count as we would every year. That’s timing, and we’ll get that back obviously in Q2 and Q3. And then we highlighted the global markets’ NII impact. It’s always been there.

The last couple of quarters, it’s been around 300 million. It is revenue neutral to shareholders, as we point out, because we pass that along to clients and we capture it elsewhere in sales and trading. But it does obviously impact the NII. That’s why we’re highlighting it.

But as it relates to the forecast, look, we feel like the modest balance declines are kind of in there. That may continue. And this continued rotation from some of the noninterest-bearing to interest-bearing, we’ve got some pricing and rate pressures. So, that’s in the back of our mind, too.

And the only final thing I’d just say is we’re reluctant to go a whole lot further out. You know, last year, we declined to give a full year guide. This year, we feel that way, in particular, because it’s just a much more sensitive environment when we’re modeling when interest rates are 5% than when they were at 50 basis points. So, for all those reasons.

Now, I will say this. This is the final point. We just got — I think we’ve got to stay patient because we’ve got to see how rates and balances and rotation shake out. And as rates return to more normal and as customer behavior, and you can sort of see it, it’s behaving maybe a little more normally, then we should be able to resume our upward path over time.

But we got to see how this shakes out. And that’s why we don’t want to go out beyond Q1 at this stage.

Glenn SchorrEvercore ISI — Analyst

Fair enough. I feel bad for all of us. Maybe a quick one on credit. Good to see charge-offs down given everything that’s going on in the world.

But can you talk through the big — the $1.6 billion sequential pickup in criticized books from last quarter, what’s driving that, and how you feel about reserves against that? Thanks.

Alastair BorthwickChief Financial Officer

Yeah. So, you’re aware, the main driver there is commercial real estate, and it’s specifically around — about 1 billion of it is office. Obviously, there’s a significant amount of change going on in office. And what we’ve chosen to do is as rates are rising here, we’re pushing that through the models.

And, you know, we just — with the debt service coverage it comes down, we pushed through the downgrades. So, we’ve chosen to do that. The performance is still OK. So, we’re not concerned with the performance, but we’re just making sure we’re being tight on the modeling there.

It is obviously a portfolio where, I think you know this, we’re pretty focused on making originations into office buildings that are leased up generally at 55% LTV at origination, and 75% of that book is Class A office building. So, we’re not alarmed there. We’re just following our own process with respect to making sure return on the debt service coverage.

Glenn SchorrEvercore ISI — Analyst

Thanks very much. Appreciate it.

Brian MoynihanChief Executive Officer

Just remember that we’re talking about office. It was very high-quality underwriting characteristics, all A Class, etc. And so, we just have a conservative rating process, frankly. And it’s well viewed out there and well looked at by many people.

But remember, office is 14 billion to 15 billion of the total portfolio, so we feel very comfortable where they are. And then obviously, we built reserves against the portfolios across the board that are strong and reflect, as I said earlier, basically a mild recession in the base case and a worst recession in the adverse case that we wait 40%.


We’ll go next to Gerard Cassidy with RBC. Your line is open.

Gerard CassidyRBC Capital Markets — Analyst

Thank you. Alastair, on the loan loss reserving, and Brian just talked about the adverse case being about 40%, can you guys share with us how much of the reserve building is what may be referred to as management overlay relative to what the models are specifically dictating on reserve building?

Brian MoynihanChief Executive Officer

We don’t disclose that, but you might assume that there’s a fair amount. There are three components to this. One is what the models say. Two is basically uncertain in precision and other things we overlay and then a judgemental, and you might think that there’s a fair amount out right now with the uncertainty, but — and so we — the model piece of that would be a portion.

Gerard CassidyRBC Capital Markets — Analyst

Very good, Brian. And then when you look at your deposit behavior of the consumer, the past cycles, is there any material differences in the way they are moving money around or not moving money around from their, you know, checking accounts or low-yielding savings accounts?

Brian MoynihanChief Executive Officer

You know, I think — when you look at the higher-end consumer, not really. You know, they move to — when the rate in the market yields money market funds, we move them to it. And it’s part of what we do. In that sort of investment cash drawer, as we call it, moves, the checking accounts don’t move.

