Bank of America Corp (NYSE:BAC) Q1 2019 Earnings Call , 8:30 a.m. ET Contents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks: Operator Good day everyone, and welcome to today's Bank of America Earnings Announcement. At this time, all participants are in a listen-only mode. Later you'll have the opportunity to ask questions during the question-and-answer session. (Operator Instructions) Please note this call is being recorded. And it's now my pleasure to turn the conference over to Mr. Lee McEntire. Please go ahead. Lee McEntire -- Senior Vice President, Investor Relations Good morning. Thanks for joining this morning's call to review our 1Q '19 results. By now I trust that everyone's had a chance to review the earnings release documents, which are available on the Investor Relations section of bankofamerica.com's website. Before I turn the call over to the CEO, Brian Moynihan, let me remind you that we may make forward-looking statements during this call. After Brian's comments, our CFO, Paul Donofrio will review the details of the 1Q results. After that, we'll open it up for all of your questions. For further information on forward-looking comments, please refer to either our earnings release documents, our website or our SEC filings. With that, take it away, Brian. Brian Moynihan -- Chairman and Chief Executive Officer Thank you, Lee, and good morning everyone. Thank you for joining us this morning to review our first quarter of 2019 results. In the first quarter, we reported $7.3 billion of net income after tax, the best quarter in the Company's history. So, let's begin on Slide 2. This slide shows the building blocks in achieving another record quarter. It also shows our commitment to responsible growth, and how it drives our shareholder model. We reported diluted EPS of $0.70, which grew 13% from the first quarter 2018. This reflects a nice mix of both operating improvements and capital returns. Pretax income of $8.8 billion, grew 4%, you can see that in the upper right, and we generated operating leverage of more than 400 basis points, which you can see in the lower right. Asset quality remains strong, as net charge-offs remained around $1 billion, the same level they have been for several quarters. Provision expense is up year-over-year to match those net charge-offs more closely and we had a small reserve build this quarter against the net reserve release last year. Through disciplined capital deployment, after meeting all the requirements to make loans to our customers and support their businesses, we continue to drive our share count lower. You can see that on the lower left. We are well under way with our goal to wring out the dilution in shares caused by the increased capital build after the crisis. Through share buybacks, our diluted shares are down 7% compared to the first quarter of 2018 and down 1.5 billion shares in the past four years. Turning to Slide 3. Part of responsive growth is to produce sustainable results, and part of that is to drive operational excellence, and we did it again this quarter. As you can see on Slide 3, we extended our positive operating leverage streak to 17 consecutive quarters. As you think across the last four years or so, we've had many different markets out there, many different interest rate environments, many different changes and perceptions in the U.S. economy and the global economy. All these things affect our business in a given quarter, but what has been constant behind that is our ability to drive operating leverage. We achieved it differently in different quarters, but as shown here, we achieved it consistently. When you think of our Company, there are three broad and diverse buckets of revenue, two of which have annuity-like characteristics and one is more susceptible to prevailing market conditions. The first bucket is spread revenue from loans and deposits, and the second bucket is recurring fees, like our cash management fees in our commercial businesses or our consumer account fees or interchange and things like that. The third bucket of revenue, which are more market related would be the sales and trading revenue, the investment banking fees and asset management brokerage revenue, which are both dependent on market levels at a given moment and market activity, giving rise to those levels. So, if you think about this quarter versus last year, our market related types of revenue was down 12%. The other two non-market related revenue sources were up 7%. That shows you the diversity in this Company. And all in, that ended up with flat revenue growth. However, our laser like focus on expense management came to the table again and resulted in year-over-year expense decline of 4%, which resulted in the 400 basis points of operating leverage. All you can see as you move to the right-hand slide -- right-hand side of Slide 3. When you think about how we are driving the Company, for managing expenses, we continue to invest in the future. Our expenses have come down from $57 billion to $53 billion and change over the last four years or so. And we've been driving the operating leverage in each quarter during that time, but we also continue to invest deeply in our franchise. And why do we do that? Because it is working. We're getting more business as we add relationship management