美國銀行 (BAC) 2015 Q1 法說會逐字稿

Good day, everyone, and welcome to the Bank of America earnings announcement conference call.

At this time all participants are in a listen-only mode but later you will have the opportunity to ask questions during the question-and-answer session.

Please note that this call is being recorded.

It is now my pleasure to turn the conference over to Lee McEntire.

Please go ahead.

Good morning.

Thanks to everyone on the phone as well as the webcast for joining us this morning for the first quarter results.

Hopefully everybody had a chance to review the earnings release documents that are available on the website.

Before I turn the call over to Brian and Bruce, let me just remind you we may make forward-looking statements.

For further information on those please refer to either our earnings release documents, our website or other SEC filings.

So with that, let me turn it over to Brian Moynihan, our CEO, for some opening comments before Bruce goes through the details.

Brian?

Thank you, Lee, and good morning and welcome everyone to the earnings call for our first quarter of 2015.

I am going to start on slide two.

So the highlights are there.

We earned a $3.4 billion after tax in the quarter, which is up both on a linked quarter and year-over-year basis.

We continue to work to drive growth in all our core businesses.

We are beginning to see it overcome the run off with non-core portfolios in many areas.

At the same time, we continue to focus on managing expenses carefully.

As a result, we are beginning to see more predictable earnings with more improvement expected ahead.

Both capital and liquidity remain at record levels in our Company.

We expect to return more capital to shareholders this year than we have in the past.

Revenue on an adjusted basis was $21.9 billion for the quarter.

From the top of the house, revenue remains challenging in an environment with below trend economic growth and rate environment which comes from that.

In addition, we remain faithful to our customer strategy with strong risk management and risk appetite to ensure we do not repeat the outsized credit losses of the past.

With that said, we are seeing our core business stabilizing across the drivers of the revenue.

This quarter we saw continued growth in our wealth management revenues and a rebound from the fourth quarter in trading revenue.

In our loan and deposit areas, we saw continued core growth albeit subject to continued spread contraction.

Our expense management efforts continue.

The year-over-year expenses, excluding litigation costs, are down 6%.

Including litigation costs, year-over-year expenses are down 30%.

We continue to see our efficiency efforts drive forward beyond New BAC through our simplified and improved program.

We also continue to see progress on LAS expense.

As proof of our efforts for the quarter we ended with our headcount at a little under 220,000 full-time employees, a reduction of 4000 employees for the quarter, about 2% and 19,000 employees year-over-year, or 8%.

For the quarter this reduction came to about 35% from LAS and about 65% from the rest of the Company.

To put it in a broad context, we are approaching employment levels where we were in early 2008 prior to bringing in over 100,000 people from Countrywide and Merrill acquisition.

We are doing that to the investments we are making in technology to reduce costs and they continue to take hold.

And we will continue to drive this effort even as the economy continues to improve and rates rise helping keep balance to our operating leverage.

During the last year even while we were reducing those costs and headcount, we continued to invest in the client facing growth capacity in this Company.

We've added financial advisors in U.S. Trust and in Merrill Lynch, focused on building for the future.

We have added commercial bankers in all our Global Banking areas to help fill in our franchise.

We have added new financial centers in areas of opportunity and we continue to invest in products and innovation as well as efficiency.

A simple example is our Consumer Mobile Banking space where we now have 17 million mobile banking customers, up over 2 million from last year.

Turning to slide three, you can see what we simply need to do.

Each of the four core lines of businesses on the left-hand part of the slide earned above our cost of capital for this quarter.

In addition, the aggregate earnings for all those businesses were $4.4 billion after tax.

The LAS segment had a much smaller loss this quarter showing we are making progress.

The other area on the right-hand side of the slide has affected this quarter by the impacts of retirement eligible incentive costs and the market related NII adjustments which affect top of the house earnings.

They are booked there in distributed business over the quarters.

But this shows that we need to keep working LAS to get it to break even and the other will take care of itself in subsequent quarters.

Turning to slide four, with regard to CCAR, as previously disclosed, we received a conditional non-objection to our capital plan.

We received the approval for our requested capital actions that we requested in the original submission, a dividend of $0.05 per share and $4 billion of stock repurchase on the relevant periods.

As you can see, the cushion we have increased from about $2 billion last year under the tightest constraint to over $22 billion this year, in both of those cases under the tightest constraint after all capital actions.

These quantitative results bode well.

However, the conditional approval is an area with which we are focusing.

We are focusing our energy to the September resubmission and beyond.

Our efforts are well underway.

We are bringing additional resources to task.

We simply have to be the best at CCAR to meet our shareholder objectives in our Company.

To ensure that we achieve that success, I have asked Terry Laughlin to lead our efforts.

As many of you know, Terry helped us clean up the mortgage issues over the last several years.

I can assure you that our Board and management are extremely focused on our resubmission and our core process improvement for CCAR 2016 next year.

Terry has retained a team of external experts, increased the internal staffing to ensure we are successful.

We have had in depth discussions with our regulators regarding the particular specified issues that we need to remediate with the resubmission and we are focused on getting that done by September.

With that, I will turn that over to Bruce.

Thanks, Brian, and good morning, everyone.

I'm going to start on slide five.

As Brian mentioned, we recorded $3.4 billion of earnings in the first quarter or $0.27 per diluted share.

That compares to $0.25 a share in the fourth quarter of 2014 and a loss of $0.05 if we go back to the first quarter of 2014.

I'd like to note a few items as you review these results.

Both first-quarter periods include $1 billion in expense for the annual cost of retirement eligible incentives awarded.

This was $0.06 in EPS impact in each of the first-quarter periods.

The first quarter of 2015 also includes a negative market related adjustment to net interest income of $484 million for the acceleration of bond premium amortization on our debt securities that is driven by lower long-term rates.

That cost us $0.03 in EPS during the quarter.

The other large item that is worth noting as you look at the comparisons is the outsized litigation amount of $6 billion in the first quarter of 2014.

I'd like to spend just a moment on total revenue comparisons.

Our first quarter of 2015 revenue on an FTE basis if we exclude the market related adjustment to NII and a small DVA adjustment, was $21.9 billion during the quarter.

If we compare that to the fourth quarter of 2014 and adjust for the same items, revenue is up $1.7 billion or 8% and that 8% increase is attributable to a rebound in sales and trading results as well as higher mortgage banking income and is offset somewhat by lower net interest income mostly from two fewer days during the quarter.

If we compare back to the first quarter of 2014 and we further adjust for $800 million in equity investment gains as a result of monetizing a single strategic investment in the year-ago period, revenue is now a couple hundred million dollars or 1% and that is from lower net interest income and lower sales in trading results.

Total noninterest expense during the quarter was $15.7 billion and included the $1 billion in retirement eligible costs as well as $370 million in litigation expense.

I will go through the comparisons from an expense perspective several slides back.

As we look at provision for credit losses during the quarter, they were $765 million and included $429 million in reserve release versus $660 million in the fourth quarter of 2014.

Preferred dividends during the first quarter were $382 million and as you all look to update your models given the preferred issuances that we have had the majority of which pay semiannually as you look at preferred dividends, they should be roughly $330 million in the second and fourth quarters and $440 million in the first and third quarters going forward based on our existing preferred footprint.

Let's go ahead and move to slide six on the balance sheet.

Our balance sheet was up slightly to $2.14 trillion and that was driven almost exclusively by cash balances associated with the deposit growth that we saw during the quarter.

We continued our focus on balance sheet optimization for liquidity as we continued to ship some of our discretionary portfolio first lien loans into HQLA eligible securities.

Loans on a period end basis were down modestly reflecting good core loan activity in both our Global Banking as well as our Wealth Management segments.

That was more than offset by seasonally lower card balances in our discretionary consumer real estate area as well as run-off portfolios.

Deposits were up $34 billion or 3% from the end of the year and some of that obviously has to do with seasonal tax activity.

We issued $3 billion of preferred stock in the quarter that benefitted regulatory capital and as you look at common shareholders' equity, you can see it improved driven both by earnings growth as well as improved OCI.

As a result of these factors, tangible book value increased to $14.79, 7% higher than 12 months ago and our tangible common equity ratio improved to 7.5%.

The last point that I would note is that we did add a slide in the appendix as we updated our capital allocations across the segments coming into 2015 and the returns that we show you are reflective of those updated capital allocations.

Let's go ahead and flip to slide seven and go through loans.

From several calls, we are as frequently about the decline in reported loans which are down modestly again from the fourth quarter levels as you can see in the upper left-hand chart.

I want to make a few points though as we go through this.

As we have discussed many times, much of the movement in loans has been driven by two pieces of non-core loans.

The first relates to shifts in our discretionary mortgage loan levels that are used to manage interest rate risk and predominantly recorded in the all other unit.

Many times based on the investment decisions that we make, these loans are replaced with debt securities on the balance sheet.

The other component as you look at loans to consider is the run-off that we have within our LAS unit, which are mostly home equity loans.

As these home equity loans go away, it enables us to reduce our operating costs as we have less work to do.

As you can see over the past five quarters, these non-core loans have declined approximately $59 billion.

If you adjust for that $59 billion though, and I'll go to the upper right-hand box, you can see that our loans have actually increased by $21 billion from the first quarter of 2014.

The bottom chart on this slide provides the mix of this loan growth across our primary businesses.

And you can see within our Wealth Management area, we have experienced strong demand in both consumer real estate as well as securities based lending and that has led to year-over-year loan growth within that segment of 10%.

Within Global Banking, we saw modest growth on a year-over-year basis but importantly we saw a significant pickup in activity in the first quarter of 2015 relative to the fourth quarter of 2014.

Over that time frame, loans were up $6.7 billion or 8% on an annualized basis.

We move to slide eight and take a look at regulatory capital.

This quarter the standardized transition reporting includes the switch from reporting RWA under the general risk-based approach to Basel III and the capital number includes another year of phase-in for capital deductions.

With those changes, our CET1 ratio was 11.1% in 2015 under the new reporting.

If we go ahead and look at Basel III regulatory capital on a fully phased-in basis, our CET1 capital improved $6 billion during the quarter and was driven by earnings, lower DTA, lower threshold deductions as well as an improvement in OCI.

That translated under (technical difficulty) approach to our CET1 ratio improving from 10% in the fourth quarter to 10.3% in the first quarter of 2015 while under the advanced approaches the CET1 ratio improved from 9.6% to 10.1%.

As you know from our 10-K disclosure, we are working with our banking regulators to obtain approval of our models in order to exit parallel run.

Our regulators have requested modifications to certain commercial and other credit models in order to exit parallel run which we estimate would increase our advanced approaches RWA and negatively impact the CET1 ratio that we show here by approximately 100 basis points.

If we look at supplementary leverage, we estimate that at the end of the first quarter of 2015 we continue to exceed the US rules applicable in 2018.

Our bank holding company SLR ratio was 6.3% and in our primary banking subsidiary, BANA, we were at 7%.

We turn to slide nine, long-term debt.

At the end of the first quarter was $238 billion, down $5 billion from the fourth quarter of 2014.

In the lower left box you can see that from a maturity profile perspective, we have $16 billion of parent company debt that matures during the balance of 2015 and we will be opportunistic as it relates to refinancing that indebtedness.

Our global excess liquidity sources reached a record level of $478 billion this quarter and now represents 22% of the overall balance sheet.

The increase from the fourth quarter reflects the deposit inflows as well as the shift from discretionary loans into HQLA securities.

Within the liquidity, our parent company liquidity remains quite strong at $93 billion and our time to require funding is at 37 months.

During the quarter, we did continue to increase our liquidity coverage ratios at both the parent as well as at the bank levels and at the end of the first quarter, we estimate that our consolidated company was well above the 100% fully phased in 2017 LCR requirement.

On slide 10, net interest income on a reported FTE basis was $9.7 billion, down a couple hundred million dollars from the fourth quarter of 2014 driven by two fewer interest accrual days during the quarter as well as some spread compression.

If we exclude the previously mentioned market related adjustment, NII at $10.2 billion was largely in line with our expectations and lower than the fourth quarter of 2014 given two fewer interest accrual days.

Modest improvements in net interest income mostly from lower funding costs in the quarter were offset by some of the continued pressures that we saw in loan and securities yields as well as balances in new assets coming in at lower long-term rates.

This drove the adjusted net interest yield to 2.28%.

If we look at the movement down in rates during the quarter, our balance sheet did become more asset sensitive compared to year-end such that 100 basis point parallel increase in rates from the end of the quarter would be expected to contribute roughly $4.6 billion in net interest income benefits over the next 12 months.

Slightly more than half of that $4.6 billion is on the long end and just under half is based on the short end.

On slide 11, if we moved to expenses, non-interest expense was $15.7 billion in the first quarter of 2015 and included roughly $370 million in litigation expense.

First quarter 2015 once again did include $1 billion in annual retirement eligible incentive costs consistent with what we saw in the first quarter of 2014.

Litigation expense during the quarter included FX and RMBS items and was significantly below what we saw a year ago, which included the cost of the [FHFA] settlement.

While we are on litigation, I do want to make sure that you notice this quarter that we did get one step closer on our Article 77 settlement as the Appellate Court approved the Bank of New York Mellon settlement in all respects and I would also note that the deadline for further appeal at this point has passed.

If we exclude litigation and retirement eligible costs, our total expenses were $14.3 billion this quarter, down nearly $1 billion from the first quarter of 2014 driven by three factors; continued progress on our LAS initiatives, our New BAC cost savings as well as lower revenue related incentives within Global Markets.

Relative to the fourth quarter of 2014, the expense level on an adjusted basis is up about $0.5 billion on higher revenue related incentives mostly for the improved sales and trading results on a linked-quarter basis.

Our legacy assets and servicing costs, ex-litigation, were $1 billion.

They improved approximately $100 million from the fourth quarter of 2014 and more than $500 million if we go back to the first quarter of 2014.

And we remain on track to hit our Q14 target that we laid out for you of $800 million dollars in LAS costs, ex-litigation once again in the fourth quarter.

Beyond the LAS business, our teams continue to do very good work in optimizing our delivery network as well as our infrastructure and as you can see headcount was down 8% over the course of the last 12 months.

If we look at asset quality on slide 12, reported net charge-offs were $1.2 billion in the first quarter versus $900 million in the fourth quarter of 2014.

I do want to note that the first quarter of 2015 included a net impact of approximately $200 million in losses associated with the DOJ settlement that was previously reserved for and that was offset in part by recoveries from certain NPL sales.

Our Q4 2014 included similar items but with the net adjustment positively benefiting net charge-offs to the tune of about $163 million.

If we adjust for all these impacts, our net charge-offs during the quarter were $1 billion dollars, which is slightly lower than what we saw in the fourth quarter of 2014.