The difference, frankly, is that, you know, there is a lot of stimulus that was in addition to the earnings power of the consumer. So, we’ve never had that, you know, in history. But — and so that amount of stimulus, the question is will they spend it down or will they keep storing it up? And they’ve been spending it down very modestly across, you know, sort of median income households or so and the general consumer business. You know, to give you example, the cohort that, you know, was $2,000 to $5,000 in average balances pre-pandemic at 3,400, they’re still sitting at 12,800, but they peaked early in ’22 at 13,400.

So, they’re drifting down. But it’s still multiples. The big question was will they end up spending that down? If they’re employed, probably not. But if they’re — if the unemployment rate changes in our models, assuming the unemployment rate changes.

So, you know, I think we’re at 6 basis points now in total consumer rate paid, the rate structure is very high. You know, the — and we are 11 basis points that was where we got to. We have very low CD volumes, and things have a fair amount of money markets, but most of it’s checking. That’s why we showed you the differential on checking.

So, is it different? Yeah, probably in the mass consumer business just because they are sitting on more cash and may use that cash in, you know, certain scenarios, but, you know, the rest of the behaviors are largely the same, including in the corporate business where people, you know, can have less balances and the effective credit rate generates a bigger number to cover their fees, so they tend to pull the balances out.

Gerard CassidyRBC Capital Markets — Analyst

Just quickly, Brian, just when you look at the high net worth in corporate, do — did that move, you know, from 0% to 3% Fed funds, for example, versus 3% to where we are today at 4.5%, is most of that completed where the people that were going to move the money have already moved it in those two categories?

Brian MoynihanChief Executive Officer

Yeah, well, I mean, I can’t say definitively, but you’ve seen — that’s what we showed you on those pages where we show the stable — that the account balances are relatively stable in wealth management in the fourth quarter, you know, 300-odd billion and 300-odd billion. Basically, they’re flat if you look across the last several weeks. So, you know, there’s always a little bit of migration, you know, to the preferred deposit, which is a market for higher-yielding sort of money market account. But the big shift in that was, you know, frankly, in the second quarter of ’22 when I think we had, you know, 50 billion-odd numbers of tax payments, which was a lot higher than in past years due to — if you think about the ’21 dynamic in capital gains and those things that went through.

So, what we’re seeing is, you know, the last four or five weeks, we’re seeing relatively stable in deposit balances, Quarter-end 3, Quarter-end 4 basically flat. A little bit of movement among the categories. But in that business, frankly, a fairly, you know, sort of stable place right now. And so, I think this is the long answer.

[Inaudible] short answer, if they move the money, they’ve kind of already moved it.

Gerard CassidyRBC Capital Markets — Analyst

Brian, thank you very much.


We’ll take our next question from Mike Mayo with Wells Fargo. Please go ahead.

Mike MayoWells Fargo Securities — Analyst

Hi. I guess, Alastair, I guess no good deed goes unpunished. I mean, NII did grow 21% for the year 2022. It did grow 7% linked quarter in the fourth quarter, up $900 million.

But six weeks after you gave guidance last quarter, you lowered that guidance by 300 million, and it just raised some questions about the quality of your modeling or if you had your arms completely around the asset liability management. So, what happened to cause you to change that guidance, albeit in the context that’s still some of the best NII growth you guys have seen in many years?

Alastair BorthwickChief Financial Officer

Yeah. So, Mike, if I go back to six months ago, Quarter 2 earnings, what we said at the time was we thought over the course of the next six months, NII might go up by 1.8 — 1.85 billion. In actual fact, it’s gone up 2.25. So, that’s the actuals.

Remember, we’re forecasting as best we can at any given time. Up 2.25. Q3 was more favorable than I think we had thought, and Q4 was less favorable. And the Q4 was less favorable in large part because the balances behaved just a little bit differently and the rate paid behaved just a little bit differently and the mix or rotation, if you like, that behaved a little differently.

