美國銀行 (BAC) 2015 Q2 法說會逐字稿

Good day everyone and welcome to today's program.

(Operator Instructions)

Please note this call may be recorded.

(Operator Instructions)

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

You may begin, sir.

Good morning.

Thanks to everybody on the phone as well as the webcast for joining us this morning for the second-quarter results.

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

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

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

So with that I'm pleased to turn it over to Brian Moynihan, our CEO, for some opening comments before Bruce Thompson, the CFO, goes through the details.

Brian?

Thank you, Lee.

And good morning everyone and thank you for joining us for our second-quarter results.

As you can see from our release we reported $5.3 billion in after-tax earnings this quarter which is up from last quarter as well as more than double what we made last year.

Not only were we pleased with the bottom line but revenue was up and expenses were down comparatively against both periods.

Lots of things came together to achieve these results and we continue to work on all these also.

On the expense side we told you that we achieved the new BAC cost savings back in the third quarter of last year.

However, we didn't give up on our focus on expenses and you can see those in the results.

It's the lowest non-litigation expense base since 2008.

At the same time we continue to invest in the future of this Company.

Just to mention a few of these investments, we added sales specialists in our financial centers, up a 3% versus last year.

We added 3% to our financial advisors since last year.

4% to our commercial and business bankers.

We've opened new financial centers in new markets that we previously didn't have coverage and we continue to upgrade those in other markets.

In addition we continue to invest in young new talent in our Company.

We hired a record number of teammates from college, over 1,200, and we upped our intern program to over 1,800 this summer.

And we continue to invest as we have said in technology with over $3 billion we've spent this year to continue to improve and drive our products and our capabilities in the Company.

As we are doing that we continue to focus on our process improvement.

Our Simplify and Improve effort continues to take hold and you saw that and some of the effects of that this quarter.

The goal of the program is to hold the cost management well as the economy continues to recover and our revenues continue to recover.

Away from the expenses, a few other highlights of the quarter, we saw our overall loan growth and balances from the first quarter, we saw a continued improvement in our net charge-offs in credit quality, our deposits and our consumer continue to grow even faster this quarter than prior quarters.

We also built capital and tangible book value despite the OCI impact of higher rates.

We returned over $1.3 billion to our shareholders through share repurchase and common dividends.

And looking at the results this quarter you can also see that we're making progress on our path to our long-term targets to return on assets and return on tangible common equity.

Bruce will take you through the business activity in the various pages in the slides but some highlights.

This quarter again we averaged about 5,000 new customers a day to our mobile banking platform.

But importantly the team continues to make progress in bringing that platform into the Company in multiple ways.

An example of that is this quarter our digital channel sales were up 30% from last year in the second quarter.

In addition to that we continue to focus on our mortgage area; our direct-to-consumer mortgage and home equity originations improved 40% from a year ago.

In the mass affluent space our Merrill Edge product continues to have record assets and they're up 15% to over $122 billion.

And that's on top of our investment brokerage services revenue teammates in US Trust and Merrill Lynch that continues to grow.

We also continue to drive our 401(k) business and this year we've added some of the industry's largest companies to our platform.

So those are the trends in the business and Bruce will cover more later.

From a broad economic standpoint what do we see out there?

Notwithstanding uncertainty in economies outside the United States we see the US economy continues to steadily improved.

In our middle-market business, our commercial businesses, our Company's balance sheet is strong and they continue to draw loans at a higher rate than they did last quarter.

Our consumers continue to spend on our debit and credit cards, this quarter spending over $127 billion this quarter, up 3% from last year even with a downdraft in gas prices in the year-over-year comparison.

Our industry-leading research team under Candace's leadership and Bank of America research expects US GDP growth for the second half of the year to be 3% for each of those quarters and we see that in our statistics.

Our Company is well-positioned to benefit from that continued health in the economy.

And we continue to manage this Company to deliver for our customers, clients and for you as shareholders.

With that I will turn it over to Bruce.

Thanks, Brian, and good morning everyone.

I'm going to start on slide 3 and let's go through the results.

We recorded $5.3 billion of earnings in the second quarter or $0.45 per diluted share.

This compares to $0.27 a share in the first quarter of 2015 and $0.19 in the second quarter of last year.

A few items to note as you review the results.

In the second quarter we had $669 million of positive market-related adjustments in net interest income primarily driven by premium amortization on our debt securities from higher long-term rates.

This provided a $0.04 benefit to EPS.

The quarter also included $373 million in benefits from consumer real estate loans which added $0.02 a share.

One other item worth noting is the rep and warrant provision which is a net $205 million benefit this period.

This was mostly associated with positive developments in legacy mortgage-related matters which

I'll discuss later in the presentation.

This added $0.01 to EPS.

Revenue on an FTE basis was $22.3 billion in the second quarter and included the items that I just mentioned.

Total non-interest expense in the quarter was $13.8 billion and reflects lower litigation costs, lower LAS cost and good core expense controls compared to both the first quarter of 2015 and the second quarter of 2014.

Provision for credit losses this quarter were $780 million and included improved net charge-offs on an adjusted basis as well as less reserve release compared to the first quarter of 2015.

Return on tangible common equity this quarter was 12.8%, return on assets was 99 basis points and the efficiency ratio was 62%.

If we adjust for those metrics for the few items I mentioned earlier return on tangible common equity was 10.9%, return on assets was 85 basis points and the efficiency ratio was 65%.

On slide 4, the balance sheet was up less than 1% versus the first quarter of 2015 as loan growth and higher securities balances were offset by a decline in the ending balances within our Global Markets business.

Loans on a period-end basis were up reflecting good core loan activity.

All of our loan categories showed growth from the first quarter of 2015 with the exception of Consumer Real Estate which declined from both discretionary activity as well as other one-offs.

Common shareholders' equity improved.

This solid earnings growth was partially offset by a $2.2 billion decline in OCI and $1.3 billion in capital returns to common shareholders.

We repurchased 49 million shares for $775 million and paid approximately $500 million in common dividends this quarter.

Tangible book value increased to $15.02 and tangible common equity improved to 7.6%.

If we look at lending activity on slide 5 our reported loans on an end-of-period basis increased for the first time since the third quarter of 2013, growing $8.5 billion from the first quarter or 4% on an annualized basis.

Activity in our discretionary portfolio which is reflected in the LAS and All Other box where we use consumer real estate loans to manage interest rate risk in the LAS unit where we have a home equity run-off portfolio together showed a decline from the first quarter of 2015 of $15 billion.

The loan sales I mentioned earlier accounted for roughly half that amount and included certain loans with long-term standby arrangements that were converted into securities.

After we exclude this activity, our core loans increased $23.5 billion, or 4% from the first quarter of 2015.

Commercial lending was strong.

Among other initiatives the management team challenged our corporate and commercial lenders for the past several quarters to more fully utilize the credit limits to drive responsible growth.

In that light, Global Banking showed a continuation of loan growth from the end of the first quarter of 2015 growing $11.4 billion, or 4% during the quarter from a mix of C&I across large corporate and middle market as well as growth in commercial real estate.

Our Wealth Management business continues to experience strong demand in both securities based lending as well as consumer real estate.

And our Consumer Banking area grew both card and auto loans.

If we move to regulatory capital on slide 6, under the transition rules our CET1 ratio improved to 11.2% in the second quarter.

If we look at our Basel III regulatory capital on a fully phased-in basis CET1 capital improved $1.1 billion driven by earnings, partially offset by the OCI decline, share repurchases and dividends.

Under the standardized approach, our CET1 ratio was steady at 10.3% as RWA was stable with the first quarter of 2015.

Under the advanced approaches, CET1 ratio increased from 10.1% to 10.4% as RWA improved by approximately $34 billion.