capacity, increase our marketing and drive deeper penetration of U.S. markets through the full franchise entry and more and more markets across the United States. We also continue to invest in our people with industry leading benefit plans, both in health and retirement, with industry-leading capabilities and universities to train and reskill our teammates and plus the pay plan we announced recently, we are going to increase our minimum wage over the next 26 months from $15 an hour plus to $20 an hour. We need to do that because we need the best teammates to make this great client work -- Company work and work for our clients. Across the Company, we added 500 new sales professionals this quarter, more consumer relationship bankers, more wealth advisors, more commercial bankers and more business bankers, more small business bankers and more investment bankers. And as we have discussed many times, our initial spending for technology has been running around $3 billion for many years now, but is currently, the savings (ph) from tax reform expected to be 10% higher in 2019. We continue to enhance both our physical network for delivering products and services to clients, as well as the facilities we operate in communities and countries around the globe. All in, Bank of America invests around $2 billion a year in capital expenditures to build out, enhance our buildings, facilities and infrastructure. As it relates to our financial centers, our ATMs and other physical build-out, the point is we haven't just announced what we'll do, we're halfway through the broad-based build-out in our consumer business. We're executing the plan we laid out several years ago. But importantly for you, the cost to complete the work is already embedded in all our expense guidance. It's in fact embedded in our current run rate. So, we drive operating leverage and we invest and we see returns on that investment. One of the ways that we get a return on that investment is through our digital capabilities. Each quarter we show you the charts on Slide 5 of our digital customer statistics. Because as I discuss with many of you, we sometimes miss the obvious. What is driving this trend? It's a change in our customers' behavior. We are continuing to serve our customers in every manner possible. The customer can have their cake and eat it too; take it out digital, physical 24 hours a day cash and electronic payments, checks and wires and ACH, a loan officer, an online application, a fulfillment of their mortgage. It is their choice. 37 million digital users now, with 27 million of those mobile. And we now have 27% of our sales transacted digitally. 77% of our deposit transactions are now done through digital means.<doc-sep>Bank of America (NYSE:BAC) just posted its first-quarter report, and at first glance, the numbers look solid. Earnings came in better than expected and growth, profitability, and efficiency appear strong. With that in mind, here's a look at Bank of America's first-quarter earnings, and the most important points for investors to know. The headline numbers Bank of America beat expectations on the bottom line, reporting $0.70 a share in earnings, $0.04 above analyst estimates. On the top line, the bank's $23 billion in revenue matched expectations. So just based on the headline numbers, it appears Bank of America had a pretty solid first quarter. Having said that, those figures rarely tell the entire story of how a company performed. Let's dig a little deeper to get a better idea of how Bank of America is doing so far in 2019. Looking beyond the headlines The short version is that Bank of America's numbers look solid all around. There was a bit of weakness in trading revenue, but since the rest of the big banks have already reported their results, this wasn't a big surprise. With that in mind, here are some of the most important numbers for investors to know. The good Bank of America's net interest yield, which can be essentially thought of as the bank's "profit margin" on loans, expanded by 9 basis points year over year to 2.51%. This is among the best margin expansions we've seen in the industry so far this earnings season. The bank's efficiency ratio improved to 57% from 60% a year ago on effective expense management. Return on assets (ROA) of 1.26% is a solid improvement from 1.21% a year ago. The loan and deposit portfolios grew by 4% and 5%, respectively. Bank of America continues to be a technology leader, with 9% more mobile users than a year ago. Digital sales now represent more than one-fourth of all of Bank of America's consumer banking sales. Bank of America bought back $6.3 billion in stock during the first quarter. Based on the current price, this represents 2.2% of the bank's outstanding shares, an aggressive stock buyback rate for a single quarter. The not-so-good It's rare for a bank to have an excellent quarter all around without any problem areas. Bank of America's first quarter did have its share of disappointing and concerning numbers, and here are the most significant: Bank of America's net charge-off ratio increased by 3 basis points and the bank's provision for credit losses grew by $179 million, indicating that loan quality may be deteriorating slightly, or the bank may be anticipating an economic slowdown. Investment banking fees