Our loss rates on the same adjusted basis were at about 47 basis points in the first quarter of 2015 consistent with what we saw in the fourth quarter of 2014.

In both our consumer delinquencies as well as our NPLs declined from fourth-quarters levels.

On the commercial front we did see a slight pickup in reservable criticized exposure from the fourth quarter of 2014 as we bounce off comparatively low levels.

The first quarter of 2015 provision expense was $765 million.

We released $429 million in reserves.

Most of those reserve releases were in our consumer real estate portfolio, while we did see a modest increase in reserves in the commercial space that was associated with the strong loan growth that we saw during the first quarter.

We can flip to slide 13 on consumer banking.

Hopefully last week you all saw and had a chance to review the filing of our recasted segment results.

We mentioned to you during the last earnings call that we made changes in segment reporting where we moved the Home Loans into our Consumer Banking segment from CRES, which left our legacy assets and servicing as a standalone segment.

We also moved the majority of business banking from Consumer Banking to the Global Banking segment which is how we manage the business.

All of these changes have been made retroactively.

Let's go ahead and walk through then the business segment results starting on slide 13 with Consumer Banking.

The results showed solid bottom-line performance with earnings of $1.5 billion, which is up slightly from the year-ago quarter and down seasonally from the fourth quarter of 2014, which tends to be a better consumer spending quarter.

Business generated a solid 21% return on allocated capital.

Total revenue was lower compared to the first quarter of 2014 from a decline in net interest income.

Two-thirds of that decline in NII was a result of pushing out in the allocation of a portion of the market-related NII adjustment to the deposits business.

Our non-interest income was stable compared to last year, reflecting good growth in both mortgage banking as well as higher card income, but was offset by a portfolio divestiture gain last year of roughly $100 million in the first quarter.

Expenses were managed tightly and non-issue expense declined from the fourth quarter of 2014 as we continue to reduce our financial centers and the associated costs driven by consumer behavior patterns shifting to more digital.

The number of mobile banking customers continues to increase.

We ended the quarter at roughly 17 million and these -- activity from these customers accounts for roughly 13% of all deposit transactions.

Page 14 we have added some additional slides here to give you a sense as to some of the trends that we are seeing in the business and key drivers.

You can see we remain a leader in many aspects of our consumer bank, doing business with nearly half of all US households.

We look at fees compared to the first quarter of 2014, card income was up modestly despite some Affinity portfolio divestitures over the last year.

Our card issuance remains very strong.

Our balances did decline as our customers began to pay down holiday spend balance levels and our net charge-offs remain low at 2.8% and risk-adjusted margins remain high.

If we move to mortgage banking income, it was up 60% as originations for the Company ramped up during the quarter.

Year-over-year first mortgage originations were up 55% to $13.7 billion while our home equity line and loan originations increased 62% to $3.2 billion.

The revenue improvement was driven by these increased volumes as well as the mix of first lien originations that was 76% weighted towards overall refinance activity.

And looking forward, the pipeline remains strong, up 50% from the end of the year.

Moving to service charges, service charges were down versus the fourth quarter of 2014.

This fee line continues to be muted as more of our customers take advantage of our reward plans and are opening accounts with higher balances.

We also continue to reduce the number of less profitable accounts serviced and migrate customer activity to more self-service channels.

As a result, we are getting the same or slightly better account fees and debit interchange from fewer accounts, which is allowing us to reduce our infrastructure.

Expense is declining and if you look at cost of deposits, it has dropped from just less than 2% in the first quarter of 2014 to 1.87% in the first quarter of 2015.

And lastly, as you can see while we are bringing down our overall headcount in this business, I want to note that we have been increasing our sales specialists in the financial centers and their sales are driving client balances higher.

For example, our deposits are up 5% from the first quarter of 2014 and our brokerage assets are up 18%.

If we moved to slide 15, Wealth Management, it generated earnings of $651 million during the quarter.

If we compare this to the first quarter of 2014, there's a $78 million decline as the solid fee growth that we saw during the quarter was offset by lower net interest income and higher expense.

Once again, the allocation of the market-related NII adjustment drove the decline in NII, which more than offset the benefits that we saw from solid loan growth.

Our asset management fees continued to grow driven by strong client flows and higher market levels.

Our non-interest expense increased from the first quarter of 2014 as a result of higher revenue related incentives as well as investments in client-facing professionals.

Our pretax margin was down 23%, down last year largely impacted by the decline in net interest income.

Return on allocated capital remains strong at 22%.

If we look at the activity and drivers within Wealth Management on slide 16, you can see our management fees continue to grow and are up 10% from the first quarter of 2014 but this is partially offset by some of the sluggishness that we've seen in transactional revenue within the brokerage line.

We do continue to be an employer of choice in this business increasing financial advisors by more than 850 individuals over the course of the last 12 months.

Our client balances climbed to over $2.5 trillion, up $12 billion from the fourth quarter of 2014 driven by strong client balance inflows.

Long-term AUM flows at $15 billion for the quarter were positive for the 23rd consecutive quarter.

And as I mentioned earlier, when we discuss loans, we continue to experience strong demand in both our securities based and residential mortgage lending areas of the business reaching a new record level in loans during the quarter.

On slide 17, our Global Banking earnings during the quarter were $1.4 billion, which generating 16% return on allocated capital.

Earnings were up 6% from the first quarter of 2014 as the decline in net interest income was more than offset by lower expense as well as improved provision expense.

As we look at NII, the year-over-year decline was driven by three things: the allocation of the market related to NII adjustment, which I have touched on in previous segments; the push-out of the firm-wide LCR requirements, a good chunk of which goes to Global Banking as well as some year-over-year compression in loan spreads.

Our provision expense was lower than the first quarter of 2014 by $185 million as we did not build reserves to the same magnitude as we did in the first quarter of last year.

Non-interest expense was down 8% from the first quarter of 2014 driven by three factors, lower technology initiative spend, lower litigation as well as lower incentive costs.

Moving to the Global Banking metrics on page 18, we chart the components of revenue which show stability across the quarters with the exception of NII, as I just mentioned.

Our investment banking fees companywide during the quarter were $1.5 billion, down 4% from the first quarter of 2014.

I would highlight during the quarter we recorded the highest level of advisory fees since the Merrill merger, up 50% from the first quarter of 2014.

This helped to offset the drop that we saw within our leverage finance business as a result of the regulatory guidance that was implemented during the first half of 2014.

Equity underwriting was also up nicely, up 10% from the first quarter of 2014.

And as you look at the balance sheet, loans on average were $290 billion, up modestly on a year-over-year basis but if you look linked quarter, as I mentioned earlier, we had a fair bit of momentum ending the first quarter with balances up $7 billion on a spot basis from the fourth quarter of 2014.

The $7 billion improvement was broad-based.

We saw middle-market utilization rates at levels that we have not seen for six years at this point so we feel good about that.

And within commercial real estate, we saw linked quarter improvement as well.

On slide 19, Global Markets, we earned $945 million on revenues of $4.6 billion in the quarter.

That was an 11% return on allocated capital during the quarter.

Our earnings were up nicely from the fourth quarter of 2014 but down from the first quarter as our revenue was down 7% excluding net DVA and FVA.

The decline from the first quarter of 2014 was driven by lower fixed sales and trading results.

On the expense front, non-interest expense was modestly higher year-over-year as we had $260 million in litigation expense in the quarter.

Ex litigation, expenses were down 7% on reduced levels of revenue related incentives.

If we look at the Global Markets metrics on slide 20, sales and trading revenue of $3.9 billion ex-DVA and FVA as I mentioned was up nicely off fourth quarter of 2014 levels but down 5% from the first quarter of 2014.

Fixed sales and trading was down 7% on a year-over-year basis while equities was effectively flat with the year-ago period.

Within the macro related product areas like FX and rates, there was a solid return in volatility and client trading activity in the quarter while the credit spread traded products area experienced lower activity in line with lower issuance levels during the quarter.

And as you look at and we lay out a mix between macro and credit in the upper box, upper right-hand box and you can see that our activity tends to be more heavily weighted towards credit spread trading given the position that we occupy within the issuer market.

And the last point I would make on markets, our asset levels were fairly flat while VaR was below the level that we experienced last year.

Slide 21, Legacy Assets & Servicing, you can see we saw improvement in revenue and expense trends compared to both periods within Legacy Assets & Servicing.

The loss in this segment narrowed to less than $240 million.

Revenue improved as both rep and warrant was down $156 million from the year-ago period and we had a more favorable MSR hedge performance.

Those two factors were partially offset by lower servicing fees as we continue to reduce the servicing portfolio.

Non-interest expense ex-litigation was $1 billion in the quarter once again improving approximately $100 million from the fourth quarter and more than $500 million since the first quarter of 2014.

Importantly, our 60-plus days delinquent loans were 153,000 units but were down 36,000 units or 19% from the fourth quarter of 2014.

If we move to slide 22 All Other, All Other reflects a loss of $841 million and that includes once again the impact of the annual retirement eligible incentive costs as well as some of the market-related NII impact.

If we compare this quarter to the first quarter of 2014, revenue is lower by about $683 million and that was driven by nearly $700 million in equity investment gains in the first quarter of 2014 compared to essentially nothing in the first quarter of 2015 and it was partially offset as well by the absence of payment protection costs this quarter compared to about $141 million in the prior-year quarter.

From a modeling perspective, the effective tax rate during the quarter was about 29% and as we look out during the balance of 2015, we would expect the tax rate to be roughly 30% absent any unusual items.

So I would just wrap up the prepared part of my comments that as we end the quarter, we end the quarter with record capital.

We end the quarter with record liquidity.

We will begin our $4 billion share repurchase program this quarter.

The team is very focused on addressing our CCAR resubmission.

Expense management remains a key focus across the Company.

Our businesses are showing good activity including a pickup in lending across several businesses in the Company, credit quality remains strong and we remain well positioned to benefit in a rising interest rate environment.

And with that we will go ahead and open it up for questions.

(Operator Instructions).

Betsy Graseck, Morgan Stanley.

So Brian, very impressive commentary in the beginning of the call on headcount getting back to 2008 levels before CFC and the Merrill Lynch acquisition.

The one question we get continually from investors is what is left to do on the expenses and you've already got the core expense number coming into the $13 billion range, so can you give us some sense as to where you go from here on expense management and is it steady as she goes, or is there room to become even more efficient?

A couple of things.

One is if you parse expenses, Betsy, into three basic buckets, the litigation expense bucket, which you are seeing come down to more reasonable levels and then there is a cost of that litigation, the external legal fees and stuff, which we will continue to see lift in which is in the expense numbers.

Then you have a second bucket, LAS, we are at the $1 billion level and as Bruce said, we expect to get that down to $800 million and keep moving that to lower numbers over into 2016.

And then you get into the baseline and I think the thought on the baseline is even as we reduce the headcount we continue to reinvest in sales capacity.

So just in our consumer business, headcount down year-over-year but we have 1000 more salespeople roughly out there selling.

And then so the idea is to continue to drive salespeople into the businesses at the same time we are taking out wealth management, etc.

So when you think about the broad expense base, there is adjustments always in first quarter, second quarter just because of revenue and stuff in terms of the aggregate amount but we will continue to pare away.

You can look linked -- year-over-year quarters over the last four years, we have continued to chip away.

This year it was 300 on the core base.

We will continue to work at that but I would say that a lot of it we are trying to make sure that we create the investment rate, continue to grow the franchise (inaudible) size.

This is a matter of holding these expenses relatively flat as revenues start to pick up with the expected increase in rates and the economy continue to grow.

If that changed we would have to go aggressively and push down the core also.

We manage it every day.

We manage it every day and you can see the headcount is a leading indicator because that headcount reduction in the quarter really benefits us in the second quarter.

Got it.

And then just separate topic on GWIM and maybe you could give us some commentary around how you are thinking about the impact of the fiduciary language that has been coming out if the Department of Labor and also how you deal with the competitive threats coming from Silicon Valley including some of the robo-advisor efforts?

On the first question, John Thiel, who runs Merrill Lynch for us, where largely we are affected by the discussion on fiduciary standards because remember U.S. Trust is actually a private bank and operates under the fiduciary standard in most of its activity.

So John Thiel does the lead in our business, does a great job for us, has been clear.

We believe that doing what is in the best interests for your customers is absolutely the right thing to do.

And while this rule has just come out yesterday afternoon and frankly, Betsy, to get prepared for your questions this morning, I haven't spent a lot of time examining it in detail.

But from a basic standpoint, we have been clear that we see the industry moving and we expect to help move it there.

On the robo-advisor I think that the clear segment match for us in that area in terms of what Schwab and other people are talking about is really in the Merrill Lynch business, which is below the Merrill Lynch cut off, for lack of a better term.

So John and his team drive people $250,000 in investable assets free to invest, which is net worth $0.5 million/$1 million in [uprating] of the client.

And then Dean Athanasia and his preferred team drive the business below that and if you look in our information, you will see that that business has got about $118 billion of brokerage assets.

It is growing faster than the industry year-over-year.

I think the assets are up 18%.

The numbers of accounts are up, the sales levels are up and so that's really the automated rebalancing portfolios and stuff like that and we are driving that through as a core execution.

And by the way, they also refer tens of thousands of customers a year up to Merrill Lynch at the same time, so we are trying to have the best of both worlds.

Okay, thanks.

You have been a leader there, so appreciate that color.

Thanks.

Matt O'Connor, Deutsche Bank.

Any sense of when we get a clearer picture on the final impact of exiting parallel run?

Should we just assume the 100 basis point hit that you mentioned is a done deal or is there a potential for it to be less than that?

I think what we wanted to disclose, Matt, is that I think that we are coming out of the disclosure that we had in the K, there were a lot of questions and you are absolutely right that what we disclosed today was the requested amount from our banking regulators to exit parallel run.

That was the ask on their behalf.

Discussions continue but we did want to put out there what the ask was.

Okay.

In terms of timing of a conclusion on that?

I think that those things are always hard to predict but we are obviously working hard to get through it over the next quarter or so.

Okay.

And then just related, obviously capital build was very good this quarter of 50 basis points, so you essentially got half that back already.

But assuming that 100 basis point hit goes through, are there additional RWA levers to pull or model adjustments in the future that we can think about?

You ask a very good question, which is that to the extent that there is an adjustment in the RWA, you obviously as you look to refine and improve your models, always have the ability to work hard to get that back.

But there's obviously a lot of scrutiny with respect to models.

But your point is spot on is that there would be the opportunity as we work through and look to refine, improve and become better with our models, to get some of that back over time.

And Matt, in a broader context, we have flipped the binding constraint in our Company to some degree with a move to advanced and so therefore, continue to look at the balance sheet what mix of businesses and how you approach the businesses changes again because standardize was a constraint we were focused on and was our binding constraint and now it's going to flip to advanced, as you can see in the numbers.

And that then just -- expect us to be as aggressive and in depth at thinking through how we mix the businesses right to make sure that we are focused on that constraint now that it has become a binding one.

Okay.

That is very hopeful, thank you.

Paul Miller, FBR Capital Markets.

On your legacy asset servicing in your discussions you said that the loans went down from 36,000 loans in the quarter.

Did you sell any loans in the quarter?

There was some servicing of loans that was moved as well as the outright sale of some nonperforming loans, so there was some inorganic activity but as you look at those reductions, it was very strong from both organic as well as inorganic.

And I would say the other thing that we are seeing, Paul, is just less new delinquencies coming in than what we would've expected.

So you've got the benefit of less coming in, you've got the benefit of working through some of what you have and then we are supplementing that with moving additional out.

Yes, I know one of the things out there is what we are seeing or hearing is that there is a strong market right now for people wanting to buy either re-performing or nonperforming loans.

Are you going to use that as an advantage to start moving this stuff off your books quicker?

We have been using it as an advantage.

If you go back and look at the results, Paul, I think we were one of the first out there that started to move those loans in the first half of 2014.

We have been aggressively doing that both to take the risk of the loans off as well as to move the servicing.

And I think if you look at the impact of that and how it flows through different things, you really get a good sense for it when you look at some of the CCAR results where the loss content that we have, particularly within both first mortgages as well as home equity, has come down.

So we have been at that for some time at this point.

And Paul, I think overall remember as you get further and further removed from the crisis, what is left over even though at the time when we set up LAS or set up some of these non-core portfolios would have been a product or service you didn't want to continue.

Seven years later, you are seeing the customers are left over and paid and so there's a good bit but also we want to make sure we measure the economics of the portfolios.

Now that they are much smaller, the risk is way down and so we judge that really on the basis of who the customer is and whether we want to roll them into core loans in our Company and then also what the economics of the outside are.

So I wouldn't expect us to change our course there.

We will just look at the opportunities we have to keep moving in the right direction.

On both servicing and assets we own too because remember, Paul, there's also the servicing side of this even though we don't own the asset, the is a strong bid.

Even the agencies are moving to move some portfolios.

Okay, thank you guys.

Jim Mitchell, Buckingham Research.

Just want to follow up on the capital discussion.

You guys had pretty good progress on the advanced approach, up 50 basis points quarter over quarter but the gap between standardized and advanced is still very large.

And I guess if you have to go through with the full 100 basis points, I guess about 120 basis point gap versus your peers that are less than half that.

I guess -- is the big difference operational risk because of the larger litigation you faced over the last couple of years and how do we think about that coming down and getting more in line with the peers?

Is that just a time as you get further away from that, those op risks come down or how else do we think about the trajectory of the closing of the gap?

No, your point is exactly right, which is that as we talked about last quarter that the op risk relative to the total advanced RWA was upwards of 30%.

That's obviously higher than our peers.

It is something that we are working hard on to be able to drive down.

And to your point, the question is when are you able to get benefit from a declining litigation trend as we wrap up the legacy matters and that does take some time.

Obviously the last two quarters from a litigation perspective have been much lighter than what we experienced going back several years.

So it is up to us to continue to work that and to look to convince people that the level op risk capital should come down given the resolution of the matters.

And I would just highlight that we once again whether you look at Article 77, there was an Ocala litigation matter that was wrapped up as well as on the RMBS front with settlements that we got through this quarter were at roughly 99% of all threatened or filed litigation with respect to RMBS.

So we continue to work through that and drive through that and ultimately the benefit from that should be lower op risk capital from an RWA perspective.

Right and sorry, is that sort of a negotiation process on the models with regulators, so is it going to be sort of a step function or is it just really just time value as you move further away?

I'm just trying to understand the process.

I think in all these cases clearly that we work closely with our supervisors on all model related activity and as you look to make changes that are to the good you obviously need to work through your regulators to get those put through.

As you think forward remember you saw a good capital build this quarter and we will continue to build.

But remember that if we keep on the course of earnings that we expect -- and the issue wasn't CCAR last year when we went to the ask.

You have to remember we came off a really low nominal earnings environment and so we retain a lot of capital between now and the next time we can ask to actually change the capital position of the Company and we have a big cushion.

So we will close this gap relatively quickly and then we have a longer-term question of what you are saying which is as op risk runs off, how do you get that reflected ultimately in your capital requirements and the same with the models and the other [side].

Right.

And to your point, the stress test is based on standardized, not advanced.

But just one quick follow-up elsewhere, on the FICC revenues, can you talk about the trajectory over the quarter?

Did it improve in March?

It sounded like some of your peers have talked about a slow start.

Did it get any better in March, or how do we think about the trajectory through the quarter?

I am always hesitant to comment on results given that we are nine days into a new quarter but I think if you look at what we saw from both I would say both a sales and trading as well as an overall investment banking fee perspective, the January on the margin was a little bit slower than what we would've expected and we saw activity and momentum build up throughout the quarter to where if you had to grade which of the three months of the quarter did you feel best about, it was clearly March.

And like I said, we are only nine trading days into the new quarter but we have not seen anything change directionally.

Some of the activity that we saw in March, we have continued to see in April.

Okay, great.

That's very helpful.

Thanks.

Glenn Schorr, Evercore ISI.

Quick question on Proposal 8 in the proxy.

I don't think the regulators want it to happen.

I don't think it should happen and I assume you have been doing a lot of the work on this along the way for the last couple of years.

But curious why the Board is so against shareholders voting for it and what you actually have to do if it does get the yes vote?

As I think you read the response in the proxy, Glenn, you will see this is a core Board duty and they do look at it periodically and think about the optimal company structure, capital structure.

So the idea to have a special element around it is really the whole Board looks at it and that is who should look at it.

So then the technical terms of what the request is are a little hard to understand when you think about how a company really operates.

But we do look at the question of do we have the optimal business mix?

Is it optimal for shareholders?

And the Board will look at it continuously and we will continue to look at it.

Okay.

I appreciate the comments you made on the increased asset sensitivity and if I remember the numbers correctly, it sounds like more of the increased sensitivity came out on the long end.

So I guess my question is, it is great you make a lot more money if the curve shifts up 100 basis points.

But I think a lot of people are more fearful of what happens if we get into a [flattener] environment.

So is it is simple as you capture at least half by short rates going up and if we're in a flattener, that's where it ends?

A couple of things, Glenn.

The first is that in many respects we were at 3.5/3.6 at the end of the year and we went to 4.5/4.6 this quarter.

Keep in mind that a chunk of what you see as far as becoming more asset sensitive is just the FAS 91 that we lost during the quarter.

So I'd keep that in mind.

And to your point you are exactly right.

If you looked at where we were at year end, I think we were just over in the 2.1 to 2.2 benefit from short rates moving and that has not changed materially.

So to your point, the asset sensitivity is based almost solely on long-term rates and given the deltas that we saw change from the end of the year to the end of the first quarter.

Okay.

I appreciate it.

Thank you.

John McDonald, Sanford C. Bernstein.

Just a follow-up on in terms of if rates stay pretty flat, what kind of outlook would you have for the core NII if we take the 10.2 this quarter as a jumping off point?

Do you have any room to lower the debt costs from here or how would you expect the core NII to trend if we don't see too much movement on rates?

It is something we have spend a lot of time on, John.

When we got to the end of the first quarter we looked at and said during the balance of 2015 what is the impact that we would see if in effect we rolled a spot throughout 2015, which just means that you don't get the benefit of the curve as we go through.

And if you look at that, it is roughly a couple hundred million dollars a quarter relative to $10 billion of NII.

So we think that we've done between the debt footprint, deposits and if you actually look at the clean yields during the quarter Q4 to Q1 that we've done a pretty good job of managing this exposure in what has been a tough environment.

But to your question, there is probably a couple hundred million dollars a quarter in risk if you roll the spot.

Got it.

Okay and that's couple hundred million over a couple of quarters, Right?

It would be about $200 million per quarter over the next three quarters.

Got it.

And that's just kind of core leakage from new stuff coming on or lower yields and you not investing much in a low rate environment?

That's correct.

Yes, and continuing to shorten the balance sheet every time we get a chance to.

Okay.

And then just switching gears, Bruce, on the credit side, do you see the net charge offs kind of bouncing around the $1 billion per quarter level, or is there room for those to come down or is that kind of stabilizing?

And how should we think about reserve releases from here relative to the 400 or so you did this quarter?

A couple of things on that.

I would say we continue to see, John, if you look at within the consumer space and overall consumer credit that the first quarter typically all of the things being equal is the toughest consumer quarter in the first quarter.

So I think there's probably a little bit of room there if we continue to see what we see in the economy on the consumer side.

The tougher piece of it is probably to judge commercial because outside of what we see in the small business lending, there really haven't been many charge offs and we will just have to see how long that benign environment covers.

On the reserve release for the quarter, the one thing I want to make sure that we point out that while we release 400 plus of reserves, 200 of that was from the DOJ where with the mailings you had both charge-offs and reserve release, so as it relates to just from a -- as you look at the provision perspective, realize that which impacted the provisions is more like 200.

Okay.

So that should be something -- the jumping off point is more like a 200 reserve release number?

Yes.

And I think we have said that we clearly expect reserve releases to moderate, so we will have to see as we roll into the quarters.

But I think you are directionally right on your charge-off number and we will see if there's anything left in the reserve releases as we go through the second and third quarters.

Okay.

Last quick thing for me.

In terms of rep and warrants, the slide 26, not sure if you mentioned this already, Bruce, there was a pickup in the claims, the new claims this quarter showed a big increase.

Just what is the driver of that?

Why would those show up now?

And any color you can provide on whether that is a concern or not.

Yes, I think you need to go down to and we lay it out in the footnote but if you start up in the new claim trends, if you recall there is a case going through where the statute of limitations on rep and warrant claims in the ACE case was found -- the statute was six years and if you look at the claims that you see up in the new claim trends, you can see virtually all of those claims were in the pre-2005 through 2006 area.

So absent any tolling, a good chunk of those are going to be time barred.

The other part that -- the other point that I would mention is if you go down to the footnote you can see that the vast majority of these claims were put in with no file work done on whatsoever or no individual loan work that was done.

So I think there continues to be obviously activity on that front but there is not a lot of work being done as those claims are being filed.

Okay.

Thank you.

Steven Chubak, Nomura.

So Bruce, I just wanted to touch on the preferreds for a moment.

So saw that you completed another $3 billion of issuance in the quarter.

But seeing as you are already at the 150 basis point target contemplated under Basel III, whether it's fair to assume that you are now full on press at the moment and we shouldn't expect any additional issuance?

Yes, I think you're absolutely right that we got the bucket filled up this quarter.

I think the only thing that is out there is depending on exactly where we come out from an overall RWA perspective as we exit parallel run.

That beyond 2015, could there be a couple billion dollars more preferred sometime during 2016?

That's a possibility but you are absolutely right that based on where we are from an RWA perspective, the bucket is filled up, so we don't see much if any at all in 2015.

Maybe a little bit in 2016 but not much.

Excellent.

Thanks for clarifying that, Bruce.

And I suppose since you mentioned RWA, one thing that I just wanted to clarify, I believe it was relating to your response to Jim where you noted that for CCAR it only contemplates a standardized approach.

But I just wanted to know if that determination had been finalized since some are speculating that the advanced approach could be incorporated within the CCAR exam going forward?

Yes, there is an open question out there that you are absolutely right that for the different CCAR submissions that went in in 2015, that those submissions are against the standard ratios.

And as an industry, we just don't know the answer if we will test under just standardized in CCAR 2016 or if advanced will be brought in.

That is an open question that is out there for the industry.

And do you have a sense at least for the moment as to what the impact would be on RWAs if they were to incorporate the advanced approach versus the standardized?

I think if you look at the numbers you can see the difference that we have within our numbers.

As to advanced, I think the open question that is out there as you look at moving to advanced in a CCAR scenario is that under advanced you hold capital for op risk and then that there's the open question if you go to stress test under advanced, what do you do with respect to CCAR in those op risk litigation type items?

And like I said, that is an open question for the industry.

Right.

But would it be fair to expect that because it is a -- the advance calculation is more procyclical in nature that the RWAs calculated under a period of stress would be higher versus the standardized?

There is no question that there is a procyclical aspect of it that intuitively I think you are right but it is just until you understand exactly the completeness and the entire picture of what you are looking at, I just don't want to speculate.

Fair enough.

That's it for me and thank you for taking my questions.

Ken Usdin, Jefferies.

I was wondering if you could talk a little bit about the investments in brokerage services business.

The metrics continue to look very strong as far as assets gained but the growth rate on a year-over-year basis looks like it has slowed considerably.

Any context you can provide around revenue generation and is there a potential catch up that we should see or expect going forward based on either markets or just activity levels?

From a high-level that team has continued to invest and grow and there is a couple of things driving that.

One is they are adding more core advisors.

So in the last 12 months I think we added 120 experienced advisors and we added almost 900 total.

So there's a carry cost to bring those up but that is good for the future.

The second thing is there's a little bit of a business mix issue which is that the investment management side of the business continues to grow but we have seen weakness in the brokerage transactional side just as the business gets repositioned in that sort of year-over-year is enough to hit you.

And then third, frankly, is that the NII that Bruce pointed out earlier, just the way we allocate and we won't let businesses take an excuse for intercompany allocations but the way we allocate year-over-year, a big chunk of the NII loss is just due to the way we allocate out the impact on the market and less NII.

Okay.

And then secondly, just extending that to the other consumer fee lines, card income flattish and service charges down a bit.

Is this customer behavior driven or additional repositioning in there and can you talk about growth expectations on the consumer side as well?

I think as Bruce talked about earlier, if you think about a couple of broad things.

One is, as we continue to drive to be the core checking account for households, we are seeing higher sales.

We are seeing higher primary sales but with that comes less fees in the sense but the average balances are higher.

And so what you're seeing is a flattening of the fees charged on accounts, overdraft and other fees while you see an increase in the consumer balances, which in this environment are worth something but will be worth a lot more as rates rise because these are core checking account.

So there is some elements of how the business has been shifted based on our priority of making sure that we just don't have a lot of checking accounts, we have a lot of core checking accounts and that has caused it.

So you are seeing a far faster growth and balances and actually a slight decline in total checking accounts out there.

When you put debit fees and other fees plus the interest rates together, which is core checking revenue, it's actually a little better picture.

But that is kind of the story there.

On the credit card fees, it is basically we have absorbed most of the compression on the interchange at this point in the rebates we give.

So really year-over-year you have a bit of loss there because we added a divestiture of a big Affinity program, two big Affinity programs that hurt us and you should expect to see that a little bit more in line with our spending growth going forward, which has been about 3%, 4%.

Okay.

And then last one, just Bruce, you mentioned on the discretionary portfolio on the switch out to HQLA.

Can you give us a sense of just how much more of that mix shift we should expect or at some point do you get to a point where the loan portfolio finally starts to bottom out?

I think a couple of things.

So the shift to the discretionary portfolio, you probably have about $5 billion of that in each of the second quarter and the third quarter of this year and at that point that work is done.

I would say as you look at just discretionary mortgage balances and what you are seeing from a payments for the old stuff that was put within the investment portfolio, you are probably looking at before what the new is that we put on within the business that you are in the $10 billion to $14 billion type run off in each of the next couple of quarters.

Realize all of that net interest income doesn't go away because there is reinvestment of that and there is new loans coming in but you do have probably two more quarters where we will move stuff into securities and obviously there does continue to be a run-off of that portfolio as well.

Thank you.

Eric Wasserstrom, Guggenheim Securities.

Just one quick question on the legal expense that was incurred in this period.

Are those issues now the FX and the RMBS, are those issues now settled or are they ongoing?

The RMBS piece I quoted, there were both amounts in litigation for things that were settled as well as accruals during the quarter.

And once again, Eric, I would go back to that from an RMBS perspective at this point we are 98% or 99% of threatened or filed claims on original UPB that we're through, so that's where we are with the RMBS.

With respect to the FX piece, I think if you go back and look at where we said that we were in October, that we resolved the matter with the OCC, the top up that we saw in the quarter related to FX with respect to other banking regulators and there was also the resolution and we are working through the final documentation of the civil piece of the overall FX work.

And that is all included within the litigation reserve during the quarter.

Okay.

And sorry, just so I understand that last point -- the civil component, is that with the DOJ or some other kind of authority?

No, the civil piece with respect to a class-action type matter, not the DOJ.

Oh, I see.

Okay.

But that was contained within the accrual in this period?

That is correct.

Okay, great.

Thank you for the clarity.

Mike Mayo, CLSA.

What are your financial targets for 2015 and 2016?

So, Mike, as we said, our goal is to continue to drive towards the 1% return on assets and depending on where we end up with capital between 7.5% and 8% tangible common equity ratio, that would translate into a 13 down to 12 return on tangible common equity.

In this quarter we moved to up to where we have a return on tangible common equity is 8% and so -- and our return on assets was 64 basis points, so we are sort of two-thirds of the way to that goal.

And what timeframe do you expect to get then?

I think if you adjust our earnings this quarter for a couple of things, the FAS 123, the FAS 91 and then continue to think of LAS normalizing, you see us get close to that goal and that should happen between now and the end of 2016 because we just keep chunking away at LAS as we have described.

So is that your specific financial target -- what is your target for 2015 when it comes to your financial metrics?

I think the way you asked that, we basically have to give you our earnings estimates for 2015 and we just don't do that.

But our targets long-term we told you each time you asked is the same, 1% return on assets and a 12%, 13% return on tangible common equity based on where we think our tangible common equity ratio will settle out.

Okay.

I guess when I look back at 2014 I ask myself the question did Bank of America meet its financial targets?

And I have trouble because I'm not sure if you had specific targets just for the year 2014 as opposed to your longer-term targets.

We made $4 billion in change last year against the expectation by you and your colleagues of $15 billion.

So clearly we didn't meet the financial targets due to the litigation we took last year.

Okay.

Let me just ask a separate question then.

Glenn Schorr brought up Proposal 8 and the proxy and I guess my reaction is why not give more information on the trade-offs of the business model?

One of your competitors gave three slides on this topic at their investor day.

They weren't asked to do this and they have some higher ROE and ROA.

So more information I think would be good and in the proxy it says that your Board believes that the proposal would not enhance stockholder value.

If that is the conclusion of the Board, just why not share some of the insights of the Board to investors?

The insights we have when you look at the returns on page two or three of the material show that the core businesses return is above our cost of capital and that the mix between them and the revenue synergies and the diversity we get have been there.

But let's back up.

What a lot of people are looking at here, Mike, is can you simplify your company to make it tighter?

We started that in 2010 with about $2.4 trillion in assets.

We are down to $2.1 trillion.

We started with about $70 billion in capital or $80 billion in capital.

We are up to $140 billion.

And we started by getting rid of 60 operating businesses and so we have done a lot of simplification.

So what is really left and this is one of the reasons why our market business is more constrained in its growth prospects potentially than some other people's is because we keep it to about one-third of the franchise in terms of size.

And that market business is really focused on driving the value of our issuer side customers going to market and then with our investor side customers providing sources of capital for that.

So it's a very synergistic basis.

So we will continue to try to provide insight but if you look at it, the businesses return above their cost of capital and then if we put them out there the question would be what we would look like after and we would have capital we can't deploy and we would have less earnings power.

All right.

Well if you can share additional insights into that conclusion in addition to what you just gave that would be great at least in the future.

Thanks a lot.

Nancy Bush, NAB Research.

I have one straightforward question and one that is more existential.

I will ask the straightforward one first.

Brian, could you just restate your position on paying or raising the dividend?

I know the CCAR this year has distorted that a bit and if you could just state how you feel about dividends versus buybacks?

I think number one in terms of we received approval for what we had asked for which is a nickel a share of dividend and $4 billion of stock buyback in the CCAR.

And we had to be conservative in that ask, leaving aside the modeling and other questions -- but this had to be conservative in base ask because if you think about it, our run rate of earnings was such that we were coming off a $4 billion plus earnings quarter.

We had to keep our head on in terms of how we were accumulating capital and make sure we earned the capital before we paid it out.

The second thing is that the $22 billion cushion shows that based on all the works at CCAR we have a strong cushion going forward.

So the key for us to be able to increase the dividend and continue to push forward is to get that normalized earnings stream in a couple of quarters, $3 billion plus in earnings we are getting.

Long-term we have said many times our ultimate goal is to take about 30% of our recurring earnings and pay it out in dividends and then to use the rest for capital management.

At this price we would be buying stock back and if there's a different scenario where our multiple to book and earnings multiples are higher we might pay additional dividends but the goal would be about a 30% payout ratio of recurring earnings as we get there.

Okay, thank you.

The second one is this and this is maybe a little bit more difficult to answer.

You had a good trading quarter but we have seen one of your competitors have a much better trading quarter and I know that there is a mix issue there.

But also as I kind of look at the composition of your businesses there, have you de-risked the trading desk to the point where you can't really take full advantage of the volatility in markets?

And I'm wondering if you see that as the case?

And secondly, if there will come a time when you are able to do some re-risking there?

Nancy, what you asked is really the core question, which is if you look a few years ago we put core capital Global Markets out as a separate reported segment to ensure that people saw that that was a less volatile earnings stream than people perceived and it was not the earnings stream of the Global Banking segment, high investment banking which you can see the fees move up or down and were relatively stable in clearly the loan book and the treasury services.

So we tried to sort the businesses so people can see what we are doing with Global Markets.

Based on our capital and based on our view of how the franchise fits together, we keep that business to about one-third of our total size.

So this total balance sheet deployed is under $600 billion and has been for years.

That then requires Tom and the team to make a series of choices how they deploy that based on our appetite for risk expressed by VaR, our appetite for size expressed by the $600 billion, which other people have far bigger balance sheets deployed in the business.

And that then does limit their ability to take risk and do certain things.

So there is a mix issue based on this quarter.

In other quarters we have performed better relatively and that is this issue.

But from a core standpoint, it's not an existential question at all.