And it kind of makes sense because Q4 is where QT kind of kicked in. So, look, we don’t have a great deal of precedent. It’s obviously a historic period. It’s difficult to forecast quarter to quarter.

And it’s — our models are just a lot more sensitive right now. So, you know, I think we’re going to try and share with you what we know when we know it, but it’s just a more difficult environment at this point to predict looking forward.

Mike MayoWells Fargo Securities — Analyst

It’s like the first half of your round of golf, you played well, you should have just stopped after that then, I guess. But, you know, I guess as we look — so in other words, that $400 million extra that you got, you’re kind of giving back here from the fourth — the first quarter. So, 14.4 billion NII guide, if you annualize that, that would be still 9% NII growth in 2023. Is that a fair starting point? Can you give us, you know, not big confidence, but a little confidence given that deposits have stabilized, the day count, cards are seasonally lower? So, again, you analyze that, that’s 9% NII growth.

And then, you know, Brian, still on expenses, any change there? Are you going to keep it to just like 1.5% growth?

Brian MoynihanChief Executive Officer

So, on the first thing, Mike, if there was something I was going to pick up on earlier to first question, you picked up, going to the point. You know, we will have growth in NII year over year in the range you talked about if you take the 14.4. As Alastair said, we expect it to sort of be less variability and annualize that and compare that to ’22 of 9%, as you said. So, you’re exactly right.

So, that’s good growth. And I think you’ll see as you move through this year of ’23, leave aside the economic scenario playing out, but you’ll see you’ll move from where we are today, which is uncertain about where the balances will finally settle in and the plateauing of those balances to where you get back to normalized growth and normalized loan growth, etc. So, you’ve got it right. There’ll be, you know, nice NII growth year over year.

On expenses, you know, if you look at your guys’ estimates for 62.5, which is what we sort of said earlier this — in the fourth quarter, you know, we’re comfortable that, that’s what the average of the Street analysts are, you know, and that — but that takes a lot of good management to get there. And, you know, we’ll continue to work on it. Let the headcount drift back down and continue to invest in things that provide efficiency. So, you got it.

And key to that is the six quarters of operating leverage and the idea of continuing that going.

Mike MayoWells Fargo Securities — Analyst

And then the last part of the income — or the EPS is simply your excess capital, which you highlighted. It seems like you’re well above your CET1 ratio. So, what does that mean for the pace of buybacks and your desire to buy back stock at this price?

Brian MoynihanChief Executive Officer

So, we’ve always said that, you know, the first desire is always to support business growth. And that’s what we’ve been doing. We then — we’re well above our minimums. We’re on a path to close out the requirement for next year.

And so, you know, we bought back a chunk of shares this quarter. You’d expect that to start to increase neutralizing the employee issuances and then going above that each quarter now because we, you know, 11, 20 — 11.2 something, we were close to 11.4 target. So, we’re back in the game.

Mike MayoWells Fargo Securities — Analyst

All right. Thank you.


Our next question comes from John McDonald with Autonomous Research. Your line is open.

John McDonaldAutonomous Research — Analyst

Good morning. Alastair, I know we’re asking you to predict a lot of things here. Just thinking about the credit and the pace of normalization, do you have any sense of where charge-offs kind of might start out the year and what kind of pace of normalization? If we look at the charge-off ratio that moved up a little bit this quarter, what might that look like for 2023?

Alastair BorthwickChief Financial Officer

Yeah. So, we’re not going to look too far into the future, John. But if you look at our 90 days past due in the credit card data that we show you every quarter, that tends to give you a pretty good leading indicator of what’s coming down next quarter. So, you can see that the 90 days past due have picked up just a little bit, 30 days past due have picked up just a little bit.

We’re still well below where we were pre-pandemic, but that would tell you on the consumer side, it looks like it’s drifting just a little higher. So, that’s number one. Number two, with respect to commercial, this quarter was a little unusual. We had three deals that we ended up having to charge off.

Not correlated in any way. They’re in totally different businesses. And they’d been hanging around for a while, but it was — two of them are fully reserved. So, it didn’t come as a surprise.