declined by 7%, thanks to a general lack of IPOs and debt offerings in the first quarter. Trading revenue was a particularly weak spot, as market volatility was rather low in the first quarter, especially compared with the first quarter of 2018. Equity trading revenue plunged 22% from a year ago and fixed-income revenue dropped by 8%. Investor takeaway Bank of America's first quarter was solid all around. While some of the increased charge-offs were caused by the credit card portfolio, the bulk was due to a single commercial loan exposure. Trading revenue was down across the industry, so that shouldn't be too concerning. And while a lack of IPOs caused poor investment banking revenue during the first quarter, there's a wave of high-profile IPOs expected in the third quarter and beyond, so this could easily turn around going forward. Bank of America is growing its business and its profits nicely, is returning tons of capital to its shareholders, and is doing a great job of keeping expenses low and efficiency high. Investors should be pleased with the bank's performance, and at less than 11 times earnings, Bank of America stock could be an excellent value given its impressive growth.<doc-sep>Bloomberg (Bloomberg) -- Hedge funds often measure their investments in minutes, not decades; but for Anchorage Capital Group, its long-held stake in Metro-Goldwyn-Mayer Studios Inc. is proving that patience can also be profitable.The New York-based money manager stands to make roughly $2 billion on its investment in the film and TV producer, one that began almost 11 years ago with MGM in bankruptcy court. Amazon.com Inc. agreed to buy the company for $8.45 billion Wednesday, a price that includes just under $2 billion in debt.The deal is in many ways a vindication for Kevin Ulrich, the former Goldman Sachs Group Inc. trader who co-founded Anchorage in 2003 and was part of a group of distressed debt investors that took control of MGM as it went through the restructuring process. In recent years the stake looked to be an albatross for the fund, one that came with significant drama in its own right.Ulrich brought in and later fired a high-profile chief executive officer, resisted efforts by activist investor Carl Icahn to take control, and held out for a bigger payday after years of considering various exit strategies. By selling now, as demand for media content from entertainment and technology companies alike is booming, he’s proving his long-held faith in the investment was justified.“There was a lot of maneuvering, a lot of financial engineering,” said Steven Azarbad, chief investment officer at New York’s Maglan Capital, an MGM investor who sold his shares four years ago. “But they’ve done great.”A representative for Anchorage declined to comment.When Ulrich first invested in MGM, he was new to Hollywood. He helped pick Gary Barber, a South African-born producer of films such as “Ace Ventura: Pet Detective” as chief executive officer of the storied but debt-laden studio. Barber brought to the table a shrewd business sense, and connections into a world Ulrich long admired from afar.Barber shepherded MGM’s development of “The Hobbit” franchise, a co-production with Warner Bros., that became a global smash hit. He helmed the release of the James Bond film, “Skyfall,” which generated over $1 billion at the box office, and he revived the studio’s work in television. Barber also brokered a deal to bring on TV super producer Mark Burnett, which gave MGM access to reality show hits like “Survivor” and “The Apprentice,” but would ultimately become personally troublesome.In 2012 the company bought back Icahn’s stock for $590 million. It also filed paperwork for a possible public offering of shares, and considered other options, such as a sale.As Barber boosted MGM’s film and TV pipeline, Ulrich was increasingly entranced by the allure of Hollywood. He became a regular at movie premieres in Los Angeles and New York, and frequented industry parties in the Hamptons and elsewhere. He became active in creative decisions after becoming chair of MGM’s board -- somewhat unusual for a non-executive lacking Hollywood experience -- even getting involved with business granularities like casting.Growing RiftBut over the following years a rift began to open up between Barber and Ulrich. When it was time to renew Barber’s contract in 2017, Ulrich conducted an extensive search for a new CEO. When it ended, he ultimately chose to sign Barber to a new five-year deal. Yet around the same time, the pair split on whether to sell the company, with Ulrich wanting to hang on to the studio and Barber saying it was time to find a buyer.The company would hold buyout talks with Apple Inc. as well as Chinese investors that would ultimately prove fruitless.Only months after renewing Barber’s deal, Ulrich fired him. The shock departure meant the company had to pay Barber for five years of salary and buy out his equity, a package totaling $260 million. In the three years since Barber left, Ulrich hasn’t replaced him, instead operating an “office of the chief executive officer,” comprised of various people that each have their personal vision for MGM.Barber declined to comment via his spokesperson.Bounce BackAfter the initial period of success following the restructuring, the gains became harder