Bank of America Earnings Call Nuggets: FICC, Expense Trends

On Thursday, Bank of America Corporation (NYSE:BAC) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here are key insights executives shared with analysts and investors.

FICC

Glenn Schorr – Nomura: May be we could get a little more granularity on FICC the trading numbers were great pretty much across the board big turnaround from last quarter, wanted to talk about which piece of the franchise you thought were strongest and may be any help you can give us on the positioning coming into the quarter. So will you think about the rest of the year, the right way?

Bruce R. Thompson – CFO: Sure if you look at and think about the numbers that we gave you, within FICC I mentioned on both, or I mean on an absolute dollar basis clearly the most significant area that we saw was rates and currencies, client flows were very strong and we saw them in two areas. We saw them within Europe with some of the volatility in the markets in Europe, activities were very high. The second thing I would say is that within the FICC business as you think about the high levels of activity that we saw in the investment grade area that translated into opportunities to do more business with our corporate customers, and that contributed to the results in FICC as well. Outside of FICC, the areas that had nice increases during the quarter included our commodities area which we’ve been focused on and starting to get some traction in the growth there, as well as in the mortgage area. Those were the three most significant areas. Glenn, I’d say the area that was down, a touch during the quarter, would’ve been the overall loan trading area as some of the revenue opportunities given that the new issue business in loans was a little bit slower this quarter than a year ago quarter. We didn’t see quite the opportunities there, but at the same time, that area performed very well.

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Glenn Schorr – Nomura: I don’t want to put words in your mouth, but it sounds like it was a pretty cash driven flow as well, as opposed to the derivative side?

Brian T. Moynihan – CEO: That’s fair. Glenn, I think if you think over the last 24 months time and a team we’ve been continuing to build out, the breadth of our platform across the world and we are reaping the benefit of that. So if you think about this quarter, this year versus last year, all the prop trading was closed out by mid-last year et cetera. So it’s really client flows driving. Now, it is driven by really as you said less derivatives, but more client flows, more of the new issue activity, more of the cash businesses. It’s a very core aspect of what we do. So next quarter, this is a strong quarter in total revenues, it may not be as strong, but the way we are getting there is very consistent quarter-after-quarter-after-quarter.

Glenn Schorr – Nomura: Bruce, I wonder if you could just explain the drop more, give a little color on the one-third of the RWA reduction that was the optimization of balance sheet or OTC assets.

Bruce R. Thompson – CFO: Sure. If you go through that area, I’d say, we continue to work very hard in scrubbing the data. There were certain lending activities that we do that are secured lending activities that as we work through we have the ability to optimize from an RWA perspective. So we had some of that I would say as we look to and we refine what we do in the markets business. We improved the ability to net as we consolidated certain trading type activities and we also worked through and got third-party ratings on certain of the things which improved that as well. So we continue to be very focused and think we’ve gotten through the majority of the optimization associated with Basel I. And as I referenced in the increase in our guidance we’re very focused now on optimizing the balance sheet and looking to drive those Basel III ratios higher as we go throughout the year.

Glenn Schorr – Nomura: Last one for me, reps and warranty claims continue to rise. Just curious if you can give us an overall comment on a, what’s driving it and b, when we might see a leveling off?

Bruce R. Thompson – CFO: I think what I would say on that Glen, I would say it’s really consistent with what we’ve talked about when we discussed year end numbers and with the disclosures that are in the slides. The majority of the increase in the backlog of reps and warrants is in the GSE category. It largely relates to Fannie Mea and if you saw and compared the balance of the – at the end of the third quarter of 2011 with the balance at the end of the first quarter. You would see that the majority – a substantial amount of the amounts that are coming in are for borrows that it paid well north of 24 months and we obviously continue to have a disagreement with them about whose responsibility those are.

Expense Trends

Matthew O’Connor – Deutsche Bank: Maybe we could drill down a little bit more on the expense side. You mentioned the legacy mortgage costs ought to come down in the back half this year, obviously that the New BAC card sales will probably start to accelerate. When we put that all together how do you envision the expenses trending you know both the second quarter and the may be as we exit this year?

Brian T. Moynihan – CEO: What I would say is you think about that and as you think – let’s spend a moment just on what we saw during the fourth quarter. And I think there are two items to know in the fourth quarter when you think of expenses. The $900 million that I referenced is related – as it relates to compensation related expense. That obviously as I said only occurs in the first quarter of each year. So as you look out at over the next group of quarters that will obviously no longer be there. The second thing when you think about expenses for the quarter over and above that FAS 123 amount the expense number for the quarter was up given that the accruals that we had based on the strong performance within the overall markets area. So I think it levels that with those two areas as well as think about some of the mortgage related charges that I’d referenced. The goal is as we work through the year that those would come down. Once you move away from those expenses you move to the New BAC expenses. If you think about New BAC, one, we’d originally given guidance that it was $5 billion 20% of which we would recognize during 2012. We obviously took that guidance up and said it would be greater than 20%. So as you look at those consumer businesses on the line of business slide that we gave you, you would expect to continue to see those expenses going down. Obviously we’re in the midst of New BAC 2 which we’ve looked to wrap up in the May time frame and I would just reiterate what we’ve said there which is that, we don’t think the expenses will be as great as what we saw in New BAC 1 although once again given that they are not as interdependent on technology. We’ve looked to see those expense savings to start as early as the end of this year. So I would say that it’s we continued to press through these I think we wanted to show you the line of business break down, because I think it gives you good sense within each of the lines of business outside of what we are seeing in LAS which Brian talked to about in the second half of this year savings as well as all other which can be lumpy to the extent that there are non-recurring type item showing that you get a sense for where we are trying to go, but clearly we would expect sequentially each quarter during 2012 for expenses to go down each of the next three quarters.

Matthew O’Connor – Deutsche Bank: As we think about from the lumpy items like the litigations the mortgage rate assessments and maybe any restructuring our severance costs for New BAC parts 1 and 2. Any thoughts on the magnitude and timing of those?

Bruce R. Thompson – CFO: I think one of the things to keep in mind is that as we’ve gone through, and as we are going through New BAC we’ve been absorbing through the P&L the severance costs that goes along with the actions that we’ve taken. So if you go back to the fourth quarter we talked about there being a couple of hundred million dollars of severance and related items that we took during the fourth quarter. We have roughly $100 million of those type items that we saw during the first quarter for severance as it relates to the other items. The only thing I can say about the lumpy items is that, each quarter, we accrue them and threw them up for what we think our best views are, and we’ll continue to do that. So it’s hard to give any specific guidance about what we may or may not see in any one quarter recognizing that the accruals that we have on the balance sheet at this point are significant.

Matthew O’Connor – Deutsche Bank: Then just separately on the capital side, obviously the build last two quarters has been very impressive, much more than many of us including myself have thought. As we start kind of hearing you guys talk about additional changes from here, whether it’s (like some) branch sales or there was something in the media the other day about you guys potentially looking at selling the non-U.S. wealth management, like as we see those things potentially coming up, is that still about a goal of building capital or is it much more about just kind of rationalizing the franchises as Brian mentioned to earlier. Just how do we think about like what’s driving the motivation for some of these actions that you might be doing or might be being speculated out there?

Brian T. Moynihan – CEO: Without addressing speculations, if you look across the last two years Matt, our goal is to get the franchise against the three customer groups and get out of businesses which don’t do that and everything we’ve been doing successfully with that doesn’t contribute to capital yet. I’d say you shouldn’t expect the things in the future to have as much impact as the things we did in the last couple of years, incrementing capital, and a lot of the capital generation really comes from the earnings. In the case of Basel III, remember that our biggest difference between our peers is the deductions for disallowed (DTA) et cetera which accrete off over time, and then third thing is continue to optimize our balance sheet. So when we are making decisions about various aspects, whether it’s Canadian card or something like that, it is in line with the strategy which is that everything we have will be direct-to-customers focused on those customers and where we have competitive strength. And then in branches I talked about earlier, it’s really to fine tune the franchise. That we have top positions in the top 30 markets, a lot higher than other people by numbers of branches and things like that. We continue to enhance that position, continue to build out markets behind that, but also focus a little bit more on the markets that has growth potential and size and scale that we could take advantage of.

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