Lower counterparty RWA drove this decline and was equally split between three factors.

The first lower derivative exposures mainly driven by movements in both rates as well as FX.

Second, optimization through better collateral management and reductions in certain positions.

And third, an increase in the population of trades eligible for model treatment.

The balance of the improvement was driven by lower levels of market risk.

In regards to the Fed's requested modifications to models in order to exit the parallel run that we have previously communicated to you, at the end of the quarter we estimate if we made the requested modifications that our advanced approach's CET1 ratio would be approximately 9.3% at June 30.

Moving to our supplementary leverage ratios we estimate that at the end of the second quarter we continue to exceed the US rules that are applicable in 2018.

Our bank holding company SLR ratio was approximately 6.3% and our primary bank subsidiary BANA was approximately 7%.

If we turn to slide 7 on funding and liquidity, long-term debt of $243 billion was up $6 billion from the first quarter as issuances outpaced maturities.

As you can see from the maturity profile we have $10 billion of parent company debt scheduled to mature in the rest of 2015 and we'll continue to be opportunistic in regards to issuance.

Our global excess liquidity sources reached a record level during the quarter at $484 billion and now represent 23% of the overall balance sheet.

The increase from the first quarter of GELS reflects a continued shift from discretionary loans into HQLA securities as well as the increased step balances.

Our parent company liquidity increased to $96 billion and our time to required funding improved to 40 months.

At the end of the second quarter we estimate that the consolidated Company was well above the 100% fully phased-in 2017 requirement for the liquidity ratio.

If we turn to slide 8 on net interest income, on a reported FTE basis was $10.7 billion, an increase of $1 billion from the first quarter of 2015.

Volatility in long end rates over the past few quarters has clearly caused some variability in out reported NII.

The market-related adjustment from our bond premium amortization this quarter was a benefit of $669 million as rates rose 40 basis points in the quarter while in the first quarter of 2015 we reported a negative $484 million adjustment from a decline in rates in the period.

If we adjust for those items our NII declined approximately $100 million from the first quarter of 2015 to just over $10 billion as the impact of lower discretionary balances and consumer loan yields more than offset the impact of one more day of interest.

At the end of the second quarter an instantaneous 100 basis point parallel shift increase in rates would be expected to contribute roughly $3.9 billion in NII benefits over the following 12 months and that's split roughly 60% to short end rates and 40% to long end rates.

Given the movement higher in long end rates our balance sheet did become less sensitive to long end rates compared to March 31 as we realized some of that sensitivity through FAS 91 in the second quarter.

As you can see on slide 9, non-interest expense was $13.8 billion in the second quarter and included $175 million in litigation expense.

Litigation expense did decline significantly from the second quarter of 2014 levels.

If we exclude litigation expenses were $13.6 billion in the quarter, a decline of $900 million, or 6% from the second quarter of 2014.

On balance we're quite pleased with our year-over-year expense improvement even while we continue to invest in the franchise.

In the third quarter of 2014 we wrapped up the new BAC cost savings initiatives and several quarters later we continue to see good progress on operating cost reductions in LAS as well as in other areas.

Our headcount is down 7% compared to the second quarter of 2014 and as a reminder we do expect to incur some costs associated with our CCAR resubmission through the balance of the year.

If we go ahead and switch to asset quality on slide 10, reported net charge-offs were $1.1 billion versus $1.2 billion in the first quarter 2015.

Both periods include charge-offs associated with the August 2014 DOJ settlement which we had previously reserved for.

If we exclude these impacts and a small impact from recoveries on NPL sales, our core net charge-offs declined $75 million from the first quarter of 2015 to $929 million.

Loss rates on the same adjusted basis improved to 43 basis points in the second quarter of 2015.

US consumer credit card delinquencies improved as well and on the commercial front we saw an uptick in NPLs and reservable criticized exposure from the first quarter driven by downgrades in our oil and gas exposures.

Despite these downgrades we feel good about our exposure in this area as they are well collateralized and most of these credits only had a one level migration on a risk rating scale.

The second-quarter provision expense was $780 million and we released a net $288 million in reserves which includes the utilization of previously accrued DOJ reserves.

Releases in consumer card and consumer real estate were partially offset by reserve builds within the commercial loan growth area.

Let's go ahead and move to the businesses on slide 11, Consumer Banking.

Consumer Banking had earnings of $1.7 billion which was 4% greater than the second quarter of 2014 and 16% above the first quarter of 2015 level.

This in turn generated a strong 24% return on allocated capital.

Within revenue fees were up 2% from last year driven by higher card and higher mortgage banking revenue but this growth was more than offset by a decline in net interest income.

The decline in net interest income is a result of the allocated impact of our ALM activities as well as some compression in card low yields.

Provision decreased $44 million from the second quarter of 2014 driven by the continued improvement that we saw in both the credit card as well as the auto portfolios.

Our non-interest expense was down 4% from the second quarter of 2014 as we reduced the number of financial centers and associated costs and personnel.

The cost of average deposits ratio is now less than 175 basis points and we have a 57% efficiency ratio within this segment.

This business is a good representation of how the Company is doing more business while we continue to reduce expenses.

We also continue to experience a shift in consumer behavior patterns away from branches and towards more self-service.

For example, the number of mobile banking customers continues to grow and increase to more than 17.6 million customers this quarter and these customers look to mobile devices for approximately 13% of all transactions or all deposit transactions.

If we look at some of the key drivers and trends within the consumer area on slide 12 we remain a leader in many aspects of Consumer Banking doing business with roughly half of all US households.

Let's look at card activity.

Card income increased 5% from the second quarter of 2014 on strong sales and solid spend levels.

Card issuance reached almost 1.3 million units in the quarter on increased sales efforts while the average book FICO score was also strong.

Average loan balances were down slightly from the second quarter of 2014 as we do see customers paying down more of their balances.

Net charge-offs declined from very low levels and were 2.7% in the second quarter and risk adjusted margins remain high at roughly 9%.

Mortgage banking income in this segment was up 8% from last year as originations had nice follow-through from the elevated pipeline at the end of the first quarter as well as higher production margins.

First-quarter mortgage -- first mortgage originations for the total Company were $16 billion, up 44% year over year and up 16% from the first quarter of 2015.

Home equity line and loan originations increased 23% to $3.2 billion from the year-ago quarter and were stable with the first quarter.

Revenue improvement versus the second quarter of 2014 was driven by improved margins.

Although the mortgage pipeline remains solid it is down 15% from the end of the first quarter driven in part by higher rates.

Service charges were down modestly versus the second quarter of 2014.

This fee line item does continue to be somewhat muted as we continue to open higher quality accounts and those accounts are carrying higher balances.

Compared to the second quarter of 2014 our average deposits of $545 billion are up $31 billion, or 6% even as we lowered the rates paid which now stands at 5 basis points.

Lastly, while we are bringing down our overall headcount in this business we continue to invest in the growth opportunity of our preferred client base.

And we've been increasing sales specialists in the financial centers and that's resulted in increased activity.

If we turn to slide 13, Global Wealth and Investment Management produced earnings of $690 million which was up 6% from the first quarter of 2015 levels but down 5% from the second quarter of 2014.

Compared to the second quarter of 2014, solid fee growth was offset by lower net interest income, higher credit cost and modestly higher expenses which resulted in a decline in year-over-year results.

The allocation of the impact of our Company's ALM activities more than offset the NII benefits that we had from solid loan growth within this space.

Year-over-year non-interest income was up 4% on strong asset management results.

Non-interest expense was modestly higher in the second quarter on the strength of our asset management fees as well as the continuing investment in client facing professionals.

The year-over-year increase in provision reflects larger reserve release in the prior periods.

Pretax margin was 24% and the return on allocated capital remained strong at 23%.

If we look at activity and drivers on slide 14 asset management fees continue to grow and are up 9% from the second quarter of 2014.

This was partially offset by sluggishness of transactional revenue in the brokerage business.

We did increase our financial advisors by 6% over the last 12 months and we feel good about the number of advisors that are joining us from competitors.

Client balances are above $2.5 trillion, up almost $12 billion from the first quarter of 2015 driven by solid client balance in-flows as well as improved market valuations.

Long-term AUM flows were $9 billion for the quarter and that's the 24th consecutive quarter where we've seen positive flows.

As I mentioned earlier we continue to experience strong demand in both our securities based and residential mortgage lending areas and we reached a new record for loans within this space during the quarter.

If we turn to slide 15, Global Banking earnings were $1.3 billion which is 14% unallocated capital.

Earnings did decline 13% from the second quarter of 2014 as lower non-interest expense was more than offset by lower net interest income, lower investment banking revenues and higher provision expense that was associated with a strong loan growth that we saw during the quarter.

The year-over-year decline in net interest income reflects the allocation of our ALM activity and liquidity cost as well as some compression in loan spreads.

Non-interest expense did decline 3% from the second quarter of 2014 as lower litigation and other technology initiative cost were partially offset by investment in client facing personnel.

If we look at the trends on slide 16 we chart the components of revenue.

Investment Banking fees for the Company were $1.5 billion, down 6% from the near record levels that we experienced during the second quarter of 2014.

Advisory fees were up 5% during the quarter.

Debt underwriting was relatively stable as increased activity in the investment-grade and other products offset the declines that we saw within our leverage finance area.

Equity underwriting was down 19% from what was a record level for our Company in the second quarter of 2014.

Outside of Investment Banking fees other banking revenue declined from lower leasing gains partially offset by modestly higher treasury fees and card income.

If we look at the balance sheet loans on average were $301 billion, up 4% from both the year-over-year and linked quarter periods.

The growth was broad-based across both corporate and commercial borrowers.

Although average deposits were relatively stable versus the second quarter of 2014 we did see a favorable shift in mix with our non-interest-bearing deposits up over $20 billion and our interest-bearing deposits down $17 billion versus the second quarter of 2014.

This growth in non-interest-bearing balances was driven by a continuing focus on the growth within operating balances.

The decline in interest-bearing balances was driven by targeted reductions in these low liquidity value deposits.

Switching to Global Markets on slide 17, in the second quarter earnings were $1 billion on revenues of $4.3 billion.

We generated 11% return on capital in this business during the quarter.

Earnings were up modestly from the first quarter of 2015 levels which included higher litigation but down from the second quarter of 2014 is revenue declined.

Total revenue excluding net DVA declined from the second quarter driven by lower equity investment gains, lower FICC and sales and trading results and lower investment banking fees.

If we exclude a $188 million difference between periods on the sale of an equity investment, revenue was down 4% from the second quarter.

Non-interest expense was reduced 5% from that same period in line with the revenue reductions.

If we focus on the sales and trading performance components on slide 18, sales and trading revenue of $3.3 billion ex-net DVA is down 2% from the second quarter of 2014 levels.

Compared to the same period a year ago, FICC sales and trading was down 9% and not unlike what we saw in the first quarter of 2015 strength within the macro-related products like FX, rates and commodities was offset by lower levels of activity within the credit products space.

And to remind you, our mix does remain more heavily weighted to credit products based on the size of our new issue business.

Equities trading was up 13% year over year driven largely by increased client activity within the Asia-Pacific region as well as a strong performance within the derivative area.

Slide 19 shows our Legacy Assets and Servicing business where we were profitable during the quarter given the net benefit in our rep and warrant provision.

Revenue excluding this benefit did decline from the first quarter of 2015 on less favorable MSR hedge performance as well as lower servicing revenue.

Litigation expense declined significantly from the second quarter of 2014.

Non-interest expense ex-litigation was roughly $900 million this quarter, improving $122 million from the first quarter of 2015 and $526 million going back to the second quarter of 2014.

We remain on track to hit our fourth-quarter goal of approximately $800 million in LAS cost ex-litigation.

We were also pleased that during the quarter our number of 60-plus day delinquent loans decreased to 132,000 units.

That's down 14% from the first quarter and almost 50% from the prior period of last year.

Before I move away from the mortgage space let me mention an important development in our legacy mortgage exposures.

This quarter there was a closely watched case in New York's highest court which confirmed that the New York six-year statute of limitation on filing rep and warrant claims begins to run at the time the reps and warranties are made and not at some later point in time.

Based on our review of the relevant documents we believe the vast majority of the bank's remaining PLS representation and warranty obligations are governed by New York law.

As a result of the case ruling you can see on slide 20, a significant $7.6 billion reduction in our gross outstanding private label claims as a result of certain claims now being time barred.

This ruling also had positive implications on our rep and warrant provision as I mentioned as well as the range of possible loss above those reserves.

You recall, the RPL had been a range of up to $4 billion for several years and so the top end of that range has now been reduced to up to $2 billion.

On slide 21 we show all other.

The $637 million of earnings this quarter resulted in a swing in profitability as a result of the improvement in the NII market-related adjustment from quarter to quarter as well as the prior-period inclusion of the annual retirement eligible incentive cost.

The loan sales I mentioned earlier also included in revenue.

Our effective tax rate for the quarter was 29% and I would expect the tax rate to be roughly 30% for the rest of 2015 absent unusual items like the recent UK tax reform proposals.

Among the UK proposals were a reduction in the corporate tax rate, a surcharge tax on bank earnings and a reduction in the bank levy rate.

Our preliminary read is that we could have a one-time charge of several hundred million dollars later in this year to reprice our UK deferred tax assets upon enactment.

At this time on an ongoing basis we expect a recurring tax impact to be modest.

Before wrapping up on this slide let me remind you that our preferred dividends in the third quarter should be $440 million and $330 million in the fourth quarter of this year.

So to wrap up as Brian started the presentation with many things that our teams have been focused on for some time came together nicely this quarter and that enabled us to report more than $5 billion in earnings and move closer to our long-term targets.

Revenue reflected relative stability, we lowered cost, we grew loans nicely, our credit quality remains very good and we're focused on operating leverage within the business.

The foundation of the Company's balance sheet has never been stronger with record capital and record liquidity levels and we remain well-positioned to benefit from a rising rate environment.

With that let's go ahead and open it up for Q&A.

(Operator Instructions) Betsy Graseck, Morgan Stanley.

Hi, good morning.

The question I'm getting from people this morning is around the expenses.

You showed some very nice improvement in core expenses coming down meaningfully Q on Q and year on year, and the question is have we reached the end state here or is there any further opportunity to bring down expenses from here?

I think, Betsy, in the broadest context we continue to work expenses.

If we talk to all of you about each quarter, 18 straight quarter reduction in core operating expenses outside litigation, 15 straight quarters of 3,000 people or more reduction each quarter.

So we just continue to apply technology to continue to over the long term reduce expenses.

So the goal we have in SIM is to keep the expenses flat as revenue increases.

And if the world economic situation changes different what people are expecting we'd have to look at it differently.

But as you can see this quarter that will result in a constant downward pressure given where we are in the economy.

Okay.

And then on the reps and warranty side you had what looks like a little bit of a true-up based on this litigation decision.

Is that the right way of reading it or is there potential even in more to come in the future as you go through these cases?

No, clearly what the case is significant is this, Betsy.

We looked at and as we do every quarter look at the rep and warrant provision and you're right it was a net benefit of $200 million this quarter.

I think the important thing I think more than the $200 million is if you look back on our slide 20 in the earnings materials the effect of the decision led to two things that do reduce tail risk on a go-forward basis.

The first is you can see the number of new claims that came in was just over $200 million which is a dramatic improvement from what we've seen historically.

And second as a result of the time barring of certain claims that the outstanding claims that we have, and keep in mind these outstanding claims are based on original UPB, came down fairly significantly to just below $19 billion.

So while it was nice to have the modest benefit that we did in the quarter I think importantly on a go-forward basis it does reduce the tail risk that's out there.

We saw some of the benefits from that in the activity levels this quarter.

Okay, thanks.

And then just one last question.

You indicated the upside that you have in the event of a rate rise $3.9 billion if the parallel shift is 100 basis points.

The question is how you're thinking about dropping that to the bottom line?

Is there reinvestments that would take up some of that or are you at sufficient run rate in investment spend that you would be able to drop more to the bottom line?

There's no question, Betsy, as we look at and I'll just remind people that we were at $3.9 billion for a 100 basis point move.

If you look at that roughly 60% of it is on the short end now.

40% of it is on the long end, and there's no question that we would expect to drop a significant portion of that to the bottom line if and when we see that 100 basis point move.

Okay.

And then just back to the expense side, the expense run rate that you've got right now is something you think you can hold at least if not improve from here, is that fair?

Yes, Betsy, really to your last question we've been investing in headcount to open up a customer facing capacity.

So I'd rather give you some of the statistics earlier, so we're comfortable from a technology spend rate, from an investment and client facing capacity, marketing and everything we're at a good run rate.

So there'd be downward pressure as headcount continues to come down through the application of technology across the platform with customers internally.

So we're comfortable that we can continue to drive it.

And make no bones about it this is what we work on every day and we're reluctant to put out a dollar target because frankly that tells the team we've made a goal and stop as opposed to just get better at it every day.

So we are constantly working to improve the dynamics of revenue versus expense in this Company.

Thanks a lot.

Matt O'Connor, Deutsche Bank.

If we look at the core net interest income ex- the market-related marks it was down a little bit versus last quarter but you're starting to see the loans inflect as you mentioned earlier.

Do we start seeing stability in the core net interest income looking at next quarter or two or do we really need higher short-term rates for that?

Thanks for the question.

It's a good question.

I think if you look at we typically have a little bit of seasonal pressure in the second quarter on NII so as we sit here today based on the curve we would expect to see the core net interest income which obviously excludes FAS 91 move up from Q2 to Q3 and we'd expect further growth from Q3 to Q4.

Okay.

And that's without any benefit from rates?

It's just based on the realization of what the existing curve is which quite frankly we don't look at and our models don't show Fed funds going up until January 2016.

So there's not a lot of great benefit in that at all.

Okay.

And then on the discretionary book you mentioned it came down a little bit when you look out on a combined securities mortgages basis and I guess just we saw long-term rates go up and some banks have been increasing the discretionary book with higher reinvestment rates or higher investment rates here.

What's the thought on bringing that book down as rates have gone up?

I have two comments.

I think the first is that when we talked about the discretionary balances coming down that's basically the whole loan portfolio as well as certain pieces of the home equity portfolio.

So we referenced that those came down about $15 billion quarter over quarter, half due to sales and half to paydowns.

We probably have one more quarter where you'll see some of the conversion of those loans to securities.

But if you actually look at the amount of securities from a balanced perspective they went up a little bit Q1 to Q2 based on the conversion of those loans to securities.

And as we continue to see the deposit footprint grow we will continue to invest and we're obviously mindful of the balance between increasing net interest income like I spoke about as well as being sensitive to OCI risk.

Okay, thank you very much.

Jim Mitchell, Buckingham Research.

Hey, good morning.

Just a quick follow-up on the NIM outlook.

I think Bruce last quarter you mentioned that if the yield curve stayed where it was you'd have about $600 million of drag in NII over the next few quarters.

Are you saying that that's pretty much changed with the steepening of the curve since April when you spoke last and not only NII is growing but NIM should stabilize or is it just sort of offsetting each other?

Are you getting a boost from that?

How do we think about the yield curve versus your prior comment?

As we look and snap forward there are a lot of things that influence that number.

One is obviously the ability and how much we've put the increase in deposits to work through growing loans and clearly we've seen during the second quarter we saw that loan growth move up which is obviously a good thing which lessens some of that sensitivity.

And as we look at the amount and what we're doing from an investment portfolio there's less to do during the second half of the year.

So all in all as we look at those different factors it's why we're comfortable saying that we'd expect the core to increase both Q2 to Q3 as well as from Q3 to Q4.

Okay, fair enough.

And just on the capital side, when do you think the modifications become official and you exit the parallel run?

How long do we think we have to wait for that and is there anything that could change in terms of your expectation around I guess the 90 basis point hit to your CET1?

I think I can say that we can't say too much about regulatory matters.

I think given the updated disclosure we've given you can assume that we're getting closer to having that resolved.

You never know until you're ultimately done but we feel very comfortable with the guidance of 9.3% factoring in the adjustments based on where we were at the end of the second quarter and we'll look to get that wrapped up sooner than later.

Okay, that's helpful.

And just one last quick one on the $3.9 billion of sensitivity to higher rates, how much is FAS 91 related versus core?

Sure.

As I mentioned roughly 40% of it's long end which is $1.5 billion of the amount and roughly half of that is FAS 91 and half of it is non-FAS 91 related.

Okay, thanks a lot.

John McDonald, Bernstein.

Hi, thanks.

Bruce just one more question on the rate sensitivity, the $3.9 billion move for 100 basis point parallel move I assume that illustration is to a 100 basis point move that's a shock or an instantaneous move in rates?

Can you give us any feel for how that number would change if the move in rates is more gradual?

As the Fed is saying if I go gradually how does that change if it's not instantaneous?

Well I mean ultimately over time if you get to the 100 basis point number you have that, I think your point is that if they move 25 basis points is it 25% or is it more than 25%?

And I think the thing that you have to keep in mind and we've talked about it a lot with what we would expect from a deposit repricing perspective that clearly you'd expect the first 25 to 50 basis points move up that we would not have to do much from a deposit perspective.

So net-net on a relative basis that should be a positive as you look at the numbers.

Okay.

And a clarification, where it is the gain on consumer real estate loans?

Is that in the Mortgage Banking line?

No, it's in other income and it's reflected in the All Other segment.

Okay.

The Mortgage Banking income was very strong on the fee income line, obviously you had the rep and warrant in there.

Was there anything else in there that helped on the Mortgage Banking line?

I would say that generally that the hedge results on the MSR were fairly decent in the quarter and then like we've said there just wasn't much litigation during the quarter as well.

So all of those things led to the results being where they are.

But you're right we've typically had 100 to 200 of rep and warranty provision and we had 200 benefits, so you get a sense of the magnitude of the swing on a comparable period basis.

Got it.

Okay, and then last question for me on the credit, do you see the net charge-offs bouncing around the current level the $929 million and how do you see it playing out in terms of provision reserve release relative to what you just did this quarter?

I think this quarter I think you're seeing a continuation of what we've been talking about and I want to be careful that I think we need to exclude DOJ both on the top as you did in your $929 million number as well as in the reserve release.

So if you back out what we had for DOJ the reserve release was about 150, the charge-offs of $929 million were down roughly $75 million.

And while this can bounce around a little bit I think what you're likely to see over the next couple of quarters is probably a convergence where the charge-offs and the provision number become more closely aligned.

And I would just say that particularly on the consumer side we continue to like what we see on credit and on the commercial side you can see that charge-offs are virtually nil within the large corporate space and there's nothing that we see out there that's going to change that materially.

Okay.

And on top of that will the DOJ still be a factor for the next couple of quarters?

As it relates to that I want to think, John, that it will be in the $100 million type area as it relates to both charge-off and reserve release and then by the time we get to the fourth quarter it should virtually go away.

It can bounce around a little bit but it should largely be gone by the end of the third quarter.

But it pares off John so the way you subtract this quarter continue.

So it's a number it's offset by a previously established reserve.

Got it.

Okay, thank you.

Glenn Schorr, Evercore ISI.

Hi, thanks.

Two quick ones on the average balance sheet.

When you look at the debt securities line, the yield went up some version of a lot from 2% to 3.2%.

I'm assuming some of that is LAS loans converting, but could you give a little color on what drives that?

Because the overall size of the book didn't change that much.

Yes, it's interesting, if you look year over year and you adjust for FAS 91 which shows up in the NII when you're looking back at the table that the yields were almost identical from the second quarter of 2014 to the second quarter of 2015 once you make that 91 adjustment.

Okay.

Similar but different question, inside the C&I book, the used commercial book it was just a 4 basis point drop quarter on quarter but there's growth there.

So I'm just curious the trade-off between price and yield give up on the new loans you're putting on versus the responsible growth you talked about.

It doesn't seem that bad.

I'm just curious on what kind of yield you're putting new loans on?

Sure.

I think when you look at commercial loan spreads there are two things that those numbers reflect.

I think the first thing which just from a macro perspective that has been a little bit of compression although we're seeing it slow as it relates to just the competitive landscape and where loans are getting done.

As it relates to your question about the new loans, the responsible growth, if you looked at in particularly in the areas that picked up during the second quarter that on our risk rating scale they would translate to credits that tend to be in the strong BBB or a single 8 area so that they are largely investment-grade type credits where we're extending it and if you look at average spreads in that area they tend to be in the LIBOR plus 150 type area on average which is a little bit lower than the average across the commercial platform.

But as you can see the credit is clearly at the upper end.

So Glenn it's probably say if you think about it we're not on credit structure we held our discipline, on price there's been pressure but then you have to look at that on a whole relationship basis with the other fees and revenues you get from cash management and stuff.

And we try to have a client focused discipline to do it.

But your observation is right, there is a little pressure on those spreads due to that.

Okay, I definitely appreciate that.

Last one is when you talk about the pushing for growth and you mentioned the different specialists in the branches, the Business Banking, the financial investment consultants, I'm curious what are you doing to incent and to encourage them?

In other words are there actual incentives or do they get paid on their production?

In the sales context there is there are incentives for production but it has to be done the right way with the right customers in the right structure so it is not -- it doesn't drive their behavior.

It's different than let's say the Wealth Management business in terms of the balance between incentives.

But yes they are paid to open, the mortgage loan officers are paid to produce mortgages and to open up checking accounts and other things.

But it's really, it's actually deploying the people and building the capacity to sell, that's where we are reducing the need for services through all the automation that's going on and shifting that group of people.

So that it is really just having more of them than think of it as incentive driven behavior.

And then really then having the information at the point of the sale through our technology of offers that have been made to people for credit cards, etc., so you can make the offer again that's already been made to them online or something.

So it's a combination of sales practices, more people and then just the discipline of the team, Tom, Glenn and Dena (inaudible) then it would be incentive driven.

All right.

Thanks very much.

Eric Wasserstrom, Guggenheim Securities.

Thanks very much.

Just to follow up a little bit on that last point, when I was trying to shift through the core loan growth numbers this morning it looked like the core loan growth coming out of the institutional bank and the Wealth Management looked strong but I'm still unclear what the core level of growth was inside the consumer organization and so I'm just trying to reconcile that with where the incremental hiring is occurring on the sales front.

So can you just clarify what the core level of consumer growth was?

Well as you look at the consumer on page 5 you can see the balances and you can see the different pieces.

We had change of practice of how we booked residential mortgages for our consumer customers that has an impact on that.

But overall you remember they're still fighting a couple -- we're still fighting a couple of things on consumer.

One is the card balances are finally stabilize and you saw from first quarter to second quarter a slight uptick there.

That's because we've been hitting increasingly record sales of credit cards so I think we did about $1.3 million this quarter, Bruce, that is again a record for us and since we changed the business model six, seven years ago.

And if you look at -- but if you look at things like the home-equity balances and things like that those are under pressure just because we're still seeing significant repayments even though we're producing a lot in that area.

So if you look at that you can see it's across the board just a little bit upside tilt, in part the interplay between some of the runoff in the other category and the buildup in residential.

But they do a lot more than sell loans in that place and so the investment sales levels that drives that Merrill Edge, in fact at the FSAs and the branches that we deploy do $4 million of notional on average a month of new investment products.

In building $4 million to $5 million they sell obviously checking accounts, net checking accounts this quarter.

We're in a net checking account growth position even taking into account the runoff from divestitures and other things and then you have the loan side.

So they are responsible for driving all that and so it shows up in the loans a little bit but also that's why the feed category is stable in other areas.

And so do you have a sense or is there some sense maybe you can give us to how that investment in front office staff is contributing to growth outside of the segment?

Well, for example in the small-business arena in the first half of the year we did about $5 billion of originations and what the world would define as small business we have it across two divisions and they helped grow that.

Merchant services growth, you know they sell that goes into the Business Banking -- Global Banking segment and they sent about 20,000 customers a year into Wealth Management that literally walk in a branch are wealthy and they get moved over and that helps our Wealth Management business.

So you can't think of -- you're right.

That salesforce does what it does in the segment but it has the benefit across the board and then service is a lot for all customers.

Business Banking, Commercial Banking customers come into the branches obviously for the cash -- related to the cash management revenue.

So it is across the board and contributes and so the good news is they are making more money than they made last year on their own but they are still providing that services and capabilities across the platform.

And so when this is my final question on this if we divorce just the runoff from some of the legacy assets that are still occurring, would you expect the core consumer asset growth to accelerate as a consequence of this investment or do you think that it's currently run rating?

As the runoff subsides in the consumer categories this is Consumer Banking here and then you've got the LAS piece, the LAS home equities will continue to go down because frankly those are products we put in there because we decided not to do them.

But on the consumer you should see as it stabilizes you'll see a little bit better loan growth.

But remember that focus on the responsive part of responsible growth we're not going to open up the credit card business in a way that will produce charge-off later down the road that we won't be happy with.

So we are driving that growth into the core strong credit quality that we want to have in this Company.

And so I'd be careful about assuming it will just leap to us because to do that you'd have to go into credit postures that we won't do.

And I would just add, Brian, if you look at home-equity it's a good example where if you look within the consumer banking space during the second quarter of this year the home equity originations of line amounts were about $3.2 billion.

They were to loan to value less than 60%, FICOs deep into the 700s and so there were more than $3 billion of those booked.

It's number one market share, roughly $1.5 billion of that was funded, but you do have some of the legacy stuff that's running off.

So I think when you wonder about activity levels and what's happening I think you need to realize that with that number one share in what we're doing it is growing.

It's just that there is a runoff that mutes that effect.

Great, thanks very much for the answers to all my questions.

Ken Usdin, Jefferies.

Thanks, good morning.

First question just on the RWAs, looks like when you look at the reconciliation of the move to fully phased-in there is a little bit of a help on the advanced models this quarter and just in a general sense obviously we still have that finalization to come but what additional tweaks are you working on inside the models and what additional mitigation could we still see from here on the RWA side?

I think there are couple of things.

We're obviously working hard to move as many of the exposures from CEM treatment to IMM treatment which generally has favorable benefit there.

The second thing I talked about better collateral management as well as looking to work to do more compression and to net things out and we continued to see some benefit there.

I think third is we continue to move out and we're largely through this but as we continue to move out some of the non-performing consumer real estate as well as the benefits of improved consumer credit quality, we're seeing benefits there.

And there still are a few RMBS and other type positions that we'd expect to get benefit for over the next couple of quarters.

So I think this quarter was clearly a quarter between the activities that we undertook as well as what happened from a rates and FX perspective where we saw pretty good quarter-over-quarter improvement.

And obviously that was not only in the markets business but also in the consumer businesses.

I'd say, Bruce, the other thing we have a healthy dose of operating capital due to the operating risk embedded from Countrywide and other things that we have to figure out over time how we can work through the system because we never did the activities in the Company but on the other hand we had to deal with the cost of them.

And so both operating and general, so as you think about that longer term we had to get a more rational view of that operating risk relative to the Company we run today which is different but that will take time and working through the models there too.

Okay.

And then my second question relates to the Wealth Management business and Bruce you alluded to there being a little bit of a slowdown on the revenue.

So if a look at the segment or the line item on the income statement there has been a deceleration, advisor productivity looks a little bit lower and you've added a lot of people.

You've added a lot of assets.

So I'm just wondering what do we need to see to get a re-acceleration of the revenue side in brokerage and Wealth Management?

And is it just a time lag relative to those additions?

A couple of points on that.

I think first there's clearly a building up of advisors particularly if we're bringing them in and training them, that there's a ramp up in productivity that occurs.

I don't think there's any question.

The second thing that I do think is important is that when you look at the net interest income line that as I mentioned it looked a little bit muted, if you saw gross loan net interest income you would see this increasing.

So some of the push out of the ALM activities has muted the NII line a little bit.

And then the third thing which you reference that I do think is a little bit more of a trend and I think is not only is somewhat consistent with some of the regulatory standards which we're seeing more and more of the assets that we manage being managed on a long-term basis where we're managing them.

And so that's leading to growth in the asset management fees and the corollary to that is that you do have lower brokerage income but net-net you can see that we are growing in the segment and we feel good about the activity that we're seeing there.

And I'd say that the few quarters we saw the margin, the pretax margin come down and you're seeing it start to turn back and go up.

And there's positive pressure out in the future on that at the end of this year because of some of the deal stuff runs off will add a couple of points to margin that it's in the numbers this year but won't be in the numbers next year.

And then your point is the maturity of the investment cycle so if you go back we're adding financial advisors, their books are coming in, they're building the books and as that maturity happens you'll see it match a little better.

But the encouraging signs we're seeing the margin comeback up.

And remember this business also benefits a lot by the rate changes, too, ultimately.

It is a big bank, it's got $250 billion deposits, round numbers, a lot of loans, and it has a lot of the same sensitivity our Consumer Bank does that people don't think of it in this context.

So as we think about the comp structure is in place but there's an added deal piece that runs off you're seeing the maturity cycle of the people coming up.

And the team is just working hard on the revenue expense management and we started to see some better signs they've got some work to do still though.

Understood.

Okay, thanks, guys.

Steven Chubak, Nomura.

Hi, good morning.

So I have a couple of questions on the topic of capital.

The first is a follow-up to Ken's earlier question regarding RWA mitigation potential.

And Bruce I do appreciate the color you cited relating to all the mitigation opportunities on the horizon.

I'm just trying to get a better sense given your efforts to grow the core loan portfolio how we should be thinking about the trajectory in advanced RWAs, maybe excluding the upward adjustment tied to the regulatory guidance just to give us a sense as to what that trajectory should look like over the next couple of quarters?

You make me the caveat that this assumes that we don't have a significant change one way in market conditions because obviously there's a part of Basel III that's somewhat pro cyclical.

But I think net-net if we do a good job of managing this the way that we would expect to that absent any exogenous changes we should be able in the institutional business which is both Global Banking as well as sales and trading that we should be able to grow loans while at the same time have reductions in the overall risk-weighted assets that are attributed to that area.

Now where you will probably see it be more dollar for dollar is obviously under standardized those loans tend to be every dollar of loan is a dollar of RWA so you have to be a little bit careful between which method you're looking at.

Okay.

But presumably the focus at least on your part is going to be on mitigating the advanced RWAs given that that appears to be your longer-term binding constraint.

It's both because you're right, as it relates to a ratio pro forma for this it is the lower number.

But keep in mind you have to keep the focus on standardized as well because at least based on last year's CCAR as well as guidance that's out there standardized is very important from a CCAR perspective.

No, understood.

Okay and then actually it's a great transition to my next question on the topic of G-SIB surcharges where I'm sure you're aware there's been some discussion around the possibility of incorporating the surcharges within CCAR.

And I was just hoping to get a better sense as to what contingency plans you might have in place if the surcharge were to be included and are there opportunities that you see to sufficiently mitigate the G-SIB indicators so that you could move into a lower bucket?

A couple of things on that front.

The first is as it relates to G-SIB, their application, where they may or may not be used, at this point while we participate in industry forums I think that the supervisory area has been very transparent and sharing much of the same things that they share with us you are also aware of.

So I think that the information is fairly disseminated amongst everyone.

As it relates to contingency planning it's really an ongoing continuation of what we did from 2013 to 2014 which if you recall is related to our quantitative CCAR results in a timeframe where we didn't have significant levels of net income that our CCAR cushion grew significantly.

So what are we doing to focus on that?

On the investment portfolio we're mindful of managing OCI risk given that it flows through the overall CCAR process.

We continue to be very focused on moving out those loans and those assets that have higher loss content and at the same time making sure that the originations that we put on were of the highest quality.

So we continue to focus on that.

If you look at the overall risk that's being taken within the markets business, we're managing that so that there's not a surprise as it relates to that.

And clearly we continue to work hard to move out those exposures that have high loss content there.

So I think I would say it's really much more of a continuation of the work that we've been at for several years now.

And we're mindful of making sure that we continue to push that stuff out at the same time that we're originating those things that we'll perform well as part of that overall exercise.

All right.

Thanks Bruce.

That detail is extremely helpful.

And then one more quick final one for me.

I was hoping you can give us an update on where your TLAC ratio sit today?

I think that the TLAC ratio as it relates to where we are and this assumes that we exclude stuff that's less than a year, I think the TLAC ratio is roughly 21% at this point, we'll have to see the deducts that come in and out of that based on G-SIB and other things.

But I think we're just below 21% at the end of the quarter.

Okay, great.

Thank you for taking my questions.

Brennan Hawken, UBS.

Good morning.

Thanks for taking the question.

A quick one on Wealth Management.

Is it possible for you to quantify for us how much of your total Wealth Management client assets are in retirement accounts and of that, what percentage are advisory?

We'll let Lee get back to you on that.

I don't have that off the top of my head in terms of -- I just don't have that fact right in front of me.

Okay.

Just the whole idea there is trying to get at the DOL proposal and maybe what could be potential downside even based on how it all gets finalized understanding that it's preliminary at this point.

Yep, Lee can fill you in on that.

Okay.

And then looking at the branch declines that you guys referenced earlier should we count on the 5% year over year as a reasonable decline rate sustainable from here given the trends that you're seeing in your mobile platform?

And could this potentially add additional juice to your expense declines beyond the business as usual type pushing that you've spent a lot of time talking about here on the call today?

So let's step back and make sure that we understand one thing is the idea here is we're moving because the customers are moving and how they conduct business.

And so you've got to run your changes consistent with what they're doing.

That's a baseline that you have to stick to because if you forget that you can overshoot or undershoot frankly and so that being said that's one point.

The second point is in the 6,100 branches that we had at the peak down to this level there were multiple things we were doing, customer behavior changes, change in the configuration of the markets we attack, etc., so there are lots of elements.

So now we're now on a business as usual ongoing practice which will really be driven more by the customer behavior as opposed to some viewpoints we have about markets and arranging the franchise.

So I'd expect that they will continue to work themselves down and I wouldn't predict a steady rate because it's a very complex equation but then let's flip to what's really going on.

As Bruce talked about earlier we have 17.6 million mobile users.

We have 31 million bank computer banking users, that number is actually growing again.

For a while it was kind of flat, it's actually growing, so it's interesting that that's happening.

16% of all our sales are all digital now.

About 6% of the sales of digital which is computers and mobile are mobile and that's growing at 300% so it's catching up.

And then you get things which are interesting because it goes to the efficiency of your branch.

There are about 10,000 appointments scheduled in a mobile device a week at the branch which then allows us to have a more efficient branch structure.

Even though we may have less we may have bigger branches because you have more sales going on in them.

So think about that, that's up from 2,000 last year, second quarter of 10,000 times a week now and growing at that rate implied there.

People are scheduling appointments to come see us which is a lot better experience for us and then to help us to serve them.

So it allows us to have our staffing levels done.

Bruce referenced the checks deposited are 13% of all the checks so the activity of all this is critical to that question.

So I won't give you a 5% reduction or 4% reduction.

I think you can mathematically derive what we've done.

But I'd be careful about assuming it will be that ratable but it will be more based in behavior change.

But the key is our customer scores have gone up overall and even in the mobile channels we've gone up year over year 1,000 basis points in our mobile channel, top two box satisfaction.

So it will be a complex thing.

It's an integrated pool of capabilities.

Phones, online ATA and branches and you'd expect it to be pressure going down but remember we were early into this and if you think about 1,400 branches that's bigger than a lot of companies out there already out of the system.

So we've been at this for a long time but we will do it the right way because if you push too hard you will upset the client.

That's helpful color, Brian.

Thanks.

And then last one for me you made a reference earlier to a couple of points margin from the employee forgivable loan amortization dropping off next year.

Is next year a bump in the trend or is that indicative of potential further declines in forgivable loans as they continue to roll off?

And does it assume some level of counter pressure offsetting pressure from continued recruiting?

And maybe a little update on the recruiting environment for FAs would be helpful.

What I'm referencing is discrete away from the entire recruiting process.

This is a -- was set up at the time of the transaction for a group of people at that time and it just came in over the years and it's not this last year it goes away.

The forgivable loan practice and all the other stuff in recruiting is a whole different thing.

But for John in key banks and the teams they're successfully recruiting on the experience level the attritions for the top two quintile financial advisors is at an all-time low, I think again I think it's running at 2% or something like that.

So we're retaining those and then we're recruiting at both the experienced level but importantly what is obvious to us is to drive the amount of client need here, drive against the client need which is huge and underserved in our belief.

We had to create more advisors than there are out there and so we've really worked hard on what they call the PMD program which is basically bringing people in the business who may have experience in other firms by bringing them into our firm and also other industries into our firm.

And that is now reaping benefits to us given we've been working on it for two or three years to retool it and drive it.

So you should expect our advisor count to go up and our productivity may come down per advisor.

But frankly there's a lot of business where remember our value predict is 1 million and so on so bringing it down a little bit to get a lot more growth, a lot more growth in advisors would not be -- would be a great trade for our Company.

So our recruiting is strong.

We're net doing a decent job at the higher end that you hear a lot about, that is not a big part of the advisor count, several hundred a year, like in a couple 200, 300.

But what's going to drive our advisor and capabilities to serve our clients is the broader buildout of the teams which is the BFAs and the PMDs that work at the branches in some cases and work with people.

And that should redound to our benefit over time although it will have a little drag on profitability right now because it's investment.

Great, thanks for that.

Marty Mosby, Vining Sparks.

Thank you.

I wanted to ask about the asset liability management.

When you look at the market adjustments that you had of $669 million this quarter, as rates go up there is less and less impact from that.

How much is remaining in the next 50 basis points in just the prepayment speed slowing down?

I don't have 50 basis points, Marty, but the number we quoted was on a 100 basis point move the FAS 91 benefit would be $775 million.

Okay.

Perfect.

And then when you're talking about being able to see the margin go up in the back half of the year because of the current steepness of the yield curve does that include some utilization in the sense of increasing your securities portfolio while you invest some of the liquid assets you have on the balance sheet?

There's clearly some of that because we would expect as we go forward with the composition of the balance sheet that there will be incremental cash that's generated.

Obviously some of that goes into loan growth and some of it goes into the investment portfolio.

So embedded in that those comments is an assumption that there will be a little bit more to be invested.

(multiple speakers) range $10 billion, $20 billion, $30 billion, any kind of rule of thumb there?

I would think of it as on the low end of that during the third quarter and a comparable amount in the fourth.

And there's one other thing that I did want to correct that I said earlier that if you look at the securities balances yield the stability that we saw once you adjust for FAS 91 was Q1 to Q2.

Got you.

And lastly this is a nuance but when you look at the trading activity typically in the past when I had a trading activity in the bank that I was managing when you had a steepening of the yield curve you get some pickup because you're getting the current long-term yield funded by short-term rates.

The rate on the trading activity account did not go up this quarter but averaging into the next quarter would you expect some benefit there?

I think if you look at -- I think the important thing is that so that rate tends to manifest itself in the market based NII.

There are a lot of things that drive that when rates move around as much as they have but I don't think there's any question that over time as you're in an increasing rate environment that there is a part of the yield component that flows through NII that you would expect to get a little bit better.

I'm just more focused on the steepness versus the flattening of the yield curve.

A steeper yield curve typically brings a little better spread on the trading account?

It would but the question is it works its way through but if you look across long periods of time it's relatively constant.

Okay.

Thanks.

Nancy Bush, NAB Research.

Hi, good morning.

Guys, just another liquidity issue.

Could you just tell us what's on deposit, what excess deposits you've got with the Fed now and what your plans are for those going forward?

At any one point in time it can move around but you should assume it's comfortably above $100 billion that's on the Fed in any one night during the quarter.

And I think that when you look at where we are with LCR where we are at both the parent as well as the bank, that I think and $484 billion of overall liquidity which is a record that we feel we're in a reasonable place and I don't see significant changes going forward, Nancy.

Okay, you mean in overall liquidity or at liquidity on deposit with the Fed?

Probably both.

Okay, that's a lot of liquidity.

My second question, Brian is for you.

You've gone through a lot of change over the past few years and this transition to mobile, etc., etc., but one of the things I still get from talking to people are persistent gripes about service quality particularly in the mortgage company.

Can you just tell us what your internal polling or whatever shows in terms of improvements in credit quality and how you feel about that entire subject?

In the mortgage business, for example the bank originators we're number one in JD Power survey and I think we're number two or three overall of all mortgage companies.

So I think in terms of originating mortgage loans a guy name Steve Boland runs that for us has gotten that platform settled in and you'll get momentary spikes where the refis will bump up and things slow down.

From a get the loan done, from keeping our credit quality where we wanted that ends up with us having some noise around people who don't get mortgages.

So we did $15 billion or whatever we did this quarter, 30% of those loans were moderate income so we're still serving that segment.

But again we are not pushing for credit terms and mortgage and I think you'd understand why, Nancy.

But how about just more the issue of service quality at the branches, etc.?

Well, if you look at our customer scores continue to rise almost on a monthly basis and in the broadest context our brand and part of that is due to what happens at the branch.

Part of it is also due to there's less stuff going on about the Company and that's gone from the low point in the fourth-quarter 2009 and has rose fairly steadily.