It's an actual determination we made to have our SIFI buffer lower, to have our overall risk lower to man demand the company, which is really customer focused on the core banking middle markets, franchise and the core investor, it would still be big enough to be a very impactful, number one research house in the world and have $3.5 billion, $4 billion of revenue in a given quarter.

We had to basically optimize around size, capital, the capital deployed in the business and then the risk we were willing to put in the P&L and that's where we ended up and that's resulted in us having 100 basis points less SIFI buffer requirement than other people.

And we think that's balanced because with our book of business if we increased that, we've got to carry that 100 basis points across the whole franchise, not just the markets business and that extra capital in our balance would really increase the capital requirements that is really not needed for our core banking business.

So basically you are happy with the trading desk as it is?

No.

We are always -- never happy because we always wanted to do better.

But on the other hand, it is fair to say that we are not unsatisfied when we make almost $1 billion after tax in the quarter where they had a couple of big elements.

This mix in the macro businesses, which we are positioned in on purpose.

And then secondly, remember a core part of our business we are still adjusting to which was the leverage finance transaction business, which you can look at is down dramatically year-over-year as we adopted the guidance and what was acquired.

That is through the numbers now and then we will build back based on that business doing it the way that meets the regulatory standards.

So happy -- we are never happy with any business.

We are always pushing them to do better but given the constraints, there is an understanding I would say more than happiness of where we ended up.

Okay, thank you.

Brennan Hawken, UBS.

A quick follow-up on the op risk questions.

So if we still have pending settlements out there on a few of the remaining large issues, could that lead to op risk at least sustaining at elevated levels and could it even potentially cause a little bit of an uplift there?

I think at this point we have walked through and as we said on the last call that we are at the level that we need to be from an overall op risk perspective.

And to your point, if we look at the last two quarters relative to when that op risk capital was set, we have seen fairly sizable declines in overall litigation expense.

So you obviously work through that but our belief over time is that number should be less, not more but we need to deliver that to the shareholder.

Yes, from your lips to God's ears, but if we still have some potential settlements my only point is that it might take a little while before we end up seeing that come down.

Isn't that a similar reason?

(inaudible).

Just as we said, there's a bid ask on the RWA related to commercial credit factors and models.

There was a bid ask an operating risk.

We closed that out and we have actually moved our RWAs to a number of those asks.

And then from then you just look at it very simply, think about the last four quarters versus last year just picking up the third and fourth quarter, you have a complete change in the amount of litigation expense that is gone through the enterprise and you will see that keep rolling through.

It will take a while for that to average out but basically assume that we've agreed to an amount which was requested to bring our op risk and we put that through last quarter.

Okay, thanks.

And then it seems some high-level turnover in your equities business.

Can you comment maybe on what is driving some of those departures, any potential implications and what you are doing about it?

Yes, we have had some retirements of people worked in the business for 25 years, Henry and the team and it's just the ebb and flow of business.

I don't think there's any major issues going on there.

I think that (inaudible) and the team have done a good job and stabilized that business and brought it back.

We continue to work on the prime brokerage side to make sure that we can be positioned to restart that engine of growth.

Now we had to hold the business back where we got the operating platform in place to where we wanted (technical difficulty) not this past fall but the fall before.

So I think you should not read anything into that other than the usual ebb and flow of people deciding to do other things.

Okay.

Thanks for that color.

And then the last one for me following up on Ken's question, it sounds like the FA headcount adds are sort of biased a little more to the junior side.

So should we count on a bit of a headwind from that on your productivity metrics in GWIM?

And maybe could you also comment on the recruiting environment currently and if you still think that comp may moderate as some of those deals with FAs from crisis level sunset?

The average deal last year I think was -- for the highest end producing FAs, which there were 100 of, 120 of, the average deal was like 1.27 times trailing 12 or something like that, or slightly less than that.

Don't hold me to those exact numbers but think of it conceptually.

So the rumors about these payouts are probably far in excess.

The reality is only 120 people or so.

So take whatever number.

So let's broaden out the productivity question.

The productivity per advisor in our business is extremely strong and has sort of structurally been strong for many years and continues to increase.

You wouldn't mind diluting that to get faster long-term growth prospects for the business and broaden out the business and that is what John and the team are doing.

Whether it goes down or not is really going to be a factor.

How fast the revenue stream grows -- it has been outgrowing that impact of investing in the lower-end business but we aren't -- I wouldn't say it is going to go down or up based on the added younger advisors but let's flip that and say that the way we think this business has to drive for our competitive advantage as a franchise is the linkage from preferred to Merrill Lynch Wealth Management and the interaction between the financial services centers and the people that come in there and the tens of thousands of people that get referred to Merrill is a competitive advantage for Merrill.

And we will continue to drive that and part of that connectivity is we are now putting Merrill team-based brokers in the branches to work with clients and ultimately move physically onto the teams in the offices.

So we've got a lot of programs going.

They seem to be working very well.

It could dilute the productivity a little bit but it would be immaterial because of the strength of the core franchise is so strong.

Thanks for the color.

Jeff Harte, Sandler O'Neill.

A couple from me.

First of all, you mentioned the commercial utilization rate being up a lot.

Can you give me some or give us some idea of how much of that is energy complex driven versus maybe coming from other less stressed industries?

Most all of that given that the number I quoted was within the commercial bank, that's almost exclusively outside of the energy space so it has nothing to do with anything distressed.

It is just core commercial clients drawing more.

Those numbers bottomed out in the low 30s and they are now up in the high 30s.

Think of that, when we say commercial, that is middle-market, general middle-market for us.

Not the corporate bank where the energy exposure would be.

So it is back to basically where it was not the highest point because it ran up right before the crisis but if you look back, it is higher than it was in say 2004 and 2005 at this point, or right on it.

So you're starting to see a normalization of that borrowing, which is good news because that means that people are borrowing the money to do something.

Okay.

And looking at the balance sheet, can you talk a little bit about the plans, the level of excess cash?

22% of assets in cash, a 7% plus SLR ratio.

It would seem awfully tough to generate ROE or ROA with that much of the balance sheet sitting in cash.

Is there something you can do there?

I think the first thing as you look at that, you have to consider as we went through with the different regulatory metrics we needed to get to that the last metric that we needed to solve for and we wanted to get behind us was the satisfaction of where we needed to be from an LCR perspective in 2017 at both the bank level as well as the parent.

And we are to the point where we've gotten to that point, so from an overall liquidity HQLA perspective, we feel very good about that progress.

As you look at on a go-forward basis, obviously the big focus and the reason as a company that we are looking to drive the loan growth that we have is to basically take the excess deposits today that are within the investment portfolio and release them from the investment portfolio into core loan activity to do more with our clients.

So as you look at the changes and mix in the balance sheet as far as the build that you've seen with cash, I think we are at the point where from an overall balance and where we need to be with the different metrics, that we have satisfied that at this point and it will be more of a normal course on a go-forward basis.

I think generally thematically if you think about, as we see roles come up we try to get in full compliance as fast as possible even though there is delay dates and then you can then work back on how to continuously improve the way you get there.

But the first thing you've got to do is get over the hump because it affects every other aspect of the franchise.

And so I think the LCR is another case that we got over the hump.

2017 is two years away still and we are in compliance and then the idea is that you keep -- to figure out how to work the dials to make it more and more shareholder friendly over time.

But the first thing you want to do is show you can do it.

Okay, thank you.

I think that was the last question.

Thanks for joining today and we will talk to you next quarter.

This concludes the program for today.

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