But I think, you know, because the commercial stuff was so close to zero, it immediately looks like, you know, a pop in any given number. That’s part of the reason why we showed those graphs of what charge-offs have looked like over time in the earnings materials. But the commercial portfolio continues to look very strong.

John McDonaldAutonomous Research — Analyst

OK. And you touched on this a little bit in Brian’s comments, but just on loan growth, what are you guys thinking about for this year, and what’s the perspective of where you closed the spigots a little bit in the third quarter as you managed RWA? You kind of said those were opening up in the fourth, but we didn’t really see it translate to robust loan growth. Just kind of that dynamic between what you’re looking to do and what you’re seeing on demand for loan growth outlook. Thank you.

Alastair BorthwickChief Financial Officer

Yeah. So, we said we’re wide open for business in the fourth quarter, and that remains the case. Brian covered the capital point. We had to do what we had to do in the third quarter.

We did it. We’ve added 75 basis points of capital in the last two quarters. Puts us in a great place. So, mainly, what you’re seeing in Q4 is just it was a slower environment for loan growth.

A year ago, you know, we were talking about the fact we anticipated that loan growth might be high single digits, and we grew 10. This year, we feel like it’s going to be, you know, mid-single digits, it’s going to be slower. And it’s going to be led by commercial, it’ll be led by card. But things like securities-based lending, that’s just quieter now.

We’ve got balances being paid down there. Mortgage is quieter this year. And then in our base case, you know, you look at the economic blue chip consensus, you can see the forecast is for recession. So, it’ll be a quieter loan growth year this year, I suspect.

But we’re open for business to support our clients.

John McDonaldAutonomous Research — Analyst

OK. That’s helpful. Thank you.


We’ll go next to Erika Najarian with UBS. Please go ahead.

Erika NajarianUBS — Analyst

Yes, hi. Good morning. I just had one compound clarifying question. The first is, Brian, did you, in response to Mike’s question on NII, bless 57.6 billion in NII for ’23, right? He was saying 14.4 times four, 9% NII growth.

You seem to be going with it. I just wanted to confirm that. I think there’s a bit of confusion given that you were — you guys were saying you don’t want to go beyond the first quarter. And the second question is also for you, Brian.

I think that you’ve done an unbelievable job of transforming the company. And I think the one thing that remains is that the investor base still thinks you as mostly a bank to invest in when rates are going up, right? And clearly, there’s a lot of uncertainty over the NII outlook, but could you sort of give us, you know, what we should be, you know, potentially excited about that you can control with regards to the revenue trajectory from here? And also, you spent so much time on deposits, I’m just kind of confused on the message in terms of, you know, deposit declines from here, because you’ve laid out this case that you have this very resilient deposit base, and it seems like a lot of attrition has already happened. That feel — sorry, that was actually three questions in one, I apologize, but that’s it.

Brian MoynihanChief Executive Officer

I think — I’ll put all those questions together in one answer. If you go to page that’s in the report where we sort of say look at the difference between the consumer business in ’19 and now. And it’s something to be excited about because we have during a period of time where, you know, we were completely shutting down branches, like 2,000, opened back up. We actually went down from 4,300 branches to 3,900 branches.

We filled out a lot of new cities. We do this work. We have 10% more checking accounts. The customer favourability is at an all-time high.

Our small business part of that business is the biggest in the country and growing. And, you know, you look at that and that provides a great anchor which provides a great stable deposit base we showed you on the slide where we showed that base and also provides a lot of, you know, very low-cost deposits and as rate rise and materialize that. And then if you think what happened last cycle for a year when rates did not move up, we continue to grow deposits in the consumer business in the mid-single digits, which just is infinite leverage. And so, that’s something to be excited about from not only a customer side where we’re digitized and, you know, you have Zelle, usage is going up.

Erica usage is going up. Erica meaning our Erica, not you, Erika. But the balances in the consumer investments open up 7% more accounts in a year when the investment world is choppy. And then you pair that into the wealth management business, same thing.