to come by, as they did in Anchorage’s overall credit-focused business. Two senior managers left the firm in January 2020, and another in November. Anchorage’s flagship strategy, with about $8.5 billion under management, returned just 0.6% in 2018, 1.5% in 2019 and 4.4% in 2020, according to people familiar with the matter.In December, MGM hired investment bankers for a potential sale.MGM only released one film in theaters in 2020. Its biggest potential hit, the latest Bond film, “No Time to Die,” was pushed from last year to this October as a result of the pandemic.Yet the value of MGM’s library rose as everyone from media companies to technology giants have sought to build video streaming platforms that can compete with industry leader Netflix Inc. Earnings jumped 48% last year, to about $307 million, even as sales declined.Anchorage holds a roughly 30% stake in MGM, worth about $2.5 billion in the sale, said people with knowledge of the matter. Anchorage invested around $500 million in the company more than a decade ago. Including the MGM stake, Anchorage’s flagship fund is up 18% this year, the people added. The fund has gained about 8% in 2021 not counting the studio.More stories like this are available on bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.<doc-sep>
The stock decline steepened after Chief Financial Officer Paul Donofrio issued guidance on net interest income during a conference call with analysts. He said that NII grew 6% last year under more favorable conditions. Despite posting a record first-quarter profit driven by cost cuts and strength in the bank's Main Street lending operations, shares of the company fell 2.6% after the first hour of trading. It recovered most of its losses by 12:55 p.m., when the stock was down 0.22 percent. Bank of America shares dropped Tuesday after executives said the lender's net interest income growth was fading because of declining interest rates and a slowing U.S. economy. "The economy is expected to grow more moderately in 2019 and rate expectations have been lowered, plus we have some seasonable headwinds in Q2," Donofrio said. "Ultimately, we expect NII for the full year of 2019 to be up roughly half the pace of 2018. This perspective assumes today's forward curve and loan and deposit growth consistent with the current economy." The slowing growth in net interest income, a core way that banks make money, is one of the biggest worries of the industry's investors. Bank stocks have struggled in recent weeks as the Federal Reserve shifted gears and indicated it could be done raising rates this year. Combined with signs of a global economic slowdown, that has led to falling long-term interest rates, crimping the industry's profit margins. Last week, Wells Fargo shares tanked after its CFO lowered guidance for net interest income for 2019, saying it would declined 2 percentage points to 5%. Bank of America said earlier Tuesday that first-quarter profit rose 6% to $7.3 billion, or 70 cents a share, exceeding analysts' estimates of 66 cents a share. Revenue was roughly unchanged from a year earlier at $23 billion, essentially meeting analysts' estimates. Under CEO Brian Moynihan, the megabank delivered its second straight record quarterly profit while methodically working costs down. Expenses fell 4% to $13.2 billion, almost $500 million below analysts' estimates. The bank's record profits have come despite tough conditions for Wall Street trading desks. "Economic growth and consumer activity in the U.S. continue to be solid, businesses of every size are borrowing and driving the economy, and asset quality is strong," Moynihan said in the earnings release. The company's net interest yield, a key metric of profitability for a bank's core lending activities, rose 9 basis points to 2.51%, edging out analysts' 2.48% estimates. Loans across its consumer and commercial businesses rose at least 3%, while deposits rose 5% to $1.4 trillion. Those factors were most evident in the bank's biggest division, its consumer lending business, which posted a 25% increase in profit to $3.2 billion. It managed that feat by boosting revenue in the business 7% to $9.6 billion while reducing costs by almost $200 million. That helped offset a weak quarter in its global markets division, where profit slumped 26% to $1 billion. Revenue dropped 13% on weak trading results and lower investment banking fees. Equities trading revenue fell 22%, while fixed income declined 8%. The bank's other two divisions generated positive results. Its global banking business posted a 2% profit increase to $2 billion. Wealth management profit rose 14% to $1 billion. Now in his 10th year leading Bank of America, Moynihan has focused on trimming costs while looking for profit opportunities that fit his "responsible growth" mantra. More recently, he announced that the company's success will be shared with employees: The bank is raising its minimum wage to $20 an hour over the next two years, the highest rate among the megabanks. To tighten its grip on retail banking customers, Bank of America is also planning to release a digital financial coach for its 66 million customers in the fall. The bank's shares have climbed more than 20% this year, outperforming most of its peers and the KBW Bank Index. Here's what Wall Street expected: