At the end last week, executives at Bank of America (NYSE:BAC) held its quarterly conference call with analysts. Here are the five most important points made on the call by CEO Brian Moynihan and CFO Paul Donofrio.
1. An update on capital requirements
As a global systemically important bank, Bank of America is subject to stricter capital requirements than regional and community banks. Among other things, it must hold an additional tranche of capital, known as the G-SIB buffer, the size of which is determined by Bank of America's size and complexity.
According to Bank of America's latest quarterly regulatory filing, its G-SIB buffer at the end of the third quarter was 3%. Fast-forward to the fourth quarter, and that dropped to 2.5%. As Moynihan explained:
After reviewing our year-end calculation and through the hard work of our teams, we are pleased to report that our method 2 G-SIB capital ratio requirement has dropped 50 basis points. So, our total 2019 CET 1 requirement is now 9.5%, instead of 10%.
2. How much will last year's interest rate hike help B of A going forward?
It's no secret that higher interest rates will boost Bank of America's earnings. But now that rates have begun to rise, how much additional income can investors expect the North Carolina-based bank to earn?
Bank of America's fourth-quarter results were only marginally impacted by higher rates, as both short- and long-term rates didn't increase until late in the quarter. The real benefit, says Moynihan, will come this quarter -- i.e., the first quarter of 2017 -- when Bank of America expects to earn $600 million more in net interest income from the surge in short- and long-term rates:
But now we see rate increases in the fourth quarter of '16 in the latter part of the quarter on both the long end and the short end. As these rate increases were late in the quarter, they didn't benefit the fourth quarter NII number that's significant, but we look forward to first quarter '17 when we expect NII to grow, all things remaining equal, by approximately $600 million per quarter despite having two less days in that first quarter.
3. What if rates continue to head higher?
Bank of America is one of the most asset sensitive big banks, meaning that its earnings are especially sensitive to changes in interest rates. Before rates moved up last quarter, the bank estimated that a 100-basis-point increase in short- and long-term rates would translate into $5.3 billion worth of additional net interest income in the 12 months following the increase.
This estimate no longer holds true. As the presentation accompanying the conference call discloses, a further 100-basis-point increase in rates would translate into an added $3.4 billion worth of net interest income over 12 months. Most of that (75%) would come from higher short-term rates, with the remaining 25% from higher long-term rates.
4. More share buybacks
Earlier this year, as part of the stress test, Bank of America got approval from regulators to repurchase $5 billion worth of stock through the middle of this year. That number is now going up.
On the call, Moynihan announced that the bank has added another $1.8 billion to its repurchase authorization. It did so by using the so-called de minimis exception, which allows banks to supplement previously announced buybacks by as much as 1% of a bank's high-quality capital:
This morning and as part of our release, we announced that we got approval for de minimis of $1.8 billion, that's the $2.5 billion we have for the first half of this year to bring the repurchased volume to $4.3 billion for the first half year. So we applied to that obviously in December and got the approval and our Board has approved it.
5. The link between branches and mobile banking
Like most other large banks, Bank of America is aggressively trying to reduce its branch count. It's able to do so because a growing share of its customers prefer to use its smartphone app for routine banking needs.
None of this means, however, that Bank of America's branches are going away anytime soon. As Donofrio noted on the call:
I think as you look at -- think about that number, my focus on the active mobile users, because that's going to be the interplay here. Active mobile users were up 16% year-over-year. On a big base, we grew active mobile users more than we grew in 2015. Mobile deposit transactions are now 19% of all deposit transactions, that's the equivalent of 880 financial centers, but -- so that's -- on the one hand, that says maybe you can optimize a little more, but on the other hand, as I said in the lead in, we still have 1 million people, almost 1 million people coming to the branch every day and they need that channel. They need it to transact some of them. But a lot of them come in for advice and we want them to do that. So, we need a certain footprint of financial centers.