One of the biggest deposit franchise in the country, biggest, you know — three-point-something trillion — high $3 trillion of assets; growing net households at the fastest rate it’s grown in a long, long time, maybe history; growing advisors. Those are things to get excited. That’s the organic growth engine of the company. You got to put that against the backdrop of a plateauing of NII, which is basically what Alastair said, sort of think about of less variability around the 14.4 starting number, which might annualize and did math.

And so, he did the math and made it out. But that provides us a good base of which to drive forward. And so, you really got to get through the economic uncertainty, and then all those things will start to bear. Meanwhile, the trading business, which we invested in a couple of years ago now, is at its best fourth quarter ever.

And Jimmy and the team were doing a good shape. And so, I — you know, we just feel good about the overall franchise, more customers, more with each customer. And then that provides a big stable base, which as rate increases slow down, the marginal impact of it will slow down until we see the good core loan and deposit growth, which you saw after rate — the last rate rising increase stopped and produced, you know, the 20 quarters of operating leverage and things like that. So, that’s pretty good to be excited about.

Biggest bank growing its franchise and only growing solid economy in the world at a faster rate than anybody else is pretty interesting.

Erika NajarianUBS — Analyst

Just to clarify, Brian, you mentioned, you know, the plateauing of NII, and then hopefully all the investment in the business would drive growth from there. Is that still possible if, you know, we have a, you know, continued rate cuts through 2024?

Brian MoynihanChief Executive Officer

You know, the scenario of rate cuts and rate rises, you know, we basically is blue chip, so I’m not sure. You know, it depends on what’s causing that. You know, if it’s a normalization of the rate curve back to — of, you know, say, 3% on front end and 4.5 in the back end or something like that. You know, that’s different than what you saw when they had to cut rates for the pandemic or after the financial crisis and left in there for years to get the engine of the United States economy restarted.

What’s different this time, frankly, and that’s what we’re talking about the consumer data is even with strong rise in interest rates, you know, a less tight labor market, and, you know, inflation and what people are being told to worry about, you’re actually seeing consumer spending consistent with, you know, a good, you know, 2% growth environment, a low inflation environment, which is good because a consumer’s being, you know, appropriately conservative right now.

Alastair BorthwickChief Financial Officer

Erika, the other thing I’d just say is you think about why we’ve got to slow down in some of our fee-based businesses right now. It’s because rates have risen so quickly. And that’s created a lot of volatility. And it’s created — you know, the asset management business has had a big sell-off in bonds and stocks.

So, we’re poised now in a lower base where we can grow from here. Same thing if you look at our net income. We’ve really outrun a pretty historic decline in investment banking fees. So, we’ve got a diversified set of businesses, whereas some normalcy returns, we can see some pickup in those fee lines as well.

Erika NajarianUBS — Analyst

Thank you very much.


We’ll go next to Ken Usdin with Jefferies. Your line is open.

Ken UsdinJefferies — Analyst

Thank you. Good morning. I wanted to follow up, Alastair. You had about $800 million of incremental interest income from the securities book.

And I’m just wondering if you can help us understand how much of that was attributed to that continued benefit from the swap portfolio. And also then, you know, how would you expect that to impact your outlook for the 14.4 in the first quarter guide? Thank you.

Alastair BorthwickChief Financial Officer

Yeah. So, most of the increase in securities portfolio, we’re not really reinvesting in there at this point as the securities portfolio is sort of declining. We’re using the money that’s throwing off to put it into loans. That’s always our first preferred place.

So, you’re picking up on the right thing. It’s mainly the treasuries that are in there. They’re swapped to floating. That way, we don’t have any capital impact from rising rates.

And so, you’re going to see the securities yield just continue to pick up, number one, based on the treasuries swap to floating as floating rates go higher; and number two, as the securities come due, there’ll be fewer and fewer of them at lower rates. And so, you’re going to see the pickup over time.

Ken UsdinJefferies — Analyst

And just as a follow-up, what’s our best benchmark rate to kind of watch that trajectory for, you know, how we can understand that helper from that swap portfolio?