So it's been in fact back to within 95% of where it was at it is highest point in 2005 and 2006.

So with that we're satisfied.

And if you actually go to the customers who actually get served when we measure all the channels which we measure with tens of thousands of customers a week and a month you find that those scores continue to go up and the top two box score I think we're in the 70s to 80s of the various channels and including mortgage.

So because you just have a lot of customers you'll find out that once in a while we're bumping up in our jobs to fix something we do but if you think about it we've added mortgage production, checking accounts net new, credit cards and that's the ramification of good service and driving it and the team just continues to work on it.

We're not perfect and we will always get better but I think if you look at it over the last three or four years it continues to get better.

All right.

Thank you.

And by the way if you look at our deposit growth it continues to accelerate in over the top of the CDs continue to run off year over year of $10 billion.

So we're up $31 billion in deposits and consumer year over year I think it has and CDs were probably down I don't know $10 billion or so.

So think about that if people didn't like us a lot they wouldn't be giving us their core checking account and that is happening more and more every quarter.

And that will serve us well as rates change because we are a hugely primary focus checking account company in the broad mass-market business which is different than the past.

All right.

Good to hear.

Thank you.

Mike Mayo, CLSA.

Hi, I just wanted to follow up on Betsy's question at the start talking about expenses being at a run rate or maybe going lower.

The expenses are down $400 million year over year but if you look at your four business lines the revenues are down twice that implying a lot of the rest is coming through the other line.

So I guess I'm just wondering how much more there is to cut or should cut if the expenses are down again $400 million but the revenues in the four business lines are down $800 million?

How do you balance that trade-off?

Yes, I think the first thing that you have to keep in mind, Mike, when you quote the numbers within the business is on a year-over-year basis you have two significant things happening.

You've had FAS 91 in a significant movement in rates as it relates to push out of those charges as well as we push the LCR out to the businesses from a reported segment perspective that has a significant impact.

And so I think as we've gone through the presentation that the numbers that I would focus on are very much what's going on within the segments looking at the fee income line because there is activity from a net interest income perspective of greater activity within the businesses.

So I'd be a little bit careful with that characterization and I think in that context I'd go back to Brian's initial comments which we continue to push hard, we're adding client facing personnel across the Company, at the same time we're reducing aggregate headcount and that's leading to declines in the expense numbers and we're very, very focused on continuing to keep that balance as we go forward.

Okay.

Just to understand because I'm just looking at your slides, slide 17 and the other slides in your presentation today, I looked at the four slides related to GWIM, Global Banking, Global Markets and Consumer Banking, I took second quarter of 2015 versus second quarter of 2014 and looked at the delta in revenues and that's how I got the $800 million decline.

So you would say which adjustments should we make from that?

Don't take GWIM because I got that number off the top of my head Mike.

I think year over year the difference in GWIM NII allocation due to sort of unfundamental things is Bruce how much of --

Yes, let's just go through.

Relative to the second quarter of 2014 you've got consumer from an overall NII impact was more than $200 million.

GWIM was as Brian said roughly $130 million, overall Investment Bank, our Global Banking was a couple hundred million and then you have de minimis amounts within markets and LAS.

That is nothing more than us changing the allocation method, it's because of LCR and other things becoming important.

So we pushed down the businesses to get the behavior of the businesses aligned with the parent.

So this is why you have to be a little careful about micro assessing these movements because things change in the methodology year over year and we don't go back and restate this.

We didn't do it last year.

Okay.

I will follow up on that.

So are you comfortable, are you satisfied with the revenue progression that you've had no matter how you take a look at it?

Mike, we are satisfied that we are starting to see the hard work of all our teammates come through but we're not satisfied in the sense that we expect better performance on both the revenue expense dynamic in the future.

That's -- we'll keep working at it.

But if you look at it over the last several quarters what you've seen in stability in revenues but continue to work on expenses both in the dollars but also in the headcount.

15 straight quarters, 3,000 more personnel reductions per quarter is a pretty strong record to show that we're disciplined in workers.

And then a separate question, I think it's the first time you've listed ROA and ROE on the first page of your press release.

And should we read anything into that that we're more focused on achieving these targets with a specific timeframe or what changed?

It may be the pagination.

It's been listed in our documents consistently.

(Multiple speakers) focused on those goals and we've told you that each time you've asked the question.

And then lastly just, I know I've asked this question before is there a specific timeframe that you can commit to to achieve your ROA and ROE goals?

Mike, as I told you at the Annual Meeting when you were there with a few other people and asking the questions on this question, we had the building blocks in place to get us to where we are and we can see the building blocks falling in place to get us to our goals.

And there are external factors, the rate increase and stuff that you see in the market curve that's changed just in the last 15 days in this quarter and has moved around dramatically.

But with our control of elements we continue to drive and we see the progression towards it over the next several quarters like we told you.

And I think, Mike, just to be clear we've talked about 100 basis points and 12% to 14% return on tangible common equity.

Obviously at 99 basis points we're bumping right up against that.

And I think what's important is as you look to the path to what we've talked about we're basically there in the second quarter, you could say you had the $700 million in FAS 91, the $400 million of loan sale gains and a couple hundred million dollars from rep and warrant provisions.

But what I think is interesting and as you look at the path there is if you look at and assume the 100 basis point parallel shift in the yield curve what that would mean in the quarter as well as if we ultimately get to where our LAS expense goals are you're basically back to all other things being equal where we were this quarter.

So what was articulated is something where you couldn't see a path or a way to get there, I think it was a step forward this quarter as far as seeing how we can get there.

All right.

Thank you.

Christopher Wheeler, Atlantic Equity.

Yes, good morning gentlemen and I'm sorry to raise the subject of cost again.

But I just want to square away what you said I think to Betsy's question at the very beginning to what you said at the conference back in May when you actually said that if trading revenues didn't pick up you'd have to adjust costs further.

I just wondered where you were on that because obviously trading revenues were down about 2% year on year I think in the quarter and I'm having to assume that the start to the quarter has been pretty bumpy with Greece and China.

So could you just talk a little bit about how you see that?

But perhaps also talk a little bit about how you might address that situation in global markets and global banking in respect of the US business and the international businesses?

Because it is really clear that the US business seems to be offering more opportunities not just because they are more buoyant but also because you're seeing European banks play a lesser role.

And obviously seeing three of the big banks get new CEOs in the last few weeks I hardly imagine they are going to be allocating more capital to Investment Banking.

Thank you.

Let me take a stab at a couple of parts of that question.

The first is and I think you referenced that what would you do if global market expenses were lower on a go-forward basis?

I think this quarter was reflective of the way you'd expect us to manage it which is the pure sales and trading number was down 2% and total expenses within the segment were down 5%.

So I think some of what Brian communicated inmate you saw evidence of that happening during the quarter.

The second thing that I would say is that it's obviously earlier in the quarter but I wouldn't draw any conclusions as to overall performance based on the volatility that we've seen during the first couple of weeks to the negative.

And then third I think your question was and is just that with what's going on within some of the European banks as well as changes in management and questions around capital, how does that translate and what are you seeing in the US business?

I think what I would say is that we obviously have significant share in the US business.

We're looking to do a better job of that and I think that as you look at some of the loan growth that we've seen that it is reflective of the fact that we're deepening in the US but just as importantly that loan growth is not only in the US, it's throughout Europe.

There's been a little bit in Latin America and there's been growth in Asia-Pac.

So we are looking to use some of these market opportunities as a basis to deepen and look to grow the overall global banking segment.

Thanks very much.

Thank you.

Well thank you everyone.

That's the last question.

We look forward to talking to you next quarter.

This does conclude today's program.

You may now disconnect at any time.