Alastair BorthwickChief Financial Officer

Normally, it’s SOFR, Secured Overnight Financing Rate.

Ken UsdinJefferies — Analyst

OK, great. Second quick one just on capital. You had a 20-basis-points increase in your CET1. You did 1 billion or so of the buyback.

Just wondering how you’re thinking about capital return with the bar package of rules still ahead of us going forward. Thanks.

Alastair BorthwickChief Financial Officer

Well, I think, you know, Brian said the right things. The strategy hasn’t changed. We’ve got, number one, support our clients. We’re going to, number two, invest in our growth.

Then we plan to just sustain and grow our dividend. And over time, we’ll balance building capital and buying back shares. I think the difficult part with Basel III end game right now is we don’t have the rules. So, we’ve got to wait, I think, until we see those.

They’ll go through a comment period. At that point, we’ll offer much more perspective. But, you know, I’ll say the obvious, banks have got plenty of capital. We were asked to take 90 basis points more in June.

There’s a lot of procyclicality already in things like the stress test and stress capital buffer and in CECL. And I think, look, we’ve shown our ability to perform and build capital, in this case, 75 basis points in two quarters. So, we’ll deal with whatever the ultimate rules come up with.

Ken UsdinJefferies — Analyst

Great. Thank you, Alastair.


Our next question comes from Matt O’Connor with Deutsche Bank. Your line is open.

Matt O’ConnorDeutsche Bank — Analyst

Good morning. Have you guys thought about how to better insulate yourselves against potentially lower rates and not just kind of a little bit of a decline, but if we get something unusual and rates drop a lot? I know it’s easier for some of the smaller banks to do it. But, you know, we have seen some regional banks essentially kind of lock in a corridor of the NIM so that, you know, kind of medium term, it’s more about growing the balance sheet versus the rate moves up and down. And, you know, clearly, with their deposit rates low, if we do get Fed cuts, they’re just not as much leverage to bring down those rates.

Alastair BorthwickChief Financial Officer

Yeah. So, I don’t know that we’ve thought about it in terms of like a quarter of NIM, but we definitely think about balancing earnings and capital and liquidity through the cycle. So, I don’t see us making significant changes to our core. We’re trying to make sure that we operate and deliver in all rate environments.

That can be high or, two years ago, can be zero rate environment. So, the changes where — you can sort of see our changes at the margin. You can see we’re taking securities out and replacing them with loans. And you can see everything restriking higher.

So, we’ve got a smaller, more efficient balance sheet. We, at the margin, may consider fixing some rates here, depending on how things develop over the quarter. But it’s — you know, we’ve had a pretty, I’d say, good strategy that’s allowed us to drive net interest yields. You can see those on Page 16.

They’re up 46% over the course of the past year. And drive the NII. That’s up 3.3 billion year over year. So, you know, we feel like we struck that balance.

That’s what responsible growth means to us. And at the margin, we’ll probably still maintain a little bit of asset sensitivity.

Matt O’ConnorDeutsche Bank — Analyst

OK. Thank you. That’s it for me.


We’ll take our next question from Betsy Graseck with Morgan Stanley. Your line is open. 

Betsy GraseckMorgan Stanley — Analyst

Hi. Good morning. Can you hear me?

Brian MoynihanChief Executive Officer

Yes, we can.

Betsy GraseckMorgan Stanley — Analyst

Oh, OK, great. Two questions. One, just a little more color on the loan growth outlook. I heard you on expecting that loan growth will be slowing as you go through the year.

And I just wanted to get an understanding of, you know, is that more, you know, just demand slowing base effects, or is there also anything in there from you on proactive credit decisioning as normalization, you know, comes through the rest of the year?

Brian MoynihanChief Executive Officer

There’s a couple of things. If you look in the fourth quarter, you could see the cards come up, which, you know, seasonally, that’s going to come down, and that’s one of things that people tend to pay those down. The usage of those card, frankly, are still at low levels of pay rate. The other way to think about that is still in the 30s.

So, that’s sort of one thing that’s been kind of consistent through the pandemic, the customers are paying down the card balances. And we expect, at some point, those will get back to a more normalized paydown rate in the mid-20s. The second is line usage, frankly, has also come back down. It’s not gotten ever back to where it was pre-pandemic, and it moved up and it dropped by 100 or so basis points, which, across a lot of lines, is a fair amount of loans.

So, that you saw. And so, you know, how corporates manage, you know, their borrowing and cash and demand cycle, you know, seems to be flattening out a little bit. You know, then obviously, acquisitions and things are way slow down. There wasn’t much activity there.

So, I think if you put it together, then you have, in a securities-based business, customers, you know, took down leverage, paid off a fair amount of loans in the wealth management business, even though they’ve grown, I think, for 50-some quarters in a row now or something like that in loan balances. It just happens. Mortgages, obviously, are low. So — but what we think is as the rate environment settles in, you’ll see that normalize and that will get — we’ll be back on the mid-single digits.

We just won’t have, you know, like 10% loan growth year over year because that is faster in economy and faster we do. We have not changed credit underwriting standards. I mean, you can see that in the consistency of the origination standards back in the pages of the appendix where we showed sort of our cars and home equity and things like that. It’s just the demand side is a little softer because people are reading the same headlines we’re all reading, about a recession coming and what should — and they should be careful.

Betsy GraseckMorgan Stanley — Analyst

OK, got it. And then on the expense side, I know we talked a lot about the NII and, you know, the puts and takes as you go through the year that you’re looking for. What about [Audio gap] ability on the expense line to manage through any, you know, worse-than-expected outcomes on the NII? What kind of levers do you think you have to pull there, Brian?

Brian MoynihanChief Executive Officer

Well, we always have — you know, the variable compensation stuff will drop because assuming that the reason why rates are going — being cut is because economic activity is worse than people thought. And then you have the general just efficiency movements in the house that we are — we’ve been pretty good at. And then you have to remember, we tried to get people to go off of nominal expense to operating leverage. And so, we have six quarters of operating leverage.

As the NII growth slows down, we have to manage the company, produce operating leverage. And so, we’d expect that fees might stabilize and, you know, absorb the billion-dollar downdraft and quarterly investment banking fees and start to work up from there and other types of things. So, I think we feel very good about the ability to find ways to manage expenses. Always have.

We, you know, slowed down hiring as we came into the fourth quarter, not because, you know, we’re trying to — because frankly, we’ve hired — we’d gotten our hiring to match the great resignation early in the year, and it was sort of overachieving. So, we slowed that down. And that allowed us get back in line and start to bring the headcount back down to where we wanted to be. But those are, frankly, positions that are relatively — have a relatively high movement rate and only because of nature of the job.

So, we feel good about between very rate compensation, between continuing to reduce headcount for efficiency, and frankly, you know, just activity levels. In a down scenario, we’ll be able to pull the expenses down. But, you know, meanwhile, we’re trying — we’re going invest $3.7 billion in technology development in ’23 versus 3.4 in ’22. We continue to add bankers.

We added 800 wealth management advisors in the second half of last year. We’re — our training program for those across, you know, wealth management — all our wealth management businesses and other training programs. We continue to hire young, talented people. So, we’re trying to maintain that balance of continuing to invest in the growth.

Opening in new cities. You know, we’re averaging — you know, these branches that we’re opening are extremely successful when you look at the size of them relative to anybody else’s opening practice. And so, why would you stop that? And yet, the total number of branches comes down because we’re managing expense side. So, we’re paying for this stuff as we go.

But — and so you could slow some of that down and get leverage out of it. But the question would be, as we’re in that scenario, is that the right decision for long-term value creation?

Betsy GraseckMorgan Stanley — Analyst

Thank you.


We’ll go next to Vivek Juneja with J.P. Morgan. Your line is open.

Vivek JunejaJPMorgan Chase and Company — Analyst

Thank you. Couple of clarifications on the same NII question. I just want to understand, in your assumption about the — staying at 14.4 billion through the year on a quarterly basis, are you assuming deposits to continue growing or shrinking, number one? Are you expecting further rotation out of noninterest-bearing to interest-bearing? And do you expect the 14.4 billion number even if there are rate cuts either toward the end of the year? Is that number doable even with that — what is it that you’re assuming? Is that even with the rate cuts?

Alastair BorthwickChief Financial Officer

So, Vivek, we just said less — you know, there’ll be less variability around that number due to the fact the market stuff has gone to zero. That has no impact on it that you saw over the last few quarters have impact. So, less variability. All the things you cited are the reasons why we tend to say you have to be careful about saying what’s going to happen in the fourth quarter of ’23 with great clarity.

What we did say is if at this level with less variability, you’ll have nice growth over this year than next year. But I think everything you point out, whether it’s rates going up faster than people think because inflation doesn’t going to grow or come down because people think that they’ve done a good job and they want to get behind the economy, you know, we base our modeling on the blue chip economic assumptions out there and then looking at our balances and stuff. And so, yeah, I think that’s the reluctance. So, I — all your points are great points and they’re all why we are reluctant to say I can tell you to the three decimal places what it’s going to be three quarters out because it can move around on you.

And to Mike’s earlier point, we grew 1.2 billion and 900 million the linked quarter and somehow people thought that wasn’t good enough because, you know, there’s math that could have — would have gotten you different. So, stay tuned. We’ll tell you what we know when we know it. And — but it’s good organic customer growth.

You know, a million net new checking accounts, starting at 5,000 balances, growth in wealth management and loans deposits. These are things that stick with you and be good no matter what the scenario.

Vivek JunejaJPMorgan Chase and Company — Analyst

Another — a different question slightly. You gave that 2,000 to 5,000 deposit cohort, Brian, in terms of where they are in the deposit balances. In the past, you’ve also given the cohort below that, like a $1,000-type cohort. Where does — how is that doing? Can you give any numbers on that?

Brian MoynihanChief Executive Officer

It’s similar. It’s — they’re all moving down very slightly, that average balance, that same group of customers taken out. I’d say — so it’s in the same sort of — different sizing, but it’s the same thing. It’s — I don’t have it right in front of me, but I’ll have Lee get it to you.

But I don’t — but it’s moving down slightly. The interesting part of that kind, Vivek, honestly, is in the highest average balances, you actually have seen them down from pre-pandemic, which means you saw them reposition out in the market. So, going to the earlier question, we may have seen a lot of that already take place. But I do think of it as being down slightly month — quarter over quarter in that cohort.

Vivek JunejaJPMorgan Chase and Company — Analyst

Thank you.


You have no further questions in queue at this time. I’d like to turn the program back over to Brian Moynihan for any additional or closing remarks.

Brian MoynihanChief Executive Officer

I thank all of you. Good quarter to finish 2022 and thank you to our teammates for producing it. We continue to grow our earnings year over year. We have good organic growth and operating leverage for the sixth straight quarter.

Those will continue to 2023. The asset quality in the company continues to remain at historic lows relative to any normalized time period in the company’s history, including the strong credit performance we had just before — leading into the pandemic. So, our job is now to drive what we can control, which is the organic growth of the franchise. The investments that we make are bearing fruit and also to keep the expenses in good control.

And we plan to do that in 2023. Thank you. And we look forward to talking to you next quarter.


[Operator signoff]

Duration: 0 minutes

Call participants:

Lee McEntireSenior Vice President, Investor Relations

Brian MoynihanChief Executive Officer

Alastair BorthwickChief Financial Officer

Glenn SchorrEvercore ISI — Analyst

Gerard CassidyRBC Capital Markets — Analyst

Mike MayoWells Fargo Securities — Analyst

John McDonaldAutonomous Research — Analyst

Erika NajarianUBS — Analyst

Ken UsdinJefferies — Analyst

Matt O’ConnorDeutsche Bank — Analyst

Betsy GraseckMorgan Stanley — Analyst

Vivek JunejaJPMorgan Chase and Company — Analyst

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